<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 33-37271
PROSPECTUS
9,000,000 Shares
[LOGO OF CAPITAL TRUST]
CLASS A COMMON SHARES OF BENEFICIAL INTEREST
----------------
OF THE 9,000,000 CLASS A COMMON SHARES OF BENEFICIAL INTEREST, $1.00 PAR
VALUE, IN CAPITAL TRUST BEING OFFERED HEREBY, 7,400,000 SHARES ARE
BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 1,600,000 SHARES ARE BEING OFFERED INITIALLY
OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS. ALL OF THE CLASS A COMMON SHARES OFFERED
HEREBY ARE BEING SOLD BY THE COMPANY. THE CLASS A
COMMON SHARES ARE TRADED ON THE NEW YORK STOCK
EXCHANGE ("NYSE") UNDER THE SYMBOL "CT." ON
DECEMBER 10, 1997, THE REPORTED LAST
SALE PRICE OF THE CLASS A COMMON
SHARES ON THE NYSE WAS $11 1/2
SHARE.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
PRICE $11 A SHARE
----------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share............................. $11.00 $.66 $10.34
Total(3).............................. $99,000,000 $5,940,000 $93,060,000
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deduction of expenses payable by the Company estimated at
$1,200,000.
(3) The Company has granted the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
1,350,000 additional Shares at the price to public less underwriting
discounts and commissions for the purpose of covering over-allotments,
if any. If the U.S. Underwriters exercise such option in full, the total
price to public, underwriting discounts and commissions and proceeds to
Company will be $113,850,000, $6,831,000 and $107,019,000, respectively.
See "Underwriters."
----------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about December 16, 1997 at the
offices of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment
therefor in immediately available funds.
----------------
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH & CO.
DEUTSCHE MORGAN GRENFELL
December 10, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
SHARES. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS
OFFERING, AND MAY BID FOR, AND PURCHASE, CLASS A COMMON SHARES IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
---------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE CLASS A
COMMON SHARES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION OF SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
---------------
For investors outside the United States: No action has been or will be taken
in any jurisdiction by the Company or any Underwriter that would permit a
public offering of the Class A Common Shares or possession or distribution of
this Prospectus in any jurisdiction where action for that purpose is required,
other than in the United States. Persons into whose possession this Prospectus
comes are required by the Company and the Underwriters to inform themselves
about and to observe any restrictions as to the offering of the Class A Common
Shares and the distribution of this Prospectus.
In this Prospectus references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 11
Use of Proceeds..................... 18
Price Range of Class A Common
Shares............................. 19
Dividend Policy..................... 19
Dilution............................ 20
Capitalization...................... 21
Selected Historical Financial Data.. 22
Unaudited Pro Forma Condensed
Combined Financial Information..... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business............................ 35
Management.......................... 46
Principal Shareholders.............. 55
Certain Transactions................ 58
Description of Capital Shares....... 60
Shares Eligible for Future Sale..... 64
Certain Federal Income Tax
Consequences to Non-United States
Holders............................ 65
Underwriters........................ 68
Legal Matters....................... 72
Experts............................. 72
Additional Information.............. 73
Index to Financial Statements....... F-1
</TABLE>
---------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Risk Factors," among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this Prospectus,
including, without limitation, in "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in filings by the
Company with the Securities and Exchange Commission (the "Commission"), in the
Company's press releases and in oral statements made by authorized officers of
the Company. When used in this Prospectus, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe," and similar expressions are
intended to identify forward-looking statements.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the related notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of the U.S. Underwriters' over-allotment option. See "Underwriters."
Unless the context otherwise requires, all references in this Prospectus to the
Company include the Company, its subsidiaries and their respective
predecessors. References to the "Offering" shall refer to the offering of the
Class A Common Shares in the United States and Canada by the U.S. Underwriters
and outside the United States and Canada by the International Underwriters.
THE COMPANY
Capital Trust (the "Company") is a recently recapitalized specialty finance
company designed to take advantage of high-yielding lending and investment
opportunities in commercial real estate and related assets. The Company makes
investments in various types of income-producing commercial real estate and its
current investment program emphasizes senior and junior commercial mortgage
loans, preferred equity investments, direct equity investments and subordinated
interests in commercial mortgage-backed securities ("CMBS"). The Company
believes that a majority of the investments to be held in its portfolio for the
long term will be structured so that the Company's investment is subordinate to
third-party financing but senior to the owner/operator's equity position. The
Company also provides real estate investment banking, advisory and asset
management services through its recently acquired subsidiary, Victor Capital
Group, L.P. ("Victor Capital"). The Company anticipates that it will invest in
a diverse array of real estate and finance-related assets and enterprises,
including operating companies, that satisfy its investment criteria.
In executing its business plan, the Company believes that it will be able to
utilize the extensive real estate industry contacts and relationships of Equity
Group Investments, Inc. ("EGI"). EGI is a privately held real estate and
corporate investment firm controlled by Samuel Zell, who serves as chairman of
the board of trustees of the Company. EGI's affiliates include Equity Office
Properties Trust and Equity Residential Properties Trust, the largest U.S. real
estate investment trusts operating in the office and multifamily residential
sectors, respectively. The Company also expects to draw upon the extensive
client roster of Victor Capital for potential investment opportunities.
The Company believes that the significant recovery in commercial real estate
property values, coupled with fundamental structural changes in the real estate
capital markets (primarily related to the growth in CMBS issuance), has created
significant market-driven opportunities for finance companies specializing in
commercial real estate lending and investing. Such opportunities are expected
to result from the following developments:
. SCALE AND ROLLOVER. The U.S. commercial mortgage market--a market that
is comparable in size to the corporate and municipal bond markets--has
approximately $1 trillion in total mortgage debt outstanding, which debt
is primarily held privately. In addition, a significant amount of
commercial mortgage loans held by U.S. financial institutions is
scheduled to mature in the near future.
. RAPID GROWTH OF SECURITIZATION. With annual issuance volume of
approximately $30 billion, the total amount of CMBS currently
outstanding has grown to over $100 billion from approximately $6 billion
in 1990. To date, the CMBS market expansion has been fueled in large
part by "conduits" which originate whole loans primarily for resale to
financial intermediaries, which in turn package the loans as securities
for distribution to public and private investors.
The Company believes that as securitized lenders replace traditional
lenders such as banks and life insurance companies as the primary source
for commercial real estate finance, borrowers are often constrained by
relatively inflexible underwriting standards, including lower loan-to-
value ratios, thereby creating significant demand for mezzanine
financing (typically between 65% and 90% of total
3
<PAGE>
capitalization). In addition, since many high quality loans may not
immediately qualify for securitization, due primarily to rating agency
guidelines, significant opportunities are created for shorter-maturity
bridge and transition mortgage financings.
. CONSOLIDATION. As the real estate market continues to evolve, the
Company expects that consolidation will occur and efficiency will
increase. Over time, the Company believes that the market leaders in the
real estate finance sector will be fully integrated finance companies
capable of originating, underwriting, structuring, managing and
retaining real estate risk.
The Company believes that it is well-positioned to capitalize on the
resultant opportunities, which, if carefully underwritten, structured and
monitored, represent attractive investments that pose potentially less risk
than direct equity ownership of real property. Further, the Company believes
that the rapid growth of the CMBS market has given rise to opportunities for
the Company to acquire selectively non-investment grade tranches of such
securities, which the Company believes are priced inefficiently in terms of
their risk/reward profile.
The Company currently pursues investment and lending opportunities designed
to capitalize on inefficiencies in the real estate capital, mortgage and
finance markets. The Company's investment program emphasizes, but is not
limited to, the following general categories of real estate and finance-related
assets:
. MORTGAGE LOANS. The Company pursues opportunities to originate and fund
senior and junior mortgage loans ("Mortgage Loans") to commercial real
estate owners and property developers who require interim financing
until permanent financing can be obtained. The Company's Mortgage Loans
are generally not intended to be permanent in nature, but rather are
intended to be of a relatively short-term duration, with extension
options as deemed appropriate, and typically require a balloon payment
of principal at maturity. The Company may also originate and fund
permanent Mortgage Loans in which the Company intends to sell the senior
tranche, thereby creating a Mezzanine Loan (as defined below).
. MEZZANINE LOANS. The Company originates high-yielding loans that are
subordinate to first lien mortgage loans on commercial real estate and
are secured either by a second lien mortgage or a pledge of the
ownership interests in the borrowing property owner. Alternatively, the
Company's mezzanine loans can take the form of a preferred equity
investment in the borrower with substantially similar terms
(collectively, "Mezzanine Loans"). Generally, the Company's Mezzanine
Loans have a longer anticipated duration than its Mortgage Loans and are
not intended to serve as transitional mortgage financing.
. SUBORDINATED INTERESTS. The Company pursues rated and unrated
investments in public and private subordinated interests ("Subordinated
Interests") in commercial collateralized mortgage obligations ("CMOs" or
"CMO Bonds") and other CMBS.
. OTHER INVESTMENTS. The Company intends to assemble an investment
portfolio of commercial real estate and finance-related assets meeting
the Company's target risk/return profile. The Company is not limited in
the kinds of commercial real estate and finance-related assets in which
it can invest and believes that it is positioned to expand
opportunistically its financing business. The Company may pursue
investments in, among other assets, construction loans, distressed
mortgages, foreign real estate and finance-related assets, operating
companies, including loan origination and loan servicing companies, and
fee interests in real property (collectively, "Other Investments").
The Company also provides real estate investment banking, advisory and asset
management services through its Victor Capital subsidiary. Victor Capital
provides services to real estate investors, owners, developers and financial
institutions in connection with mortgage financings, securitizations, joint
ventures, debt and equity investments, mergers and acquisitions, portfolio
evaluations, restructurings and disposition programs. The Company may also
acquire operating businesses that the Company believes would complement Victor
Capital's existing business.
4
<PAGE>
RECAPITALIZATION AND INITIAL INVESTMENTS
Prior to July 1997, the Company operated as a real estate investment trust
("REIT"), originating, acquiring, operating or holding income-producing real
property and mortgage-related investments. On July 15, 1997, as a result of
transactions culminating at the Company's 1997 annual meeting of shareholders
(the "1997 Annual Meeting"), the Company experienced, in addition to a change
in control, a number of other significant changes, including:
. The investment of $33.0 million in the form of preferred equity capital
(the "Investment");
. The acquisition of Victor Capital's real estate investment banking and
advisory operations (the "Acquisition");
. The appointment of a new management team consisting primarily of
officers of Victor Capital;
. The implementation of the Company's new business plan emphasizing high-
yielding lending and investment opportunities; and
. The election of the Company to terminate its REIT status for federal
income tax purposes primarily in order to retain earnings and to
maximize its investment flexibility.
In addition, the Company has entered into a credit agreement, dated as of
September 30, 1997, with a commercial lender, that provides for a three-year
$150.0 million line of credit ("Credit Facility"); in connection with the
Credit Facility, the Company received an advance of approximately $11.7 million
from the commercial lender prior to execution of the Credit Facility. Such
borrowings, along with cash provided by the Investment and existing cash
resources, were used to fund the Company's initial loans and investments. The
Company believes that the Credit Facility and the proceeds of the Offering will
provide the Company with the capital necessary to expand and diversify its
portfolio of investments and will also enable the Company to compete for and
consummate larger transactions meeting the Company's target risk/return
profile.
To date, the Company has identified, negotiated and funded the loan and
investment transactions set forth below, all of which the Company believes will
provide investment yields within the Company's target range of 400 to 600 basis
points above the London Interbank Offered Rate ("LIBOR"). The Company intends
to employ leverage on its investments in order to increase its overall return
on equity. In the future, the Company may make investments with yields that
fall outside of the investment range set forth above, but that correspond with
the level of risk perceived by the Company to be inherent in such investments.
Recent investments include:
. The origination, funding and sale of a participation interest in a $50.3
million subordinated Mortgage Loan. This LIBOR-based loan is secured by
a second mortgage on the office tower located at 1325 Avenue of the
Americas in New York City which contains approximately 750,000 square
feet. A 50% pari passu participation interest was sold to Equity Office
Properties Trust, an affiliate of the Company, at closing.
. The origination, funding and sale of a participation interest in a $35.0
million subordinated Mortgage Loan. This LIBOR-based loan is secured by
a second mortgage on the approximately 1.1 million square foot Chicago
Apparel Center located in Chicago, Illinois and two mortgage notes (with
an aggregate principal amount of $9.6 million) on nearby development
sites.
. The origination and funding of a $9.8 million Mortgage Loan. This LIBOR-
based loan was primarily secured by an $11.8 million mortgage note on an
approximately 281,000 square foot office/warehouse facility located in
Philadelphia, Pennsylvania and a pledge of other mortgage collateral in
the New York metropolitan area aggregating $6.7 million. In November
1997, the loan was repaid to the Company in full.
. The purchase of a portion of an $80.0 million Mezzanine Loan for
approximately $15.6 million. This loan is secured by a pledge of the
ownership interests in the entities that own the approximately 1.75
million square foot office building located at 277 Park Avenue in
New York City.
5
<PAGE>
. The origination and funding of a $10.0 million Mezzanine Loan secured by
a subordinated mortgage on, and a pledge of the ownership interests in
the entity that owns a majority interest in, the approximately 931,000
square foot office building located at 555 West 57th Street in New York
City commonly known as the "BMW Building."
. The purchase of a Subordinated Interest in the amount of approximately
$49.5 million. The investment is secured by 20 short-term commercial
mortgage loans with original maturities ranging from two to three years,
which loans are secured by properties located throughout the United
States. The Company is the named special servicer for the entire $413.0
million loan portfolio of which this Subordinated Interest is a part.
THE OFFERING
Class A Common Shares offered by
the Company:
7,400,000 shares
U.S. Offering(1)................
1,600,000 shares
International Offering(1).......
9,000,000 shares
Total(1).....................
Class A Common Shares to be
outstanding after the
Offering(1)(2)..................... 18,138,325 shares
Use of Proceeds..................... The net proceeds to the Company from the
issuance and sale of the 9,000,000 Class
A Common Shares offered hereby (after
deduction of the underwriting discounts
and commissions and estimated offering
expenses) are estimated to be
approximately $91.9 million. The Company
intends to use the net proceeds to fund
investments and loans made by the Company
and for working capital for ongoing
operations and potential business
acquisitions. Until applied to fund
investment or acquisition opportunities,
the net proceeds will be used to reduce
temporarily the outstanding borrowings
under the Credit Facility. Pending such
uses, the net proceeds will be invested
in short-term investment-grade
securities, certificates of deposit or
direct or guaranteed obligations of the
United States government. See "Use of
Proceeds."
NYSE symbol......................... "CT"
- --------
(1) Assumes the over-allotment option is not exercised. See "Underwriters."
(2) Based on the number of Class A Common Shares outstanding as of December 10,
1997. Excludes (i) 12,267,658 Class A Common Shares into which the
outstanding Class A Preferred Shares are convertible and (ii) an aggregate
of 2,000,000 Class A Common Shares reserved for issuance under the 1997
Long-Term Incentive Share Plan (the "Incentive Share Plan") and the 1997
Non-Employee Trustee Share Plan (the "Trustee Share Plan"), including
657,000 shares as to which share options were then outstanding, none of
which were exercisable on such date. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Capital Shares."
6
<PAGE>
BACKGROUND
Prior to July 1997, the Company operated as a REIT under the name "California
Real Estate Investment Trust," originating, acquiring, operating or holding
income-producing real property and mortgage-related investments. On January 3,
1997, CalREIT Investors Limited Partnership ("CRIL"), a partnership controlled
by Samuel Zell, the Company's current chairman of the board of trustees (the
"Board of Trustees" or the "Board"), purchased the 6,959,593 Class A Common
Shares (representing approximately 76% of the then-outstanding Class A Common
Shares) then owned by the Company's former parent for an aggregate purchase
price of approximately $20.2 million. Prior to the purchase, EGI, a privately
held investment firm that is controlled by Mr. Zell and engaged in, among other
things, the ownership and management of real estate, and Victor Capital, which
was then privately held by John R. Klopp and Craig M. Hatkoff, current trustees
of the Company, presented to the Company's then-incumbent Board of Trustees a
proposed new business plan in which the Company would cease to be a REIT and
instead become a specialty finance company designed primarily to take advantage
of high-yielding mezzanine investment opportunities in commercial real estate.
EGI and Victor Capital also proposed that they provide the Company with a new
management team to implement the business plan and that they invest through an
affiliate a minimum of $30.0 million in a new class of preferred shares to be
issued by the Company. In connection with the foregoing, the Company
subsequently agreed that, concurrently with the consummation of the proposed
preferred equity investment, it would acquire for $5.0 million Victor Capital's
real estate investment banking, advisory and asset management businesses,
including the services of its experienced management and professional team.
On July 15, 1997, upon the approval of the Company's shareholders at the 1997
Annual Meeting, the Company closed on the Investment, which consisted of the
sale, for $33.0 million, of 12,267,658 class A 9.5% cumulative convertible
preferred shares of beneficial interest, $1.00 par value, in the Company
("Class A Preferred Shares") to Veqtor Finance Company, LLC ("Veqtor"), a
limited liability company controlled by Samuel Zell, John R. Klopp and Craig M.
Hatkoff. Concurrently with the Investment, Veqtor purchased the 6,959,593 Class
A Common Shares held by CRIL for an aggregate purchase price of approximately
$21.3 million. Veqtor funded the approximately $54.3 million aggregate purchase
price for the Class A Common Shares and the Class A Preferred Shares with $5.0
million of capital contributions from its members and $50.0 million of
borrowings under 12% convertible redeemable notes (the "Veqtor Notes") issued
to BankAmerica Investment Corporation, BancBoston Investments, Inc., First
Chicago Capital Corporation and Wells Fargo & Company (collectively, the
"Institutional Investors"). The Institutional Investors may in the future
convert these notes into preferred interests in Veqtor that, in turn, may be
redeemed for an aggregate of approximately 31% of the outstanding shares of the
Company after completion of the Offering (assuming, among other things, the
sale of 9,000,000 Class A Common Shares in the Offering and all 2,000,000
shares reserved under the Company's share plans are issued and outstanding).
As a result of the above transactions, a change in control of the Company
occurred, with Veqtor beneficially owning 19,227,251 (or approximately 90%) of
the outstanding voting shares of the Company. Also, the Company's shareholders
approved the adoption of an amended and restated declaration of trust (the
"Restated Declaration") that, among other things, reclassified the Company's
outstanding common shares as Class A Common Shares and changed the Company's
name to "Capital Trust." The Company immediately commenced full implementation
of its new business plan and thereby elected to terminate its status as a REIT
for federal income tax purposes. By not operating as a REIT, the Company is
positioned to respond more quickly to investment opportunities without the
structural limitations inherent in REITs and to expand its portfolio of
invested assets on a more highly leveraged basis than most REITs. The Company
is also able to retain its cash flows generated from operations for
reinvestment, thereby facilitating the Company's growth strategy.
In certain cases, the term Class A Common Shares used herein refers to the
common shares of beneficial interest, $1.00 par value, in the Company
outstanding prior to the reclassification discussed above. The Company is also
authorized to issue class B common shares of beneficial interest, $1.00 par
value ("Class B Common Shares"), and class B 9.5% cumulative convertible non-
voting preferred shares of beneficial interest, $1.00 par value ("Class B
Preferred Shares" and together with the Class A Preferred Shares, the
"Preferred Shares"), in the Company. The Class B Common Shares and the Class B
Preferred Shares, none of which are outstanding on the date hereof, are
identical to the Class A Common Shares and the Class A Preferred Shares,
respectively, except that neither the Class B Common Shares nor the Class B
Preferred Shares entitle the holder thereof to voting rights, except as
provided by law.
7
<PAGE>
OWNERSHIP STRUCTURE OF THE COMPANY
The following diagram depicts the ownership structure of the Company after
the Offering:
[CHART OF THE OWNERSHIP STRUCTURE OF THE COMPANY]
- --------
(1) Capital Trust Investors Limited Partnership (f/k/a CalREIT Investors
Limited Partnership ("CTILP")), which is indirectly controlled by Samuel
Zell, and V2 Holdings LLC ("V2"), a holding company controlled by John R.
Klopp and Craig M. Hatkoff, are each managing members of, and each owns 50%
of the common interests in, Veqtor. Messrs. Zell, Klopp and Hatkoff as well
as Sheli Z. Rosenberg and Gary R. Garrabrant, who also hold indirect
economic ownership interests in Veqtor, are members of the Board of
Trustees of the Company.
(2) Upon completion of the Offering, Veqtor will own Class A Common Shares and
Class A Preferred Shares representing approximately 63% of the outstanding
voting shares of the Company (assuming the sale of 9,000,000 Class A Common
Shares in the Offering). The Institutional Investors hold the Veqtor Notes
and may in the future convert these notes into preferred interests in
Veqtor that, in turn, may be redeemed for approximately 50% of Veqtor's
holdings of Class A Common Shares and Class A Preferred Shares.
(3) Upon completion of the Offering, the public shareholders will own Class A
Common Shares representing approximately 37% of the outstanding voting
shares of the Company (assuming the sale of 9,000,000 Class A Common Shares
in the Offering).
8
<PAGE>
Veqtor funded the approximately $54.3 million aggregate purchase price for
the 6,959,593 Class A Common Shares and the 12,267,658 Class A Preferred Shares
(collectively, "Veqtor's Company Shares") that it purchased on July 15, 1997
with $5.0 million of capital contributions from its members and $50.0 million
of borrowings under the Veqtor Notes issued to the Institutional Investors. The
Veqtor Notes earn interest at a rate of 12% per annum, except that interest at
a rate of 6% per annum is accrued and not payable until maturity or redemption
or conversion of the Veqtor Notes as discussed herein. The Veqtor Notes are
convertible by the holders thereof into preferred units in Veqtor ("Veqtor
Preferred Units") at the rate of $55.59 per unit from and after the earlier of
July 15, 2000, the dissolution, liquidation or winding up of the affairs of
Veqtor or the sale of any or all of Veqtor's Company Shares. Upon conversion of
the Veqtor Notes into Veqtor Preferred Units, at any time after six months from
the date of such conversion, the Veqtor Preferred Units are redeemable by the
holders thereof in exchange for a portion of Veqtor's Company Shares. The
Veqtor Preferred Units are also redeemable by the Company in exchange for a
portion of Veqtor's Company Shares at any time after 24 months from their date
of issuance provided all such units are redeemed. Upon such redemption, each
holder of such Veqtor Preferred Units is entitled to receive a specified
portion of Veqtor's Company Shares equal to the ratio of the total number of
Veqtor Preferred Units held by such holder to the sum of (i) the total number
of Veqtor Preferred Units that would be outstanding if all holders of the
Veqtor Notes then outstanding converted their Veqtor Preferred Units at a
conversion price of $55.59 per unit and (ii) the total number of Veqtor Common
Units then outstanding. Upon redemption of the Veqtor Preferred Units, with
respect to holders thereof who are bank holding companies or affiliates thereof
within the meaning of the Bank Holding Company Act of 1956, as amended (the
"BHCA"), Veqtor is required to convert those of Veqtor's Company Shares
allocable to such holders into Class B Common Shares and Class B Preferred
Shares, as the case may be. The Class B Common Shares and the Class B Preferred
Shares are non-voting shares and are convertible, respectively, into Class A
Common Shares and Class A Preferred Shares on a share-for-share basis upon
certification by the holder thereof that such shareholder either (a) will not,
together with any other person (other than the Company) who previously held
voting shares of the Company held by such shareholder, upon the issuance of
such shares, own more than 4.9% of any class of voting shares of the Company or
(b) is not limited by the BHCA to holding no more than 4.9% of any class or
series of voting shares of the Company. Veqtor can redeem the Veqtor Notes for
cash at par (plus accrued and unpaid interest) at any time after July 15, 2000,
subject to the right of the holders to convert the Veqtor Notes into Veqtor
Preferred Units as discussed above. In connection with the Offering, CTILP, V2
and Veqtor have agreed with the Company that upon either the redemption for
cash of the Veqtor Notes or the conversion of the Veqtor Notes into Veqtor
Preferred Units, and, in the latter case, the subsequent redemption of all such
units in exchange for the specified portion of Veqtor's Company Shares, Veqtor
shall convert the remaining Class A Preferred Shares owned by it into Class A
Common Shares. CTILP, V2 and Veqtor have also agreed that Veqtor shall redeem
the Veqtor Preferred Units on the earliest date upon which Veqtor has the right
to effect such redemption.
Assuming for purposes of demonstration that all of the Veqtor Notes
(including accrued and unpaid interest thereon) were converted on the third
anniversary of their issuance into Veqtor Preferred Units, and such units were
then redeemed for their corresponding specified portion of Veqtor's Company
Shares, and assuming further that at that time all 2,000,000 shares reserved
for issuance pursuant to the Company's share plans were issued and outstanding,
the holders of the Veqtor Notes (the Institutional Investors) would be entitled
to receive an aggregate of 3,583,349 Class A Common Shares and 6,316,361 Class
A Preferred Shares, which shares would represent in the aggregate approximately
31% of the shares outstanding after consummation of the Offering, and CTILP and
V2 would be entitled to receive an aggregate of 3,376,244 Class A Common Shares
and 5,951,297 Class A Preferred Shares, which shares would represent in the
aggregate approximately 29% of the shares outstanding after consummation of the
Offering (assuming in each case the sale of 9,000,000 Class A Common Shares in
the Offering and no other issuances of Class A Common Shares prior to the time
of such redemption).
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following tables present summary historical and pro forma financial data
for the business of the Company as of and for the nine months ended September
30, 1997, and for the year ended December 31, 1996. The pro forma statement of
operations has been presented to reflect the results of the Company's business
operations as if the Acquisition had occurred on January 1, 1996. The as
adjusted balance sheet data as of September 30, 1997 is adjusted to reflect the
sale of 9,000,000 Class A Common Shares and the application of the net proceeds
therefrom.
The information in these tables is qualified by and should be read in
conjunction with the "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Unaudited Pro
Forma Condensed Combined Financial Information" and the financial statements of
the Company and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS
PRO FORMA YEAR ENDED
ENDED DECEMBER SEPTEMBER 30,
31, 1996 1997
-------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR
PER SHARE DATA
OPERATING DATA: AND SHARE AMOUNTS)
<S> <C> <C>
Income from investment and lending transactions:
Interest and related income..................... $100 $1,863
Interest and related expenses(2)................ 86 759
---------- ----------
Net income from investment and lending transac-
tions.......................................... 14 1,104
---------- ----------
Other revenues:
Advisory and asset management fees.............. 6,940 3,251
Rental income(1)................................ 2,019 313
Interest and investment income.................. 1,369 1,045
---------- ----------
Total other revenues............................ 10,328 4,609
---------- ----------
Other expenses:
General and administrative...................... 6,324 6,506
Other interest expense.......................... 821 291
Rental property expenses(1)..................... 685 123
Depreciation and amortization................... 131 83
---------- ----------
Total other expenses............................ 7,961 7,003
---------- ----------
(Loss) income before gain (loss) on sale or fore-
closure of rental properties, provision for pos-
sible credit losses and income taxes............ 2,381 (1,290)
Gain (loss) on sale or foreclosure of rental
properties...................................... 1,069 (432)
Provision for possible credit losses(1).......... (1,743) (155)
---------- ----------
(Loss) income before income taxes................ 1,707 (1,877)
Provision for income taxes....................... (96) --
---------- ----------
Net (loss) income................................ 1,611 (1,877)
Less: Preferred Share dividend requirement(2).... -- (679)
---------- ----------
Net (loss) income allocable to Class A Common
Shares.......................................... $1,611 $(2,556)
========== ==========
Per share information:
Net (loss) income per Class A Common Share
Primary and fully diluted(2).................... $0.09 $(0.14)
========== ==========
Weighted average Class A Common Shares outstand-
ing
Primary and fully diluted(2) ................... 18,138,325 18,138,325
========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
-------------------------
HISTORICAL AS ADJUSTED(2)
---------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.......................................... $112 $192
Total liabilities..................................... 57 45
Shareholders' equity.................................. 55 147
</TABLE>
- -------
(1) Prior to the 1997 Annual Meeting and the implementation of the Company's
new business plan, the Company operated as a REIT holding income-producing
property. As of March 31, 1997, the Company had sold its two then-remaining
commercial rental properties, and since that time, the Company has derived
no revenue from rental operations. The provision for possible credit loss
for the year ended December 31, 1996 relates entirely to these two
commercial properties.
(2) Information for the Company for the nine months ended September 30, 1997
includes (i) the preferred share dividend requirement for the Class A
Preferred Shares since their issuance on July 15, 1997 ($679,000) and the
Investment and (ii) the income derived from the re-investment of the net
proceeds therefrom. Had the Class A Preferred Shares been outstanding for
that entire nine-month period, the Preferred Share dividend requirement
would have been $2,351,000 (equivalent to $3,135,000 per annum). In
addition, an adjustment has been made to reflect the sale of 9,000,000
Class A Common Shares in the Offering and the use of net proceeds
therefrom, including the elimination of the $11.7 million borrowed under
the Credit Facility. As a result, interest expense thereon for the nine
months ended September 30, 1997 was reduced by $31,000. The Class A
Preferred Shares were not considered Class A Common Share equivalents for
purposes of calculating fully diluted earnings per share as they were
antidilutive for the nine months ended September 30, 1997 and were not
outstanding during the year ended December 31, 1996.
10
<PAGE>
RISK FACTORS
An investment in the Class A Common Shares involves various risks.
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus before
purchasing Class A Common Shares in the Offering.
DEPENDENCE ON AVAILABLE INVESTMENTS; COMPETITION
The results of the Company's future operations under the new business plan
will be dependent upon the availability of, as well as management's ability to
identify, complete and realize, investment opportunities. It may take
considerable time for the Company to find and consummate appropriate
investments. In general, the availability of desirable investment
opportunities and the results of the Company's operations will be affected by
the level and volatility of interest rates, by conditions in the financial
markets and general economic conditions. No assurances can be given that the
Company will be successful in finding and then acquiring economically
desirable assets or that the assets, once acquired, will maintain their
economic desirability.
The Company is engaged in a highly competitive business. The Company will be
competing for investments with many recent entrants into the business,
including numerous public and private real estate investment vehicles,
including financial institutions (such as mortgage banks, pension funds and
real estate investment trusts) and other institutional investors, as well as
individuals. Mortgage Loans, Mezzanine Loans, Subordinated Interests and Other
Investments are often obtained through a competitive bidding process. In
addition, the Company's competitors may seek to establish relationships with
the financial institutions and other firms from which 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, may
have management personnel with more experience than the officers of the
Company and may have other advantages over the Company in conducting certain
businesses and providing certain services.
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 currently intends to significantly leverage its
portfolio primarily through secured and unsecured borrowings. The Company's
ability to obtain the leverage necessary for execution of its business plan
will ultimately depend upon its ability to maintain interest coverage ratios
meeting market underwriting standards which will vary according to lenders'
assessments of the creditworthiness of the Company and the terms of the
borrowings. The failure to obtain leverage at the levels contemplated in the
new business plan would have a material adverse effect on the Company's
ability to execute its business plan.
The percentage of leverage used will vary depending on the Company's
estimate of the stability of the portfolio's cash flow. To the extent that
changes in market conditions cause the cost of such financing to increase
relative to the income that can be derived from the assets acquired, the
Company may reduce the amount of leverage it utilizes. In leveraging its
portfolio, the Company plans not to exceed a debt to equity ratio of 5:1. In
addition, the Company's Credit Facility requires, and other debt obligations
the Company enters into in the future may require, the Company to comply with
a number of financial and other covenants on an ongoing basis. Failure to
comply with such covenants may limit the Company's ability to borrow funds or
may cause a default under its then-existing indebtedness which, in turn, could
force the Company to sell certain of its assets at prices that are unfavorable
to the Company in order to satisfy its debt obligations.
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 leverage 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
11
<PAGE>
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.
YIELD ASSESSMENT RISK
Before making any investment, 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 management's experience in evaluating potential
investments, no assurances can be given that the Company can make an accurate
assessment of the yield to be produced by an investment. Many factors beyond
the control of the Company are likely to influence the yield on the Company's
investments, including, but not limited to, competitive conditions in the
local real estate market, local and general economic conditions and the
quality of management of the underlying property.
INTEREST RATE RISK
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. Competition from
other providers of mezzanine capital may lead to a lowering of the interest
rate earned on the Company's interest-earning assets that the Company may not
be able to offset by obtaining lower interest costs on its borrowings. Changes
in the general level of interest rates prevailing in the economy can affect
the spread between the Company's interest-earning assets and interest-bearing
liabilities. Any significant compression of the spreads of the interest rates
on interest-earning assets over the interest rates on interest-bearing
liabilities could have a material adverse effect on the Company. In addition,
an increase in interest rates could, among other things, reduce the value of
the Company's Mortgage Loans and other interest-earning assets and its ability
to realize gains from the sale of such assets, and a decrease in interest
rates could reduce 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 various hedging strategies to limit the effects of changes
in interest rates on its operations, including engaging in interest rate
swaps, caps, floors and other interest rate exchange contracts. There can be
no assurance that the profitability of the Company will not be adversely
affected during any period as a result of changing interest rates. In
addition, hedging transactions involve certain additional risks such as
counter-party credit risk, legal enforceability of hedging contracts and the
risk that unanticipated and significant changes in interest will cause a
significant loss of basis in the contract. With regard to the loss of basis in
a hedging contract, indices upon which such contracts are priced may be more
or less variable than the indices upon which the hedged loans are priced,
thereby making the hedge less effective. There can be no assurance that the
Company will be able to adequately protect against the foregoing risks and
that the Company will ultimately realize an economic benefit from any hedging
contract it enters into.
NO ASSURANCE OF SUCCESSFUL IMPLEMENTATION OF NEW BUSINESS PLAN; RELIANCE ON
SENIOR MANAGEMENT
The Company is subject to the risks generally associated with the
development and implementation of its new business plan and will need to
develop effective investment and operating policies and strategies in
connection therewith. The Company's finance company operations have recently
commenced under the direction of a new management team that has never before
managed such a finance company, although certain officers and employees of the
management team have significant prior experience in managing real estate
assets, including Mortgage Loans, Mezzanine Loans and Subordinated Interests.
There can be no assurance that the Company will be successful in developing
the necessary investment and operating policies or that it will be able to
effectively implement its business plan. The Company is dependent to a
substantial extent on the experience and services of John R. Klopp, vice
chairman and chief executive officer of the Company, and Craig M. Hatkoff,
vice chairman of the Company, to implement the new business plan. The loss of
the services of either of these executive officers, or any others, could have
a material adverse effect on the Company's operations and ability
12
<PAGE>
to execute its business plan. The Company's employment agreements with Messrs.
Klopp and Hatkoff expire in 2002.
MANAGEMENT DISCRETION WITH INVESTMENT POLICY
The Company's new business plan currently emphasizes investments in Mortgage
Loans, Mezzanine Loans and Subordinated Interests. The Company does not have
any policy, and is not subject to any restrictions, limiting the percentage of
total investments in any particular category of investment other than the
limitations discussed under "--Consequences of Not Qualifying for Investment
Company Act Exemption." Subject to the foregoing, the Company's management has
complete discretion as to the relative percentages of the Company's
investments in any specific investment or any investment category. Further,
the Company is not limited in the kinds of real estate or finance-related
assets in which it can invest, and therefore may invest in assets with a
riskier profile, including distressed mortgages and foreign real estate
assets. Shareholders rely on management to select the types of investments to
be made by the Company and to determine the optimum mix of the Company's
investments.
CONTROL BY VEQTOR; RESTRICTIVE COVENANTS
After consummation of the Offering, Veqtor will beneficially own, in the
aggregate, 19,227,251 of the outstanding voting shares of the Company,
including 6,959,593 Class A Common Shares and 12,267,658 Class A Preferred
Shares, which shares, in the aggregate, will represent approximately 63%
(approximately 61% if the U.S. Underwriters' over-allotment option is
exercised in full) of the outstanding voting shares of the Company, and Veqtor
will have voting and investment power with respect to such shares. As a
result, Veqtor will retain the ability to control the election of trustees of
the Company and the vote on actions requiring shareholder approval, including
amendments to the Restated Declaration and mergers or sales of all or
substantially all of the assets of the Company, and Veqtor otherwise will
continue to be in a position to control the policies and affairs of the
Company. In addition, Veqtor's controlling ownership of the Company's
outstanding shares will continue to have the effect of precluding the
acquisition of the Company by a third party without Veqtor's consent. Veqtor
is controlled by Samuel Zell, the Company's chairman of the Board of Trustees,
Craig M. Hatkoff, a trustee and a vice chairman of the Company, and John R.
Klopp, a trustee and a vice chairman of the Company as well as its chief
executive officer. The Class A Preferred Shares owned by Veqtor have the
protection of certain covenants contained in Company's Certificate of
Designation, Preferences and Rights of the Preferred Shares (the "Certificate
of Designation") for the Class A Preferred Shares and the agreement governing
the Investment (the "Investment Agreement"), 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 "Certain Transactions--Investment
Agreement" and "Description of Capital Shares."
GENERAL RISKS OF INVESTING IN REAL ESTATE
The ultimate performance of the Company's proposed investments under its new
business plan and its existing portfolio of mortgage-backed securities will be
subject to the varying degrees of risk generally incident to the ownership and
operation of the underlying real property. The ultimate value of the Company's
security in the underlying real property depends upon the owners' ability to
operate the real property 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 changes in national
economic conditions, 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
13
<PAGE>
earthquakes, hurricanes and other natural disasters (which may result in
uninsured losses), acts of war, adverse changes in zoning laws, and other
factors that are beyond the control of the real property owners and the
Company. In the event that any of the properties underlying the Company's
investments experience any of the foregoing events or occurrences, the value
of and return on such investments would be negatively impacted.
ILLIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid. Such illiquidity limits the
ability of the Company to vary its portfolio of proposed and current
investments in response to changes in economic and other conditions.
Illiquidity may result from the absence of an established market for
investments as well as the legal or contractual restrictions on their resale
by the Company. In addition, illiquidity may result from the decline in value
of a property securing an investment by the Company. No assurances can be
given that the fair market value of any of the real property serving as
security will not decrease in the future, leaving the Company's investment
under-collateralized or not collateralized at all. Additionally, since the
Company intends to take subordinated security positions in its mezzanine
investments, a loss in the fair market value of a property securing an
investment would adversely affect the Company before it did a lender in a
first security position. It would be difficult to sell an under-collateralized
investment, and if the Company needed to do so, assuming it were even able to
do so given its typically subordinated lien position, it is likely that such
investment would be sold at a loss.
RISKS ASSOCIATED WITH LOSSES NOT COVERED BY INSURANCE
The Company intends to ensure that its borrowers maintain comprehensive
insurance on their properties, including liability and fire and extended
coverage, in amounts sufficient to permit the replacement of the properties in
the event of a total loss, subject to applicable deductibles. There are
certain types of losses, however, generally of a catastrophic nature, such as
earthquakes, floods and hurricanes, that may be uninsurable or not
economically insurable. Inflation, changes in building codes and ordinances,
environmental considerations and other factors also might make it infeasible
to use insurance proceeds to replace a property if it is damaged or destroyed.
Under such circumstances, the insurance proceeds received by the property
owner might not be adequate to restore its economic position with respect to
the affected property, which would reduce the property owner's economic
incentive to avoid a default on its loan obligation to the Company or to
preserve the value of the property in which the Company has an interest, as
the case may be.
RISK FROM COMMERCIAL AND CONSTRUCTION LENDING ACTIVITIES
The Company may originate or acquire loans secured by existing commercial
real estate, including multifamily residential real estate, some of which may
be 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 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 entity that owns the property, secured by an equity 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.
EFFECT OF CHANGES IN ECONOMIC CONDITIONS
The Company's success is dependent upon the general economic conditions in
the geographic areas in which a substantial number of its investments are
located. While the Company has no plans to concentrate its investment activity
in any particular geographic areas, there will be no limitation on the
Company's ability to do so. Adverse changes in national economic conditions or
in the economic conditions of the regions in which the Company conducts
substantial business likely would have an adverse effect on real estate
values, interest rates and, accordingly, the Company's investments.
14
<PAGE>
CONSEQUENCES OF NOT QUALIFYING FOR INVESTMENT COMPANY ACT EXEMPTION
The Company intends to invest in Subordinated Interests that may not
constitute Qualifying Interests (as defined herein) within the meaning of the
Investment Company Act of 1940 (the "Investment Company Act"). The Company
intends to limit the amount of such investments in Subordinated Interests that
do not constitute Qualifying Interests ("Non-Qualifying Investments") so as to
maintain the availability of an exemption from required registration as an
investment company under the Investment Company Act. If the Company does not
limit the amount of Non-Qualifying Investments so as to maintain the
availability of the foregoing exemption, or Subordinated Interests believed by
the Company to be Qualifying Interests are determined by the Commission or its
staff to be Non-Qualifying Investments (and the Non-Qualifying Investments
exceed prescribed limitations), the Company could, among other things, be
required either (a) to change the manner in which it conducts its operations
to avoid being required to register as an investment company or (b) to
register as an investment company, either of which could have a material
adverse effect on the Company and the market price for the Class A Common
Shares. Registration as an investment company would result in, among other
things, a significantly reduced ability to utilize leverage in the Company's
business and significantly increased operating expenses. See "Business--
Categories of Investment."
DILUTION AND ABSENCE OF DIVIDENDS
Purchasers of Class A Common Shares in the Offering will experience
immediate and substantial dilution in the net tangible book value of the Class
A Common Shares from the public offering price. See "Dilution." The Company
does not intend to pay cash dividends on the Class A Common Shares. In
addition, the Certificate of Designation restricts the ability of the Company
to pay dividends.
LIMITED TRADING MARKET
Although the Class A Common Shares are traded on the NYSE and the Pacific
Exchange, Inc. (the "Pacific Stock Exchange"), trading volume is limited and
sporadic. The Company does not intend to list the Class A Common Shares
offered hereby on the Pacific Stock Exchange, and following consummation of
the Offering the Company intends to take action such that the Class A Common
Shares will remain listed only on the NYSE. There can be no assurance that an
active and liquid trading market will develop following the Offering. In
addition, no predictions can be made as to the effect, if any, that future
sales of Class A Common Shares (or securities convertible into Class A Common
Shares) or the availability of any such securities for sale will have on the
prevailing market price of the Class A Common Shares.
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 Interest classes tend to be more sensitive to
changes in economic conditions than more senior, rated classes. The ratings
assigned to securities by a nationally recognized rating agency reflect such
agency's assessment of the ability of the issuer to make timely payments of
principal and interest and the nature and quality of the collateral underlying
the obligations. As a result of these and other factors, Subordinated
Interests generally are not actively traded and may not provide holders
thereof with liquidity of investment.
The yield to maturity on Subordinated Interests of the type the Company
intends to acquire will be extremely sensitive to the default and loss
experience of the underlying mortgage loans and the timing of any such
defaults or losses. Because the Subordinated Interests of the type the Company
intends to acquire generally have no credit support, to the extent there are
realized losses on the mortgage loans comprising the mortgage
15
<PAGE>
collateral for such classes, the Company may not recover the full amount or,
indeed, any of its initial investment in such Subordinated Interests. The
Company may acquire non-performing (i.e., defaulted) Subordinated Interests.
Such investments involve risks that the value of the mortgage collateral will
decline below the amount necessary to provide full recovery to senior classes,
in which event the Company's entire investment would be lost.
When the Company acquires a Subordinated Interest, it may not acquire the
right to service the underlying mortgage loans, even those that become
defaulted, although the Company may seek to obtain Special Servicing Rights
(as defined herein) (i.e., rights that permit the Company to make certain
loss-minimizing decisions with
respect to defaulted mortgages such as decisions with respect to the
prosecution of foreclosure proceedings, the workout or modification of the
loan provisions and the preservation of the value of the collateral generally,
including property management and maintenance decisions) with respect to such
loans. The servicer of the mortgage loans is responsible to holders of the
senior classes of CMBS, whose interests may not be the same as those of the
holder of the Subordinated Interest. Accordingly, the underlying mortgage
loans may not be serviced in the same manner as they would be serviced by the
Company or in a manner that is most advantageous to the Company as the holder
of the Subordinated Interest. While Victor Capital has performed many of the
functions of a special servicer, neither Victor Capital nor the Company is
currently a rated special servicer. Although the Company plans to seek to
become rated as a rated special servicer, or acquire a rated special servicer,
there can be no assurance as to when or if the Company will be able to
accomplish the foregoing. Until the Company can act as a rated special
servicer, it is unlikely that it will be able to obtain Special Servicing
Rights with respect to mortgage loans underlying a significant number of
Subordinated Interest investments. See "Business-- Categories of Investment."
The subordination of Subordinated Interests to more senior classes may
adversely affect the yield on the Subordinated Interests even if realized
losses are not ultimately allocated to such classes. On any payment date,
interest and principal are paid on the more senior classes before interest and
principal are paid with respect to the unrated or non-investment grade credit
support classes. Typically, interest deferred on these credit support classes
is payable on subsequent payment dates to the extent funds are available, but
such deferral may not itself bear interest. Such deferral of interest will
affect adversely the yield on the Subordinated Interests.
The yield of the Subordinated Interests also will be affected by the rate
and timing of payments of principal (including prepayments, repurchase,
defaults and liquidations) on the mortgage loans underlying a series of CMBS.
The rate of principal payments may vary significantly over time depending on a
variety of factors such as the level of prevailing mortgage loan interest
rates and economic, demographic, tax, legal and other factors. Prepayments on
the mortgage loans underlying a series of mortgage-backed securities 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.
NO ASSURANCE OF USE OF LOSS CARRY-FORWARD
The acquisition in January 1997 by CRIL of a 76% interest in the Company
resulted in a change in ownership of the Company under Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the Investment
resulted in another change in ownership of the Company, for purposes of
limitations on the use of the Company's net operating loss and capital loss
Carry-forward ("Loss Carry-forward"). The changes in ownership are expected to
result in a limitation on the amount of Loss Carry-forward that may be used to
offset the taxable income of the Company, if any, in an amount equal to
approximately $1.5 million per year until the earlier of (i) full utilization
thereof (which would occur in 2009 if the Company had sufficient taxable
income in each year to allow full use of the Loss Carry-forward, as limited)
or (ii) the expiration of the Loss Carry-forward in 2011, in accordance with
the provisions of the Code. The actual amount of this limitation may vary,
depending
16
<PAGE>
upon the actual data used in the foregoing calculations, which is 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 effective date of the
change in ownership, the amount of Loss Carry-forward 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 of the Code, there can be no
assurance that it will be able to do so and that the expected Loss Carry-
forward will be available to offset taxable income.
RISKS ASSOCIATED WITH UNSPECIFIED ACQUISITIONS
The Company has from time to time engaged in and expects to continue
pursuing discussions with respect to possible business acquisitions. While it
has no present commitments or agreements with respect to any material
acquisition, the Company is actively investigating acquisitions of firms
engaged in businesses that the Company believes will complement its existing
business, including firms engaged in commercial loan origination, loan
servicing, mortgage banking, real estate loan and property acquisitions and
real estate investment banking and advisory services similar to or related to
the services provided by the Company. Any decision to pursue acquisition
opportunities will be in the discretion of the Company's management and may be
consummated without prior notice or shareholder approval. In such instances,
shareholders will be relying on the Company's management to assess the
relative benefits and risks associated with any such acquisition.
RISK OF TAXATION AS A PERSONAL HOLDING COMPANY
As a result of the completion of the Investment, the Company may be deemed a
personal holding company for federal tax purposes under the Code and thereby
subject to additional tax on its undistributed personal holding company
income. Such undistributed personal holding company income is taxed at a rate
of 39.6%. The Company will seek to avail itself of an exception for a lending
or finance company that meets certain tests specified in the Code. Although
the Company will endeavor to meet the requirements for qualification as a
lending or finance company, there can be no assurance that it will be able to
do so. In the event the Company is subject to the foregoing additional taxes,
its after-tax income will be correspondingly reduced.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the issuance and sale of the 9,000,000
Class A Common Shares offered hereby, after deducting underwriting discounts
and commissions and estimated offering expenses, are estimated to be
approximately $91.9 million.
The Company intends to use the net proceeds from the Offering to fund
investments and loans made by the Company and for working capital for ongoing
operations and potential business acquisitions. Until applied to fund
investment or acquisition opportunities, the net proceeds of the Offering will
be used to temporarily reduce the outstanding borrowings under the Credit
Facility, which, including accrued interest, totaled approximately $33.4
million on December 10, 1997. German American Capital Corporation ("GACC"), an
affiliate of Deutsche Morgan Grenfell Inc., one of the U.S. Representatives,
and Morgan Grenfell & Co. Limited, one of the International Representatives,
is the sole lender under the Credit Facility. See "Underwriters."
The Company has from time to time engaged in, and expects to continue to
pursue, discussions with respect to possible business acquisitions. While it
has no present commitments or agreements with respect to any material
acquisitions, the Company is actively investigating acquisitions of firms
engaged in businesses that the Company believes will complement its existing
business, including firms engaged in commercial loan origination, loan
servicing, mortgage banking, financing activities, real estate loan and
property acquisitions and real estate investment banking and advisory services
similar to or related to the services provided by the Company. No assurance
can be given that any such transactions can be successfully negotiated or
completed or that any business acquired can be efficiently integrated with the
Company's ongoing operations. No assurance can be given that the net proceeds
from the Offering will be sufficient to fund any acquisitions identified by
the Company and that the Company will not need to obtain additional funds
through borrowings under the Credit Facility or through other loans or
financing arrangements.
Pending such uses, the net proceeds will be invested in short-term
investment-grade securities, certificates of deposit or direct or guaranteed
obligations of the United States government.
18
<PAGE>
PRICE RANGE OF CLASS A COMMON SHARES
The Class A Common Shares are listed for trading on the New York and Pacific
Stock Exchanges under the symbol "CT." The Company does not intend to list the
Class A Common Shares offered hereby on the Pacific Stock Exchange, and
following consummation of the Offering the Company intends to take action such
that the Class A Common Shares will remain listed only on the NYSE. The table
below sets forth, for the calendar quarters indicated, the reported high and
low sale prices of the Company's common shares of beneficial interest, par
value $1.00 per share (the "Old Common Shares"), which were reclassified as
the Class A Common Shares on July 15, 1997 in connection with the adoption of
the Company's Restated Declaration, as quoted on the NYSE based on published
financial sources.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1995
First Quarter................................................ $ 1 7/8 $1 5/8
Second Quarter............................................... 1 7/8 1 1/2
Third Quarter................................................ 1 7/8 1 1/2
Fourth Quarter............................................... 1 5/8 1 1/8
1996
First Quarter................................................ 1 1/2 1 1/8
Second Quarter............................................... 1 7/8 1 3/8
Third Quarter................................................ 2 3/4 1 5/8
Fourth Quarter............................................... 2 7/8 1 7/8
1997
First Quarter................................................ 6 7/8 2 5/8
Second Quarter............................................... 6 1/8 4 1/2
Third Quarter................................................ 11 3/8 5 3/4
Fourth Quarter (through December 10, 1997)................... 15 1/8 10 1/4
</TABLE>
The last sale price of the Class A Common Shares on December 10, 1997 as
reported on the NYSE is set forth on the cover page of this Prospectus. As of
December 3, 1997, there were approximately 1,573 holders of record of the
Class A Common Shares.
DIVIDEND POLICY
The Company has not paid any dividends on its Class A Common Shares since
1994. The Company does not currently expect to declare or pay dividends on its
Class A Common Shares in the foreseeable future. The policy of the Board of
Trustees will be to reinvest earnings in the Company to the extent that such
earnings are in excess of the dividend requirements on the Preferred Shares.
Pursuant to the Certificate of Designation, unless all accrued dividends and
other amounts then accrued through the end of the last dividend period and
unpaid with respect to the Preferred Shares have been paid in full, the
Company may not declare or pay or set apart for payment any dividends on the
Class A Common Shares or Class B Common Shares. The Certificate of Designation
provides for a semi-annual dividend of $0.1278 per share on the Class A
Preferred Shares based on a dividend rate of 9.5%, amounting to an aggregate
annual dividend of $3,135,000 based on the 12,267,658 shares of Class A
Preferred Shares outstanding on the date hereof. See "Description of Capital
Shares."
19
<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1997 was
approximately $55 million, or $2.57 per Class A Common Share (including the
Class A Common Shares into which the Class A Preferred Shares are convertible
(the "Underlying Class A Common Shares")). Net tangible book value per share
represents the total amount of tangible assets of the Company, less the total
amount of liabilities of the Company, divided by the sum of the number of
Class A Common Shares outstanding and the number of Underlying Class A Common
Shares.
Taking into account the sale of the Class A Common Shares offered hereby,
pro forma net tangible book value per share is determined by subtracting the
Company's total amount of liabilities from its total amount of tangible assets
and dividing the remainder by the sum of the number of Class A Common Shares
that will be outstanding after the Offering and the number of Underlying Class
A Common Shares. After giving effect to the sale of the 9,000,000 Class A
Common Shares in the Offering and after deducting estimated underwriting
discounts and commissions and estimated offering expenses, the pro forma net
tangible book value of the Company as of September 30, 1997 would have been
approximately $147 million, or $4.83 per Class A Common Share and Underlying
Class A Common Share. The price per share to the public of the Class A Common
Shares offered hereby exceeds the pro forma net tangible book value per share
prior to the Offering. Therefore, purchasers of Class A Common Shares in the
Offering will realize immediate and substantial dilution in the net tangible
book value of their shares. The following table, based upon net tangible book
value of the Company as of September 30, 1997, illustrates the dilution to
purchasers of Class A Common Shares sold in the Offering, based on the assumed
public offering price.
<TABLE>
<S> <C> <C>
Assumed public offering price per share ...................... $11.00
Net tangible book value per share before the Offering......... $2.57
Increase in net tangible book value per share attributable to
payments by purchasers of Class A Common Shares in the
Offering .................................................... 2.26
-----
Pro forma net tangible book value per share after the
Offering..................................................... 4.83
------
Dilution per share purchased in the Offering(1)............... $ 6.17
======
</TABLE>
- --------
(1) If the Underwriters' over-allotment option to purchase an additional
1,350,000 Class A Common Shares is exercised in full, the pro forma net
tangible book value per Class A Common Share and Underlying Class A Common
Share after this Offering would be $5.07 per share, which would result in
dilution to new investors in this Offering of $5.93 per share. The
foregoing information excludes 657,000 Class A Common Shares subject to
outstanding options under the Company's Incentive Share Plan and Trustee
Share Plan. See "Management--1997 Long-Term Incentive Share Plan" and
"Management--1997 Non-Employee Trustee Share Plan." To the extent that any
of these options are exercised, there will be further dilution to new
investors.
20
<PAGE>
CAPITALIZATION
The following table sets forth (i) certain combined short-term obligations
and the capitalization of the Company as of September 30, 1997 and (ii) such
combined short-term obligations and the capitalization as adjusted to give
effect to the sale of the 9,000,000 Class A Common Shares offered hereby and
the application of the estimated net proceeds therefrom (after deduction of
underwriting discounts and commissions and estimated offering expenses). See
"Use of Proceeds." The information set forth in the table below should be read
in conjunction with the Unaudited Pro Forma Condensed Combined Financial
Information and related notes included elsewhere herein.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997
-----------------------
AS
HISTORICAL ADJUSTED (1)
---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
SHORT-TERM DEBT(2)
Current maturities of long-term notes payable. $ 640 $ 640
-------- --------
Total short-term debt......................... $ 640 $ 640
======== ========
LONG-TERM DEBT(3)
Long-term notes payable....................... $ 4,227 $ 4,227
Credit Facility............................... 11,715 --
Repurchase Obligation......................... 36,881 36,881
-------- --------
Total long-term debt.......................... 52,823 41,108
-------- --------
SHAREHOLDERS' EQUITY(4)
Class A Preferred Shares, $1.00 par value--
12,639,405 authorized; 12,267,658 issued and
outstanding(5)............................... 12,268 12,268
Class A Common Shares, $1.00 par value--
Unlimited authorized; 9,138,325 and
18,138,325 issued and outstanding, historical
and as adjusted, respectively(6)............. 9,138 18,138
Additional paid-in capital.................... 75,719 158,579
Unrealized gain on available-for-sale
securities................................... 459 459
Accumulated deficit........................... (42,215) (42,215)
-------- --------
Total Shareholders' Equity.................... 55,369 147,229
-------- --------
TOTAL CAPITALIZATION(7)......................... $108,192 $188,337
======== ========
</TABLE>
- --------
(1) Assumes the sale of the 9,000,000 Class A Common Shares offered hereby and
the application of the estimated net proceeds therefrom (after deduction
of underwriting discounts and commissions and estimated offering expenses)
as described in "Use of Proceeds."
(2) Represents the current portion of the five-year, non-interest bearing,
$5.0 million promissory notes, payable in ten equal semi-annual
installments of $500,000, issued in connection with the Acquisition (the
"Acquisition Notes"), net of an unamortized discount of $360,000. See
"Certain Transactions."
(3) Includes the long-term portion of the Acquisition Notes, net of an
unamortized discount of $740,000.
(4) In addition to the Class A Common Shares and Class A Preferred Shares
listed in the table, the Company is authorized to issue an unlimited
number of Class B Common Shares and 12,639,405 Class B Preferred Shares,
although no shares of either class are currently outstanding. The Class B
Common Shares and the Class B Preferred Shares are identical to the Class
A Common Shares and the Class A Preferred Shares, respectively, except
that neither the Class B Common Shares nor the Class B Preferred Shares
entitle the holders thereof to voting rights, except as provided by law.
See "Description of Capital Shares."
(5) Each Class A Preferred Share is convertible at the option of the holder
thereof into one Class A Common Share, subject to adjustment to avoid
dilution, or one Class B Preferred Share. See "Description of Capital
Shares."
(6) Does not include 657,000 Class A Common Shares subject to outstanding
options under the Company's Incentive Share Plan and Trustee Share Plan.
(7) Total Capitalization includes long-term debt and shareholders' equity.
21
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
Prior to July 1997, the Company operated as a REIT, originating, acquiring,
operating or holding income-producing real property and mortgage-related
investments. Therefore, the Company's historical financial information as of
and for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 does not
reflect any operating results from its specialty finance or real estate
investment banking operations. The following selected financial data relating
to the Company have been derived from the historical financial statements as
of and for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and as
of and for the nine months ended September 30, 1996 and 1997. Other than the
data for the nine months ended September 30, 1997, none of the following data
reflect the results of the Acquisition and the Investment, both of which
occurred on July 15, 1997, or the Offering as contemplated hereby. For these
reasons, the Company believes that the following information is not indicative
of the Company's current business. The information in these tables is
qualified by and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements of the Company and notes thereto included herein and
incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -------------------
1992 1993 1994 1995 1996 1996 1997
-------- ------- ------ ------- ------ ----------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
REVENUES:
Rental income........... $ 3,641 $ 4,555 $2,593 $ 2,093 $2,019 $1,585 $ 313
Interest and investment
income................. 2,248 924 1,675 1,396 1,136 837 2,871
Advisory and asset
management fees........ -- -- -- -- -- -- 529
Other................... -- -- 519 46 -- --
-------- ------- ------ ------- ------ ------ -------
Total revenues....... 5,889 5,479 4,787 3,535 3,155 2,422 3,713
-------- ------- ------ ------- ------ ------ -------
OPERATING EXPENSES:
Operating expenses...... 1,703 2,177 1,782 592 685 475 123
Property management..... 384 620 252 96 96 76 18
General and
administrative......... 480 662 813 933 1,503 1,073 4,452
Interest................ 1,388 1,487 1,044 815 547 410 934
Depreciation and
amortization........... 1,111 847 595 662 64 45 52
-------- ------- ------ ------- ------ ------ -------
Total operating
expenses............ 5,066 5,793 4,486 3,098 2,895 2,079 5,579
-------- ------- ------ ------- ------ ------ -------
OPERATING INCOME (LOSS)
BEFORE LOSS ON
FORECLOSURE OR SALE OF
INVESTMENTS AND
PROVISION FOR POSSIBLE
CREDIT LOSSES.......... 823 (314) 301 437 260 343 (1,866)
Loss on foreclosure or
sale of investments and
provision for possible
credit losses.......... (11,102) (7,797) (337) (3,215) (674) (630) (587)
-------- ------- ------ ------- ------ ------ -------
NET LOSS................ (10,279) (8,111) (36) (2,778) (414) (287) (2,453)
Less: Preferred Share
dividend requirement... -- -- -- -- -- -- (679)
-------- ------- ------ ------- ------ ------ -------
Net loss allocable to
Class A Common Shares . $(10,279) $(8,111) $ (36) $(2,778) $ (414) $ (287) $(3,132)
======== ======= ====== ======= ====== ====== =======
PER SHARE INFORMATION:
Net loss per Class A
Common Share........... $ (1.13) $ (0.89) $(0.00) $ (0.30) $(0.05) $(0.03) $ (0.34)
Weighted average Class A
Common Shares
outstanding............ 9,128 9,145 9,138 9,138 9,138 9,138 9,138
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......... $55,477 $42,194 $36,540 $33,532 $30,036 $30,045 $112,295
Total liabilities..... 16,739 13,583 8,855 8,625 5,565 5,411 56,926
Shareholders' equity.. 38,738 28,611 27,685 24,907 24,471 24,634 55,369
</TABLE>
22
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1996 and the nine months ended
September 30, 1997 assume the Acquisition and related transactions occurred on
January 1, 1996. The following unaudited pro forma condensed combined
statements of operations are presented for illustrative purposes only and are
not necessarily indicative of the combined operating results that would have
occurred if the Acquisition had been consummated on the date indicated, nor
are they indicative of future combined operating results. The unaudited pro
forma condensed combined statements of operations are based on and should be
read in conjunction with the historical consolidated statements of operations
of the Company for the year ended December 31, 1996 and the nine months ended
September 30, 1997 and the historical combined statements of income of Victor
Capital for the year ended December 31, 1996 and the six months ended June 30,
1997, which are included elsewhere in this Prospectus.
A pro forma condensed combined balance sheet has not been presented as of
September 30, 1997, since the Acquisition had occurred as of such date, and is
presented in the historical condensed balance sheet as of September 30, 1997.
Were the Offering to have been completed on September 30, 1997 at the assumed
offering price, marketable securities would have increased by $80,145,000, the
Credit Facility would have been reduced by $11,715,000, Class A Common Shares
would have increased by $9,000,000 and additional paid in capital would have
increased by $82,860,000. See "Summary Pro Forma Financial Information."
23
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE VICTOR PRO FORMA PRO FORMA
COMPANY CAPITAL ADJUSTMENTS NOTES COMBINED
--------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
INCOME FROM INVESTMENT AND
LENDING TRANSACTIONS:
Interest and related
income.................... $ 1,863 $ -- $ -- $ 1,863
Interest and related
expenses.................. 790 -- (31) (1) 759
--------- ----- ----- ----------
Net income from
investment and lending
transactions............ 1,073 -- 31 1,104
--------- ----- ----- ----------
OTHER REVENUES:
Advisory and asset
management fees........... 529 2,722 -- 3,251
Rental income.............. 313 -- -- 313
Interest and investment
income.................... 1,008 37 -- 1,045
--------- ----- ----- ----------
Total other revenues..... 1,850 2,759 -- 4,609
--------- ----- ----- ----------
OTHER EXPENSES:
General and administrative. 4,470 1,975 61 (2) 6,506
Other interest expense..... 144 -- 147 (3) 291
Rental property expenses... 123 -- -- 123
Depreciation and
amortization.............. 52 19 12 (3) 83
--------- ----- ----- ----------
Total other expenses..... 4,789 1,994 220 7,003
--------- ----- ----- ----------
(Loss) income before loss
on sale of rental
properties, provision for
possible credit losses and
income taxes.............. (1,866) 765 (189) (1,290)
Loss on sale of rental
properties................... (432) -- -- (432)
Provision for possible credit
losses....................... (155) -- -- (155)
--------- ----- ----- ----------
(Loss) income before income
taxes..................... (2,453) 765 (189) (1,877)
Provision for income taxes... -- -- -- (4) --
--------- ----- ----- ----------
Net (loss) income.......... (2,453) 765 (189) (1,877)
Less: Preferred Share
dividend requirement......... (679) -- -- (5) (679)
--------- ----- ----- ----------
Net (loss) income allocable
to Class A Common Shares.. $ (3,132) $ 765 $(189) $ (2,556)
========= ===== ===== ==========
PER SHARE INFORMATION:
Net loss per Class A Common
Share
Primary and fully
diluted................. $ (0.34) NA NA (6) $ (0.14)
========= ===== ===== ==========
Weighted average Class A
Common Shares outstanding
Primary and fully
diluted................. 9,138,325 -- -- (1)(6) 18,138,325
========= ===== ===== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combined financial statements.
24
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
VICTOR PRO FORMA PRO FORMA
THE COMPANY CAPITAL ADJUSTMENTS NOTES COMBINED
----------- ------- ----------- ----- ----------
<S> <C> <C> <C> <C> <C>
INCOME FROM INVESTMENT AND
LENDING TRANSACTION:
Interest and related
income.................. $ 100 $ -- $ -- $ 100
Interest and related
expenses................ 86 -- -- 86
--------- ------ ----- ----------
Net income from
investment and lending
transactions........... 14 -- -- 14
--------- ------ ----- ----------
OTHER REVENUES:
Advisory and asset
management fees......... -- 6,940 -- 6,940
Rental income............ 2,019 -- -- 2,019
Interest and investment
income.................. 1,036 333 -- 1,369
--------- ------ ----- ----------
Total other revenues.... 3,055 7,273 -- 10,328
--------- ------ ----- ----------
OTHER EXPENSES:
General and
administrative.......... 1,599 4,586 139 (2) 6,324
Other interest expense... 461 -- 360 (3) 821
Rental property expenses. 685 -- -- 685
Depreciation and
amortization............ 64 44 23 (3) 131
--------- ------ ----- ----------
Total other expenses.... 2,809 4,630 522 7,961
--------- ------ ----- ----------
(Loss) income before loss
on sale or foreclosure
of rental properties,
provision for possible
credit losses and income
taxes................... 260 2,643 (522) 2,381
Gain on sale or foreclosure
of rental properties...... 1,069 -- -- 1,069
Provision for possible
credit losses............. (1,743) -- -- (1,743)
--------- ------ ----- ----------
(Loss) income before
income taxes............ (414) 2,643 (522) 1,707
Provision for income taxes. -- -- (96) (4) (96)
--------- ------ ----- ----------
Net (loss) income ....... $ (414) $2,643 $(618) $ 1,611
========= ====== ===== ==========
PER SHARE INFORMATION:
Net (loss) income per
Class A Common Share
Primary and fully
diluted................. $ (0.05) NA NA (6) $ 0.09
========= ====== ===== ==========
Weighted average Class A
Common Shares outstanding
Primary and fully
diluted................. 9,138,325 -- -- (1)(6) 18,138,325
========= ====== ===== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combined financial statements.
25
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED)
STATEMENTS OF OPERATIONS
1. THE INVESTMENT AND THE OFFERING
Information for the Company for the nine months ended September 30, 1997
includes (i) the Preferred Share dividend requirement for the Class A
Preferred Shares since their issuance on July 15, 1997 ($679,000) pursuant to
the Investment and (ii) income derived from the re-investment of the proceeds
therefrom. Had the Class A Preferred Shares been outstanding for the entire
nine-month period, the Preferred Share dividend requirement would have been
$2,351,000 (equivalent to $3,135,000 per annum). In addition, an adjustment
has been made to reflect the sale of 9,000,000 Class A Common Shares in the
Offering and the use of proceeds therefrom to eliminate the $11.7 million
borrowed under the Credit Facility. Interest expense thereon for the nine
months ended September 30, 1997 was reduced by $31,000.
2. EMPLOYMENT
Prior to the Acquisition, Victor Capital's owners were compensated pursuant
to a management agreement with Victor Capital's general partner. In connection
with the Acquisition, the owners of Victor Capital entered into employment
agreements with the Company and the management agreement was terminated.
See "Management--Employment Agreements." The Pro Forma adjustments are as
follows (in thousands):
<TABLE>
<CAPTION>
9/30/97 12/31/96
------- --------
<S> <C> <C>
Compensation per employment agreement..................... $ 500 $1,000
Fees per management agreement............................. (439) (861)
----- ------
$ 61 $ 139
===== ======
</TABLE>
3. ACQUISITION OF VICTOR CAPITAL
Other interest expense was computed based on the $3.9 million of non-
interest bearing notes issued by the Company to finance the Acquisition which
is amortized based upon semi-annual payments of $500,000 which are paid by the
Company in accordance with the terms of the notes. Interest has been imputed
on the notes at a rate of 9.5% per annum.
The discounted cost of the Acquisition in excess of net tangible assets
acquired, $342,000, is being amortized over a fifteen-year period.
4. CORPORATE TAXES
Due to the termination of the Company's REIT status and the Company's
resulting status as a taxable corporate entity, the Company's income is taxed
at a combined federal and state corporate rate of 46.6% after giving effect to
the Company's estimated available net operating losses of $1.5 million per
annum, which have been adjusted for the change in the Company's ownership.
5. CLASS A PREFERRED SHARES
Pursuant to the terms of the Certificate of Designation establishing the
Class A Preferred Shares, a semi-annual dividend of $0.1278 per share is
payable based on a dividend rate of 9.5%. The dividend requirement on the
12,267,658 Class A Preferred Shares has been presented for the period from the
date of issuance, July 15, 1997, to September 30, 1997.
26
<PAGE>
6. DILUTION OF CLASS A COMMON SHARES
Pursuant to the terms of the Certificate of Designation establishing the
Class A Preferred Shares, the holders of the 12,267,658 Class A Preferred
Shares outstanding have the right to convert their shares into Class A Common
Shares and Class B Common Shares of the Company at the rate of one Class A
Common Share or Class B Common Share for each Class A Preferred Share, subject
to adjustment to avoid dilution.
The Class A Preferred Shares were not considered common share equivalents
for purposes of calculating fully diluted earnings per share as they were
antidilutive for the nine months ended September 30, 1997 and were not
outstanding during the year ended December 31, 1996.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Prior to July 1997, the Company operated as a REIT, originating, acquiring,
operating or holding income-producing real property and mortgage-related
investments. Since the 1997 Annual Meeting, the Company has pursued a new
strategic direction with a focus on becoming a specialty finance company
designed primarily to take advantage of high-yielding mezzanine investments
and other real estate asset and finance opportunities in commercial real
estate. As contemplated by its new business plan, the Company no longer
qualifies for treatment as a REIT for federal income tax purposes.
Consequently, the information set forth below with regard to historical
results of operations for the three years ended December 31, 1996 does not
reflect any operating results from the Company's specialty finance activities
or real estate investment banking services nor the Company's current
investment portfolio. The results for the nine months ended September 30, 1997
reflect partial implementation of the Company's new business plan as discussed
below.
RECENT DEVELOPMENTS
On January 3, 1997, CRIL, an affiliate of EGI and Samuel Zell, purchased
from the Company's former parent 6,959,593 Class A Common Shares (representing
approximately 76% of the then-outstanding Class A Common Shares) for an
aggregate purchase price of $20,222,011. Prior to the purchase, which was
approved by the then-incumbent Board of Trustees, EGI and Victor Capital
presented to the Company's then-incumbent Board of Trustees a proposed new
business plan in which the Company would cease to be a REIT and instead become
a specialty finance company designed primarily to take advantage of high-
yielding mezzanine investment and other real estate asset opportunities in
commercial real estate. EGI and Victor Capital also proposed that they provide
the Company with a new management team to implement the business plan and that
they invest through an affiliate a minimum of $30.0 million in a new class of
preferred shares to be issued by the Company.
The Board of Trustees approved CRIL's purchase of the former parent's Class
A Common Shares, the new business plan and the issuance of a minimum of $30.0
million of a new class of preferred shares of the Company at $2.69 per share,
such shares to be convertible into Class A Common Shares of the Company on a
one-for-one basis. The Board of Trustees considered a number of factors in
approving the foregoing, including the attractiveness of the proposed new
business plan, the significant real estate investment and financing experience
of the proposed new management team and the significant amount of equity
capital the Company would obtain from the proposed preferred share investment.
The Board also considered the terms of previous alternative offers to purchase
the former parent's interest in the Company of which the Board was aware and
the fact that the average price of the Company's Old Common Shares during the
60 trading days preceding the Board of Trustees meeting at which the proposed
preferred equity investment was approved was $2.38 per share. The Company
subsequently agreed that, concurrently with the consummation of the proposed
preferred equity investment, it would acquire for $5.0 million Victor
Capital's real estate investment banking, advisory and asset management
businesses, including the services of its experienced management team.
At the Company's 1997 Annual Meeting held on July 15, 1997, the Company's
shareholders approved the Investment, pursuant to which the Company would
issue and sell up to approximately $34.0 million of Class A Preferred Shares
to Veqtor, an affiliate of Samuel Zell and the principals of Victor Capital.
The Company's shareholders also approved the Restated Declaration, which,
among other things, reclassified the Company's Old Common Shares as Class A
Common Shares and changed the Company's name to "Capital Trust."
Immediately following the 1997 Annual Meeting, the Investment was
consummated; 12,267,658 Class A Preferred Shares were sold to Veqtor for an
aggregate purchase price of $33,000,000 pursuant to the terms of the preferred
share purchase agreement, dated as of June 16, 1997, by and between the
Company and Veqtor (the "Investment Agreement"). Concurrently with the
foregoing transaction, Veqtor purchased the 6,959,593 Class A Common Shares
held by CRIL for an aggregate purchase price of approximately $21.3 million.
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As a result of these transactions, Veqtor beneficially owns 19,227,251 (or
approximately 90%) of the outstanding voting shares of the Company. Veqtor
funded the approximately $54.3 million aggregate purchase price for the Class
A Common Shares and Class A Preferred Shares with $5.0 million of capital
contributions from its members and $50.0 million of borrowings under the
Veqtor Notes issued to the Institutional Investors. The Veqtor Notes may in
the future be converted into preferred interests in Veqtor that may in turn be
redeemed for an aggregate of 9,899,710 voting shares of the Company.
In addition, immediately following the 1997 Annual Meeting, the acquisition
of the real estate services businesses of Victor Capital was consummated and a
new management team was appointed by the Company from among the ranks of
Victor Capital's professional team and elsewhere. The Company thereafter
immediately commenced full implementation of the new business plan under the
direction of its newly elected Board of Trustees and new management team.
OVERVIEW OF FINANCIAL CONDITION FOLLOWING IMPLEMENTATION OF THE NEW BUSINESS
PLAN
During the period June 30, 1997 through September 30, 1997, in connection
with the Company's implementation of its new business plan as a specialty
finance company, the Company originated four investment and loan transactions.
These transactions aggregated approximately $110 million, and the Company's
portion, which is net of participations and unfunded commitments, aggregated
approximately $86.4 million at September 30, 1997. These investments and loans
have yields ranging from 400 to 600 basis points over LIBOR and are consistent
with the Company's targeted risk/reward parameters. In addition, the Company
entered into the $150 million Credit Facility to finance, in part, investments
made pursuant to the new business plan. As of September 30, 1997, all of the
Company's new investment and loan assets and corresponding liabilities were
based upon floating rates over LIBOR. During the three months ended September
30, 1997, significant advisory income collected during the period as a result
of the Company's acquisition of Victor Capital was applied as a reduction in
the excess of the acquisition purchase price over net tangible assets acquired
as opposed to being reflected as a revenue item. In addition, the Company
incurred significant general and administrative expenses primarily related to
the commencement of operations as a specialty finance company. The Company
expects to consummate the Offering during the fourth quarter of 1997. The net
proceeds from the Offering after repayment of outstanding Credit Facility
borrowings will be used to fund investments and loans made by the Company and
for working capital for ongoing operations and potential acquisitions. The
Company's initial investments pursuant to the new business plan are described
below.
On June 30, 1997, the Company completed its first investment pursuant to its
new business plan, an approximately $49.5 million investment in a junior,
subordinated class of CMBS. The Subordinated Investment, which is secured by
20 short-term commercial mortgage loans with original maturities ranging from
two to three years, which loans are secured, directly or indirectly, by
properties located throughout the United States. This investment was
structured to provide an effective yield of a specified number of basis points
over LIBOR based on specified base case modeling assumptions.
On August 4, 1997, the Company originated and funded in part a $35.0 million
short-term LIBOR-based commitment for a subordinated Mortgage Loan for
improvements to a mixed-use property (the Chicago Apparel Center) in Chicago,
Illinois. The mortgage loan is secured by the property, is subordinate to
senior indebtedness and is further secured by two mortgage notes (with an
aggregate principal amount of $9.6 million) on development sites located
nearby. The loan has a two-year initial term with a one-year extension option
available to the borrower, subject to certain conditions, and is payable upon
the sale of the property unless the Company approves the assumption of the
debt by an institutional investor. On August 4, 1997, the Company funded $19.0
million against the aforementioned commitment and, subsequently, on August 19,
1997, the Company entered into a participation agreement with a third party
(the "Participant") pursuant to which the Company assigned a 42.9% interest in
the loan. In connection with the participation agreement, the Participant paid
to the Company approximately $8.2 million, or 42.9% of the $19.0 million
previously funded by the Company. During September 1997, the Company and the
Participant funded additional amounts aggregating $1.2 million, of which
$506,000 was funded by the Participant. Through September 30, 1997, the
Company's portion of the funding provided under the mortgage loan aggregated
$11.5 million.
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On August 13, 1997, the Company originated and funded a LIBOR-based $9.8
million Mortgage Loan. This loan was primarily secured by an $11.8 million
mortgage note on an approximately 281,000 square foot office/warehouse
facility located in Philadelphia, Pennsylvania. This loan was also secured by
a pledge of a $4.4 million mortgage note secured by an industrial/warehouse
facility in Queens, New York and a $2.3 million pool of secured home loans to
owners of cooperative apartments located in Brooklyn, New York. The Mortgage
Loan was further secured by a pledge of various other loans owned by the
borrower. The Mortgage Loan had a term of one year which could have been
extended by the borrower for an additional year. In November 1997, the loan
was repaid to the Company in full.
On September 19, 1997, the Company completed a fixed rate investment in the
form of a $15.0 million portion of a ten year $80.0 million Mezzanine Loan
secured by a pledge of the ownership interests in the entities that own the
approximately 1.75 million square foot office building located at 277 Park
Avenue in New York City. The investment is further secured by a full payment
guarantee by the principal owner of the entities that own the property, in the
event of certain circumstances, including bankruptcy. Seventy-five percent of
the purchase price (approximately $11.7 million) was financed pursuant to a
reverse repurchase agreement. Effective September 12, 1997, in order to hedge
its interest rate risk under the transaction, the Company entered into an
interest rate swap agreement. Effective September 30, 1997, the reverse
repurchase agreement was terminated and refinanced with an $11.7 million
borrowing under the Credit Facility.
As of January 1, 1997, the Company's real estate portfolio, which included
two commercial rental properties, was carried at a book value of $8,585,000.
The portfolio included a shopping center in Sacramento, California and a 60%
interest in a mixed-use retail property in Kirkland, Washington. During the
first quarter, these two commercial properties were sold. The sale of the
Sacramento property closed on February 14, 1997 and the sale of the Kirkland
property closed on March 3, 1997.
The Company completed the investment and lending transactions discussed
above with cash on hand and funding pursuant to reverse repurchase agreements,
including an agreement with the commercial lender on the Credit Facility made
in advance of the execution thereof.
RESULTS OF OPERATIONS
Comparison of the Nine Months Ended September 30, 1997 (Audited) to the Nine
Months Ended September 30, 1996 (Unaudited)
Net loss allocable to Class A Common Shares of $3,132,000 was reported by
the Company during the nine months ended September 30, 1997, an increase of
$2,845,000 from the loss reported for the nine months ended September 30,
1996. The increase resulted primarily from costs incurred with the
implementation of the new business plan, significant general and
administrative expenses associated with the acquisition of Victor Capital and
the retention of the Company's new management team and the Preferred Share
dividend requirement. The increase in net loss further resulted from losses
from the sale of rental properties in 1997 as compared to gains from such
sales in 1996. Such increased losses were partially offset by a decrease in
the provision for possible credit losses during 1997.
Net income from investment and lending transactions increased $629,000 to
$1,073,000 for the nine months ended September 30, 1997. The increase is
primarily attributable to the revenue earned from the Company's significant
new investment and loan originations offset by the interest paid on reverse
repurchase agreements.
Other revenues decreased $128,000 to $1,850,000 for the nine months ended
September 30, 1997. This decrease was primarily caused by a $1,272,000
decrease in rental income as the Company sold its remaining rental properties
during the first quarter of 1997. This decrease in rental income was
substantially offset by an
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increase in other interest income of $615,000, which income was derived from
the higher level of invested cash on hand and investments, and the addition of
advisory and asset management fees generated by Victor Capital.
Other expenses increased by $2,710,000 for the nine months ended September
30, 1997 to $4,789,000. The increase was primarily due to the additional
general and administrative expenses associated with the acquisition of Victor
Capital and the full implementation of the Company's new business plan. The
majority of the increase in general and administrative expenses was
attributable to salaries and other costs related to the additional employees
from Victor Capital and other administrative expenses resulting from the
acquisition of Victor Capital.
During the first quarter of 1997, the Company sold its Sacramento,
California shopping center. The net loss recognized from the sale of such
property was approximately $34,000. The Company also sold its Kirkland,
Washington retail property. The net loss recognized from the sale of such
property was approximately $398,000.
Provision for possible credit losses decreased to $155,000 for the nine
months ended September 30, 1997, as the rental properties that necessitated
the provision for possible credit losses in 1996 had been sold in 1997.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND
DECEMBER 31, 1994
Results of Operations
Total Revenues. Total revenues were $3,155,000 in 1996, down from $3,535,000
in 1995, which were down from $4,787,000 in 1994. The decrease reported in
1996 was primarily attributable to a decrease in interest revenue as a result
of the liquidation of a portion of the Company's note portfolio and decreased
rental revenues. In 1995, there was a $473,000 reduction in hotel revenue
compared to the prior year as a result of the terms and conditions of the
lease arrangement in place throughout 1995.
Rental revenues at the Company's commercial properties were $2,019,000 in
1996, down from $2,093,000 in 1995, which were down from $2,593,000 in 1994.
The decrease in rental revenues reported in 1996 was attributable primarily to
the absence of rent collected at the two properties that were sold in the
first half of the year. The decrease in rental revenues in 1995 compared to
those collected in 1994 was attributable to the absence of $196,000 in rent
collected in the prior year at a shopping center prior to its sale, as well as
a decrease of $305,000 in rents collected at the two other properties. No
rental revenues were generated by the Company's hotel property in 1996, which
was foreclosed upon after the Company suspended debt service payments.
Interest revenues were $1,136,000 in 1996, down from $1,396,000 in 1995. The
decrease was the result of a lower amount of interest received due to the sale
of certain mortgage notes offset by an increase in interest earned on cash
accounts and marketable securities. Interest revenues in 1995 were down from
1994 interest revenues of $1,675,000. In 1994, the Company recognized an
additional $735,000 in interest revenue on one of its mortgage notes. In
September 1994, this note was modified and $491,000 of accrued interest, the
recognition of which had been deferred, was paid in consideration for
releasing an asset from the pool of properties collateralizing the note. This
event was the primary cause of the decrease in interest revenues in 1995 from
1994.
Total Expenses. Total expenses were $2,895,000 in 1996, down from $3,098,000
in 1995. In 1995, total expenses were down 31% from total expenses of
$4,486,000 in 1994. The reduction in expenses in 1996 was primarily the result
of the downsizing of the Company's portfolio which reduced depreciation,
interest expense and associated property operating expenses. The reduction in
expenses by $1,388,000 in 1995 from those in 1994 resulted from reduced
interest expense and hotel and commercial property operating expenses caused
by the downsizing of the Company's portfolio and the lease agreement with the
hotel management company. In 1996, the hotel, as a function of the operating
lease agreement, generated no income or expense to the Company. In 1995, hotel
operating expenses decreased $763,000 from 1994, attributable to the leasing
of the property to a third-party hotel management company in mid-year.
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Interest expense was $547,000 in 1996, down from $815,000 in 1995, which was
down from $1,044,000 in 1994. The decrease in 1996 reflected the disposition
of the hotel property. The decrease in interest expense in 1995 over that of
1994 reflected the sale of a shopping center property and the payoff of the
note on another shopping center property.
The 1996 non-cash depreciation charge was $64,000, a decrease from $662,000
in 1995, which charge increased in 1995 compared to the depreciation charge of
$595,000 in 1994. The decrease in 1996 reflected the sale of two properties
and the disposition of the hotel property. In addition, the Company's two
remaining properties were not depreciated in 1996 because they were being held
for sale. The slight increase in 1995 over that of 1994 resulted from
amortization of certain property-specific expenses.
General and administrative expenses were $1,503,000 in 1996, up
significantly from $933,000 in 1995. General and administrative expenses in
1995 were up from the $813,000 reported in 1994. While the Company was able to
lower a number of office expenses, a net increase in general and
administrative costs occurred in 1996 due primarily to an accelerated
investigation of potential merger or acquisition candidates plus due diligence
costs. The increase in general and administrative expenses in 1995 over those
in 1994 was primarily due to legal and accounting costs which had not been
incurred in the prior year, plus expansion transaction development costs.
Net Loss. The net loss for the Company in 1996 was $414,000, a substantial
decrease over the net loss of $2,778,000 reported in 1995. This improvement
was primarily the result of sales proceeds received by the Company from
property and mortgage note dispositions offset by valuation losses discussed
further below. Net loss in 1995 was up significantly from a net loss of
$36,000 reported in 1994. The increase in net loss in 1995 compared to 1994
was due primarily to a substantial difference in valuation losses charged in
1995 as compared to those charged in 1994.
Operating income was $260,000 in 1996, down from $437,000 in 1995. In 1995,
operating income was up from $301,000 in 1994. The $177,000 decline in
operating income in 1996 was primarily the result of an increase in Company
operating expenses during the year offset by a reduction in depreciation
charges. Operating income in 1995 was $136,000 greater than that reported in
1994, primarily because of lower interest expense and reduced hotel operating
expenses.
Net Gain or Loss on Foreclosure or Sale of Investments. Gains before
valuation losses to the Company were $1,329,000 in 1996 as compared to
$503,000 in 1995 and $83,000 in 1994. The net gain recognized from the sale of
a property in the first quarter of 1996 was $299,000. There was no gain or
loss upon the foreclosure of the motel property in the first quarter of 1996
as the net book value of the property was equal to its debt.
During the second quarter of 1996, the Company incurred a net loss of
$164,000 from the sale of a storage facility property. Also during the second
quarter of 1996, the Company sold two of its seven mortgage notes. A gain of
$430,000 was recognized upon the sale of the Company's mortgage note which was
collateralized by a first deed of trust on an office/commercial building in
Phoenix, Arizona; and a gain of $30,000 was recognized upon the sale of the
Company's mortgage note which was collateralized by a second deed of trust on
a commercial building in Pacheco, California. During the third quarter of
1996, the Company sold two more mortgage notes. A gain of $115,000 was
recognized upon the sale of the Company's mortgage note which was
collateralized by a first deed of trust on an office building in Scottsdale,
Arizona; and a gain of $357,000 was recognized upon the sale of the Company's
mortgage note which was collateralized by a second deed of trust on an
office/industrial building in Sunnyvale, California.
In 1995, the Company recognized a deferred gain from the partial principal
payment received on one of its mortgage notes. During the first five months of
1994, the Company's hotel property experienced an average operating loss after
debt service of $107,000 per month. With the execution of a lease with the
hotel management company in 1994, this amount was reduced to approximately
$8,600 per month, the difference between the monthly lease payment of $20,000
and the property's monthly debt service requirement of $28,600. The lease was
renegotiated in June 1995, reducing the monthly lease payments from $20,000 to
approximately $9,000, increasing the loss recorded by the Company. In 1994,
the Company experienced a gain of $114,000
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on the sale of one property and the recognition of a deferred gain from the
partial principal payment on one of its mortgage notes. This was offset by a
$344,000 loss from the release of and default on two of the Company's mortgage
notes held at that time.
Valuation Losses. For the year ended December 31, 1996, the Company reported
total valuation losses of $1,743,000. By year end, the Company had reduced the
book value of its Sacramento, California shopping center to $1,215,000 and the
book value of its Kirkland, Washington retail property to $7,370,000. Since
these properties were no longer being held for investment, but rather for
sale, their book value was reduced to more accurately reflect the then-current
market value of the assets. The decline in the shopping center's value was the
result of the Company's relatively short lease term on the land underlying the
center, the physical condition of the property and changed market conditions
in the Sacramento area. Disposition efforts on behalf of retail property also
indicated the need to reduce this property's book value as it was no longer
being held for investment purposes but actively marketed for sale. Both
properties were sold during the first quarter of 1997.
In 1995, valuation losses of $3,281,000 resulted from the write-down in
value of two commercial properties and five mortgage notes. In 1994, valuation
losses of $119,000 resulted from the write-down in value of two commercial
properties. In 1996, 1995 and 1994 there were no extraordinary items.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $4,063,000 in cash. Liquidity in the
remainder of 1997 will be provided primarily by cash on hand, cash generated
from operations, interest payments received on investments, loans and
securities, additional borrowings under the Credit Facility and the net
proceeds from the Offering. The Company believes these sources of capital will
adequately meet future cash requirements. Consistent with its new business
plan, the Company expects that during the remainder of 1997 it will use a
significant amount of its available capital resources to originate and fund
investment and lending transactions. In connection with such investment and
loan transactions, the Company intends to employ significant leverage, up to a
5:1 debt-to-equity ratio, to enhance its return on equity.
The Company experienced a net decrease in cash of $635,000 for the nine
months ended September 30, 1997, compared to a net decrease in cash of
$1,530,000 for the nine months ended September 30, 1996, a difference of
$895,000. For the nine months ended September 30, 1997, cash used in operating
activities was $1,445,000, down $1,815,000 from cash provided by operations of
$370,000 during the same period in 1996. Cash used in investing activities
during this same period increased by $78,509,000 to $80,354,000, up from
$1,845,000, primarily as a result of the investment and lending transactions
completed since June 30, 1997. Cash provided by financing activities increased
$81,219,000 due primarily to the proceeds of repurchase obligations,
borrowings under the Credit Facility and net proceeds from the issuance of
Class A Preferred Shares.
The Company has two outstanding notes payable totaling $4,867,000 and
outstanding borrowings of $11,715,000 under the Credit Facility in addition to
the outstanding repurchase obligation of $36,881,000.
The Company has entered into the $150 million Credit Facility with GACC. The
Credit Facility has a term of three years, including extensions, provided that
the Company is in compliance with the covenants and terms of the Credit
Facility, there have been no material adverse changes in the Company's
financial position, and the Company is not otherwise in material default of
the terms of the Credit Facility. The Credit Facility provides for advances to
fund lender-approved investments ("Funded Portfolio Assets") made by the
Company pursuant to its business plan. Prior to the execution of the Credit
Facility, GACC advanced approximately $11.7 million to the Company pursuant to
a reverse repurchase agreement. Upon the execution of the Credit Facility, the
approximately $11.7 million was refinanced with an advance under the Credit
Facility and the repurchase agreement was terminated. As of December 10, 1997,
outstanding borrowings under the Credit Facility, including accrued interest,
totaled approximately $33.4 million.
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The obligations of the Company under the Credit Facility are to be secured
by pledges of the Funded Portfolio Assets acquired with advances under the
Credit Facility. Borrowings under the Credit Facility will bear interest at
specified rates over LIBOR, averaging approximately 7.9% for those borrowings
outstanding as of September 30, 1997, which rate may fluctuate based upon the
credit quality of the Funded Portfolio Assets. Upon the signing of the
agreement, a commitment fee was due and when total borrowings under the
agreement exceed $75 million an additional fee will be due. In addition, each
advance requires payment of a drawdown fee. Future repayments and redrawdowns
of amounts previously subject to the drawdown fee will not require the Company
to pay any additional fees. The Credit Facility provides for margin calls on
or collateral enhancement of asset-specific borrowings in the event of asset
quality and/or market value deterioration as determined under the Credit
Facility. The Credit Facility contains customary representations and
warranties, covenants and conditions and events of default. The Credit
Facility also contains a covenant obligating the Company to avoid undergoing
an ownership change that results in Craig M. Hatkoff, John R. Klopp or Samuel
Zell no longer retaining their senior offices with the Company and practical
control of the Company's business and operations.
On September 30, 1997, the unused Credit Facility amounted to $138.3
million.
IMPACT OF INFLATION
The Company's operating results depend in part on the difference between the
interest income earned on its interest-earning assets and the interest expense
incurred in connection with its interest-bearing liabilities. Changes in the
general level of interest rates prevailing in the economy in response to
changes in the rate of inflation or otherwise can affect the Company's income
by affecting the spread between the Company's interest-earning assets and
interest-bearing liabilities, as well as, among other things, the value of the
Company's interest-earning assets and its ability to realize gains from the
sale of assets and the average life of the Company's interest-earning assets.
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations, and other factors beyond the control of the Company. The
Company may employ various hedging strategies to limit the effects of changes
in interest rates on its operations, including engaging in interest rate
swaps, caps, floors and other interest rate exchange contracts. There can be
no assurance that the Company will be able to adequately protect against the
foregoing risks or that the Company will ultimately realize an economic
benefit from any hedging contract into which it enters.
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BUSINESS
OVERVIEW
Capital Trust is a recently recapitalized specialty finance company designed
to take advantage of high-yielding lending and investment opportunities in
commercial real estate and related assets. The Company makes investments in
various types of income-producing commercial real estate and its current
investment program emphasizes senior and junior commercial mortgage loans,
preferred equity investments, direct equity investments and subordinated
interests in commercial mortgage-backed securities. The Company believes that
a majority of the investments to be held in its portfolio for the long term
will be structured so that the Company's investment is subordinate to third-
party financing but senior to the owner/operator's equity position. The
Company also provides real estate investment banking, advisory and asset
management services through its recently acquired subsidiary, Victor Capital.
The Company anticipates that it will invest in a diverse array of real estate
and finance-related assets and enterprises, including operating companies,
that satisfy its investment criteria.
In executing its business plan, the Company believes that it will be able to
utilize the extensive real estate industry contacts and relationships of
Equity Group Investments, Inc. EGI is a privately held real estate and
corporate investment firm controlled by Samuel Zell, who serves as chairman of
the Board of Trustees of the Company. EGI's affiliates include Equity Office
Properties Trust and Equity Residential Properties Trust, the largest U.S.
REITs operating in the office and multifamily residential sectors,
respectively. The Company also expects to draw upon the extensive client
roster of Victor Capital for potential investment opportunities.
The Company believes that the significant recovery in commercial real estate
property values, coupled with fundamental structural changes in the real
estate capital markets (primarily related to the growth in CMBS issuance), has
created significant market-driven opportunities for finance companies
specializing in commercial real estate lending and investing. Such
opportunities are expected to result from the following developments:
. SCALE AND ROLLOVER. The U.S. commercial mortgage market--a market that
is comparable in size to the corporate and municipal bond markets--has
approximately $1 trillion in total mortgage debt outstanding, which debt
is primarily held privately. In addition, a significant amount of
commercial mortgage loans held by U.S. financial institutions is
scheduled to mature in the near future.
. RAPID GROWTH OF SECURITIZATION. With annual issuance volume of
approximately $30 billion, the total amount of CMBS currently
outstanding has grown to over $100 billion from approximately $6 billion
in 1990. To date, the CMBS market expansion has been fueled in large
part by "conduits" which originate whole loans primarily for resale to
financial intermediaries, which in turn package the loans as securities
for distribution to public and private investors.
The Company believes that as securitized lenders replace traditional
lenders such as banks and life insurance companies as the primary
source for commercial real estate finance, borrowers are often
constrained by relatively inflexible underwriting standards, including
lower loan-to-value ratios, thereby creating significant demand for
mezzanine financing (typically between 65% and 90% of total
capitalization). In addition, since many high quality loans may not
immediately qualify for securitization, due primarily to rating agency
guidelines, significant opportunities are created for shorter-maturity
bridge and transition mortgage financings.
. CONSOLIDATION. As the real estate market continues to evolve, the
Company expects that consolidation will occur and efficiency will
increase. Over time, the Company believes that the market leaders in the
real estate finance sector will be fully integrated finance companies
capable of originating, underwriting, structuring, managing and
retaining real estate risk.
The Company believes that it is well-positioned to capitalize on the
resultant opportunities, which, if carefully underwritten, structured and
monitored, represent attractive investments that pose potentially less risk
than direct equity ownership of real property. Further, the Company believes
that the rapid growth of the CMBS
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market has given rise to opportunities for the Company to selectively acquire
non-investment grade tranches of such securities which the Company believes
are priced inefficiently in terms of their risk/reward profile.
The Company currently pursues investment and lending opportunities designed
to capitalize on inefficiencies in the real estate capital, mortgage and
finance markets. The Company's investment program emphasizes, but is not
limited to, the following general categories of real estate and finance-
related assets:
. MORTGAGE LOANS. The Company pursues opportunities to originate and fund
senior and junior Mortgage Loans to commercial real estate owners and
property developers who require interim financing until permanent
financing can be obtained. The Company's Mortgage Loans are generally
not intended to be permanent in nature, but rather are intended to be of
a relatively short-term duration, with extension options as deemed
appropriate, and typically require a balloon payment of principal at
maturity. The Company may also originate and fund permanent Mortgage
Loans in which the Company intends to sell the senior tranche, thereby
creating a Mezzanine Loan.
. MEZZANINE LOANS. The Company originates high-yielding loans that are
subordinate to first lien mortgage loans on commercial real estate and
are secured either by a second lien mortgage or a pledge of the
ownership interests in the borrowing property owner. Alternatively, the
Company's Mezzanine Loans can take the form of a preferred equity
investment in the borrower with substantially similar terms. Generally,
the Company's Mezzanine Loans have a longer anticipated duration than
its Mortgage Loans and are not intended to serve as transitional
mortgage financing.
. SUBORDINATED INTERESTS. The Company pursues rated and unrated
investments in public and private Subordinated Interests in commercial
CMOs and other CMBS.
. OTHER INVESTMENTS. The Company intends to assemble an investment
portfolio of commercial real estate and finance-related assets meeting
the Company's target risk/return profile. The Company is not limited in
the kinds of commercial real estate and finance-related assets in which
it can invest and believes that it is positioned to expand
opportunistically its financing business. The Company may pursue
investments in, among other assets, construction loans, distressed
mortgages, foreign real estate and finance-related assets, operating
companies, including loan origination and loan servicing companies, and
fee interests in real property.
The Company also provides real estate investment banking, advisory and asset
management services through its Victor Capital subsidiary. Victor Capital
provides services to real estate investors, owners, developers and financial
institutions in connection with mortgage financings, securitizations, joint
ventures, debt and equity investments, mergers and acquisitions, portfolio
evaluations, restructurings and disposition programs. The Company may also
acquire operating businesses that the Company believes would complement Victor
Capital's existing business.
Prior to July 1997, the Company operated as a REIT, originating, acquiring,
operating or holding income-producing real property and mortgage-related
investments. On July 15, 1997, as a result of transactions culminating at the
1997 Annual Meeting, the Company experienced, in addition to a change in
control, a number of other significant changes, including:
. The investment of $33.0 million in the form of preferred equity capital;
. The acquisition of Victor Capital's real estate investment banking and
advisory operations;
. The appointment of a new management team consisting primarily of
officers of Victor Capital;
. The implementation of the Company's new business plan emphasizing high-
yielding lending and investment opportunities; and
. The election of the Company to terminate its REIT status for federal
income tax purposes primarily in order to retain earnings and to
maximize its investment flexibility.
In addition, the Company entered into the Credit Facility with a commercial
lender that provides for a three-year $150 million line of credit; in
connection with the Credit Facility, the Company received an advance of
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approximately $11.7 million from the commercial lender prior to execution of
the Credit Facility. Such borrowings, along with cash provided by the
Investment and existing cash resources, were used to fund the Company's
initial loans and investments. The Company believes that the Credit Facility
and the proceeds of the Offering will provide the Company with the capital
necessary to expand and diversify its portfolio of investments and will also
enable the Company to compete for and consummate larger transactions meeting
the Company's target risk/return profile.
To date, the Company has identified, negotiated and funded the loan and
investment transactions set forth below, all of which the Company believes
will provide investment yields within the Company's target range of 400 to 600
basis points above LIBOR. The Company intends to employ leverage on its
investments in order to increase its overall return on equity. In the future,
the Company may make investments with yields that fall outside of the
investment range set forth above, but that correspond with the level of risk
perceived by the Company to be inherent in such investments. Recent
investments include:
. The origination, funding and sale of a participation interest in a $50.3
million subordinated Mortgage Loan. This LIBOR-based loan is secured by
a second mortgage on the office tower located at 1325 Avenue of the
Americas in New York City which contains approximately 750,000 square
feet. A 50% pari passu participation interest was sold to Equity Office
Properties Trust, an affiliate of the Company, at closing.
. The origination, funding and sale of a participation interest in a $35.0
million subordinated Mortgage Loan. This LIBOR-based loan is secured by
a second mortgage on the approximately 1.1 million square foot Chicago
Apparel Center located in Chicago, Illinois and two mortgage notes (with
an aggregate principal amount of $9.6 million) on nearby development
sites.
. The origination and funding of a $9.8 million Mortgage Loan. This LIBOR-
based loan was primarily secured by an $11.8 million mortgage note on an
approximately 281,000 square foot office/warehouse facility located in
Philadelphia, Pennsylvania and a pledge of other mortgage collateral in
the New York metropolitan area aggregating $6.7 million. In November
1997, the loan was repaid to the Company in full.
. The purchase of a portion of an $80.0 million Mezzanine Loan for
approximately $15.6 million. This loan is secured by a pledge of the
ownership interests in the entities that own the approximately 1.75
million square foot office building located at 277 Park Avenue in New
York City.
. The origination and funding of a $10.0 million Mezzanine Loan secured by
a subordinated mortgage on, and a pledge of the ownership interests in
the entity that owns a majority of interest in, the approximately
931,000 square foot office building located at 555 West 57th Street in
New York City commonly known as the "BMW Building."
. The purchase of a Subordinated Interest in the amount of approximately
$49.5 million. The investment is secured by 20 short-term commercial
mortgage loans with original maturities ranging from two to three years,
which loans are secured by properties located throughout the United
States. The Company is the named special servicer for the entire $413.0
million loan portfolio of which this Subordinated Interest is a part.
The Company believes that the commercial real estate capital markets for
both debt and equity are in the midst of dramatic structural change. Although
the issuance volume of CMBS has grown to $30 billion per annum, the terms and
conditions of securitized debt are driven significantly by rating agency
criteria, resulting in restrictive underwriting parameters and relatively
inflexible transaction structures. At the same time, existing equity owners
are faced with high levels of maturing debt 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 investment
capital has grown significantly. The Company, through its new business plan,
intends to capitalize on this market opportunity.
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Immediately following the Investment and the Acquisition, Victor Capital
became a wholly owned subsidiary of the Company and Victor Capital's
management and professional team assumed comparable positions with the
Company. The Company's success is dependent upon the abilities of its new
management team who, prior to commencing investment and operating activities
under the new business plan, had never managed a specialty finance company as
is contemplated under the new business plan, although certain members of the
team had significant prior experience in managing real estate assets,
including Mortgage Loans and Mezzanine Loans. Prior to consummating the
Subordinated Interest investments discussed above, no member of the Company's
management team has ever closed any Subordinated Interest transactions. See
"Risk Factors--No Assurance of Successful Implementation of New Business Plan;
Reliance on Senior Management."
In connection with the new business plan, the Company seeks 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) Other Investments. The Company also
earns income from its real estate investment banking and advisory services
business. There can be no assurance that the Company will be able to acquire
assets meeting its investment profile, that the terms or results of such
investments will be beneficial to the Company, or that the Company will
achieve its objectives. Nor can there be any assurances that the Company will
earn significant income from its real estate investment banking and advisory
services. See "Risk Factors."
Other than restrictions which result from the Company's intent to avoid
regulation under the Investment Company Act, the Company is not subject to any
restrictions on the particular percentage of its portfolio invested in any of
the above-referenced asset classes, nor is it limited in the kinds of assets
in which it can invest. The Company has no predetermined limitations or
targets for concentration of asset type or geographic location. Instead of
adhering to any prescribed limits or targets, the Company makes acquisition
decisions through asset and collateral analysis, evaluating investment risks
on a case-by-case basis. Until appropriate investments are made, cash
available for investment may be invested in readily marketable securities or
in interest-bearing deposit accounts. See "Risk Factors--Management Discretion
with Investment Policy" and "Risk Factors--Consequences of Not Qualifying for
Investment Company Act Exemption."
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 presently does not intend to exceed a debt-to-equity
ratio of 5:1.
CATEGORIES OF INVESTMENT
The discussion below describes the principal categories of assets currently
emphasized in the Company's new business plan.
Mortgage Loans. The Company actively pursues opportunities to originate and
fund Mortgage Loans to real estate owners and property developers who need
interim financing until permanent financing can be obtained. The Company's
Mortgage Loans generally are not intended to be "permanent" in nature, but
rather are intended to be of a relatively short-term duration, with extension
options as deemed appropriate, and generally require a balloon payment of
principal and interest at maturity. These types of loans are intended to be
higher-yielding loans with higher interest rates and commitment fees. Property
owners or developers in the market for these types of loans include, but are
not limited to, promoters of pre-formation REITs desiring to acquire
attractive properties to contribute to the REIT before the formation process
is complete, traditional property owners and operators who desire to acquire a
property before it has received a commitment for a long-term mortgage from a
traditional commercial mortgage lender, or a property owner or investor who
has an opportunity to purchase its existing mortgage debt or third party
mortgage debt at a discount; in each instance, the Company's loan would be
secured by a Mortgage Loan. The Company may also originate traditional, long-
term mortgage loans and, in doing so, would compete with traditional
commercial mortgage lenders. In pursuing
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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
Mezzanine Loan. In addition, the Company believes that, as a result of the
recent increase in commercial real estate securitizations, there are
attractive opportunities to originate short-term bridge loans to owners of
mortgaged properties that are temporarily prevented as a result of timing and
structural reasons from securing long-term mortgage financing through
securitization.
Mezzanine Loans. The Company 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
(also known as pledge loans) or preferred equity investments. For example, on
a commercial property subject to a first lien mortgage loan with a principal
balance equal to 70% of the value of the property, the Company could lend the
owner of the property (typically a partnership) an additional 15% to 20% of
the value of the property. The Company believes that as a result of (i) the
significant changes in the lending practices of traditional commercial real
estate lenders, primarily relating to more conservative loan-to-value ratios,
and (ii) the significant increase in securitized lending with strict loan-to-
value ratios imposed by the rating agencies, there will be increasing demand
for mezzanine capital by property owners.
Typically, as security for its debt to the Company, in a Mezzanine Loan, the
owner would pledge to the Company either the property subject to the first
lien (giving the Company a second lien position typically subject to an inter-
creditor agreement) or the limited partnership and/or general partnership
interest in the owner. If the owner's general partnership interest is pledged,
then the Company would be in a position to take over the operation of the
property in the event of a default by the owner. By borrowing against the
additional value in their properties, the property owners obtain an additional
level of liquidity to apply to property improvements or alternative uses.
Mezzanine Loans generally provide the Company with the right to receive a
stated interest rate on the loan balance plus various commitment and/or exit
fees. In certain instances, the Company 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 the Company
will otherwise seek terms to allow the Company to charge an interest rate that
would provide an attractive risk-adjusted return. Alternatively, the Mezzanine
Loans can take the form of a non-voting preferred equity investment in a
single purpose entity borrower with substantially similar terms.
In connection with its mezzanine lending and investing activities, the
Company may elect to pursue strategic alliances with lenders such as
commercial banks and Wall Street conduits who do not have a mezzanine lending
capability and are therefore perceived to be at a competitive disadvantage.
The Company believes that such alliances could accelerate the Company's loan
origination volume, assist in performing underwriting due diligence and reduce
potential overhead. While the Company intends to seek such alliances, there
can be no assurance that the Company will be successful in this regard or, if
the Company creates such an alliance or alliances, such alliances will be
successful.
Subordinated Interests. The Company acquires rated and unrated Subordinated
Interests in commercial mortgage-backed securities issued in public or private
transactions. CMBS typically are divided into two or more classes, sometimes
called "tranches." The senior classes are higher "rated" securities, which are
rated from low investment grade ("BBB") to higher investment grade ("AA" or
"AAA"). The junior, subordinated classes typically include a lower rated, non-
investment grade "BB" and "B" class, and an unrated, high yielding, credit
support class (which generally is required to absorb the first losses on the
underlying mortgage loans). The Company currently invests in the non-
investment grade tranches of Subordinated Interests. The Company may pursue
the acquisition of performing and non-performing (i.e., defaulted)
Subordinated Interests.
CMBS generally are issued either as CMOs or pass-through certificates
("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
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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 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 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 from Ownership of Subordinated Interests in Pools of Commercial
Mortgage Loans."
Before acquiring Subordinated Interests, the Company performs certain credit
underwriting and stress testing to attempt to evaluate future performance of
the Mortgage Collateral supporting such CMBS, including (i) a review of the
underwriting criteria used in making mortgage loans comprising the Mortgage
Collateral for the CMBS, (ii) a review of the relative principal amounts of
the loans, their loan-to-value ratios as well as the mortgage loans' purpose
and documentation, (iii) where available, a review of the historical
performance of the loans originated by the particular originator and (iv) some
level of re-underwriting the underlying mortgage loans, as well as selected
site visits.
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Many of the Subordinated Interests 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.
Unlike the owner of mortgage loans, the owner of Subordinated Interests in
CMBS ordinarily does not control the servicing of the underlying mortgage
loans. In this regard, the Company attempts to negotiate for the right to cure
any defaults on senior CMBS classes and for the right to acquire such senior
classes in the event of a default or for other similar arrangements. The
Company may also seek to acquire rights to service defaulted mortgage loans,
including rights to control the oversight and management of the resolution of
such mortgage loans by workout or modification of loan provisions,
foreclosure, deed in lieu of foreclosure or otherwise, and to control
decisions with respect to the preservation of the collateral generally,
including property management and maintenance decisions ("Special Servicing
Rights") with respect to the mortgage loans underlying CMBS in which the
Company owns a Subordinated Interest. Such rights to cure defaults and Special
Servicing Rights may give the Company, for example, some control over the
timing of foreclosures on such mortgage loans and, thus, may enable the
Company to reduce losses on such mortgage loans. 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. The Company is currently a
special servicer with respect to one of its Subordinated Interest investments,
but is not currently a rated special servicer. The Company plans to seek to
become rated as a special servicer, or acquire a rated special servicer. Until
the Company can act as a rated special servicer, it will be difficult to
obtain Special Servicing Rights with respect to the mortgage loans underlying
Subordinated Interests. Although the Company's strategy is to purchase
Subordinated Interests at a price designed to return the Company's investment
and generate a profit thereon, there can be no assurance that such goal will
be met or, indeed, that the Company's investment in a Subordinated Interest
will be returned in full or at all. See "Risk Factors--Risk from Ownership of
Subordinated Interests in Pools of Commercial Mortgage Loans."
The Company believes that it will not be, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act. The Investment Company Act generally exempts entities
that are "primarily engaged in purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate" ("Qualifying Interests"). The
Company intends to rely on current interpretations by the staff of the
Commission in an effort to qualify for this exemption. To comply with the
foregoing guidance, the Company, among other things, must maintain at least
55% of its assets in Qualifying Interests and also may be required to maintain
an additional 25% in Qualifying Interests or other real estate-related assets.
Generally, the Mortgage Loans and certain of the Mezzanine Loans in which the
Company may invest constitute Qualifying Interests. While Subordinated
Interests generally do not constitute Qualifying Interests, the Company may
seek to structure such investments in a manner where the Company believes such
Subordinated Interests may constitute Qualifying Interests. The Company may
seek, where appropriate, (i) to obtain foreclosure rights or other similar
arrangements (including obtaining Special Servicing Rights before or after
acquiring or becoming a rated special servicer) with respect to the underlying
mortgage loans, although there can be no assurance that it will be able to do
so on acceptable terms or (ii) to acquire Subordinated Interests
collateralized by whole pools of mortgage loans. As a result of obtaining such
rights or whole pools of mortgage loans as collateral, the Company believes
that the related Subordinated Interests will constitute Qualifying Interests
for purposes of the Investment Company Act. The Company does not intend,
however, to seek an exemptive order, no-action letter or other form of
interpretive guidance from the Commission or its staff on this position. Any
decision by the Commission or its staff advancing a position with respect to
whether such
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Subordinated Interests constitute Qualifying Interests that differs from the
position taken by the Company could have a material adverse effect on the
Company. See "Risk Factors--Consequences of Not Qualifying for Investment
Company Act Exemption."
OTHER INVESTMENTS
The Company may also pursue a variety of complementary commercial real
estate and finance-related businesses and investments in furtherance of
executing its new business plan. Such activities include, but are not 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, foreign real estate-related
asset investments, note financings, environmentally hazardous lending,
operating company investing/lending, construction and rehabilitation lending
and other types of financing activity. Any lending with regard to the
foregoing may be on a secured or an unsecured basis and will be subject to
risks similar to those attendant to investing in Mortgage Loans, Mezzanine
Loans and Subordinated Interests. The Company seeks to maximize yield by
managing credit risk through credit underwriting, although there can be no
assurance that the Company will be successful in this regard. The Company may
decide in the future to pursue business acquisition opportunities that it
believes will complement the Company's operations. See "Risk Factors--Risks
Associated with Unspecified Acquisitions." The Company may continue to hold
its portfolio of existing liquid mortgage-backed securities acquired prior to
commencement of the new business plan or, as appropriate, may sell and
reinvest the sale proceeds into other investments.
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 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 has originated a loan and may originate other
loans secured not by real property, but rather by pledges of mortgage loans
("Note Financings"), whether performing or non-performing. Typically, Note
Financings are made in connection with the acquisition of whole loans, or
portfolios of loans, which are being sold on an opportunistic basis to a
third-party investor or to the borrower under such loans. Loan-to-value ratios
for Note Financings are typically more conservative than traditional Mortgage
Loans, due to, among other things, the greater risk in being one step removed
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 the Company
may 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 foreign 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.
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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 the Company may purchase such real estate. If so, the Company will take
certain steps to limit its liability for such environmental problems, but
there are risks associated with such an investment. Although the Company has
limited experience in investing in real estate with known environmental risks,
the Company believes that the experience of its management team 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 subordinated 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
may not be limited to, such companies as special loan servicers, mortgage
bankers and conduit lenders.
Construction and Rehabilitation Lending. The Company may take advantage of
opportunities to provide construction or rehabilitation financing on
commercial property, lending generally 85% to 90% of total project costs, and
taking a first lien mortgage to secure the debt ("Construction Loans").
Alternatively, the Company may make Mezzanine Loans and/or Subordinated
Interest investments in such Construction Loan opportunities. Construction
Loans generally would provide the Company with fees and interest income and
potentially a percentage of net operating income or gross revenues from the
property, payable to the Company on an ongoing basis, and a percentage 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 including the
Credit Facility, secured and unsecured borrowings, reverse repurchase
agreements and other borrowings, when there is an expectation that such
leverage will benefit the Company; such borrowings may have recourse to the
Company in the form of guarantees or other obligations. If changes in market
conditions cause the cost of such financing to increase relative to the income
that can be derived from investments made with the proceeds thereof, the
Company may reduce the amount of leverage it utilizes. Obtaining the leverage
required to execute the new business plan will require the Company to maintain
interest coverage ratios and other covenants meeting market underwriting
standards. In leveraging its portfolio, the Company plans not to exceed a
debt-to-equity ratio of 5:1. The Company has agreed in the Investment
Agreement that, without the prior written consent of the holders of a majority
of the outstanding Class A Preferred Shares, it will not incur any
indebtedness if the Company's debt-to-equity ratio would exceed 5:1.
Leverage creates an opportunity for increased income, but at the same time
creates special risks. For example, leveraging magnifies changes in the net
worth of the Company. Although the amount owed will be fixed, the Company's
assets may change in value during the time the debt is outstanding. Leverage
will create interest expenses for the Company which can exceed the revenues
from the assets retained. To the extent the revenues derived from assets
acquired with borrowed funds exceed the interest expense the Company will have
to pay, the Company's net income will be greater than if borrowing had not
been used. Conversely, if the revenues from the assets acquired with borrowed
funds are not sufficient to cover the cost of borrowing, the net income of the
Company will be less than if borrowing had not been used. See "Risk Factors--
Growth Dependent on Leverage; Risks from Use of Leverage."
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Reverse Repurchase Agreements. The Company has entered into a reverse
repurchase agreement and may enter into other such agreements under which the
Company would sell assets to a third party with the commitment that the
Company repurchase such assets from the purchaser at a fixed price on an
agreed date. Reverse repurchase agreements may be characterized as loans to
the Company from the other party that are secured by the underlying assets.
The repurchase price reflects the purchase price plus an agreed market rate of
interest.
Interest Rate Management Techniques. The Company has engaged in and will
continue to engage in a variety of interest rate management techniques for the
purpose of managing the effective maturity or interest rate of its assets
and/or liabilities. These techniques also may be used to attempt to protect
against declines in the market value of the Company's assets resulting from
general trends in debt markets. Any such transaction is subject to risks and
may limit the potential earnings on the Company's 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.
REAL ESTATE INVESTMENT BANKING, ADVISORY AND ASSET MANAGEMENT BUSINESS
In addition to drawing on the origination, underwriting, structuring,
monitoring, management and collection expertise of Victor Capital's
professionals with regard to the lending and asset acquisition activities
contemplated by the new business plan, the Company continues to provide
through its wholly owned Victor Capital subsidiary the investment banking,
real estate advisory and real estate asset management services previously
provided by Victor Capital. Victor Capital was organized in 1989 as a private
real estate financial services firm providing real estate investment banking,
advisory and 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 16 years of experience in the real estate financial services industry.
Real Estate Investment Banking and Advisory Services. Victor Capital
provides an array of real estate investment banking and advisory services to a
variety of clients such as financial institutions, including banks and
insurance companies, public and private owners of commercial real estate,
creditor committees and investment funds. In such transactions, Victor Capital
typically negotiates for a retainer and/or a monthly fee plus disbursements;
these fees are typically applied against a success-oriented fee which is based
on achieving the client's goals. While dependent upon the size and complexity
of the transaction, Victor Capital's fees for capital raising assignments are
generally in the range of 0.5% to 3% of the total amount of debt and equity
raised. For pure real estate advisory assignments, a fee is typically
negotiated in advance and can take the form of a flat fee or a monthly
retainer. In certain instances, Victor Capital negotiates for the right to
receive a portion of its compensation in-kind, such as the receipt of stock in
a publicly traded company.
Real Estate Asset Management. Victor Capital provides its real estate asset
management services primarily to institutional investors such as public and
private money management firms. Victor Capital's services may include the
identification and acquisition of specific mortgage loans and/or properties
and the management and disposition of these assets. As of the date hereof,
Victor Capital had seven such assignments representing an asset value of
approximately $1 billion and of approximately 7 million square feet.
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 that Victor Capital provides, there can be no assurance that
such firms will not engage in such activities in the future.
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PROPERTY
The Company's principal executive and administrative offices are located in
approximately 18,700 square feet of office space leased at 605 Third Avenue,
26th Floor, New York, New York 10016 and its telephone number is (212) 655-
0220. The lease for such space expires in April 2000. The Company believes
that this office space is suitable for its current operations for the
foreseeable future.
EMPLOYEES
As of December 10, 1997, the Company employed 23 full-time professionals,
six other full-time employees and one part-time professional. The Company
considers the relationship with its employees to be good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
TRUSTEES AND EXECUTIVE AND SENIOR OFFICERS OF THE COMPANY
The Board of Trustees is currently comprised of eight members. The trustees
and executive and senior officers of the Company, their ages as of November
11, 1997, and their positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE OR POSITION HELD
---- --- -----------------------
<C> <C> <S>
Samuel Zell............. 56 Chairman of the Board of Trustees
Jeffrey A. Altman....... 31 Trustee
Martin L. Edelman....... 56 Trustee
Gary R. Garrabrant...... 40 Trustee
Craig M. Hatkoff........ 43 Trustee, Vice Chairman and Chairman of the
Executive Committee
John R. Klopp........... 43 Trustee, Vice Chairman and Chief Executive
Officer
Sheli Z. Rosenberg...... 55 Trustee
Lynne B. Sagalyn........ 50 Trustee
Carol J. Eglow.......... 37 Managing Director
Jeremy FitzGerald....... 34 Managing Director
Marc Holliday........... 31 Managing Director
Donald J. Meyer......... 47 Managing Director and Chief Investment Officer
Edward L. Shugrue III... 31 Managing Director, Chief Financial Officer and
Assistant Secretary
</TABLE>
TRUSTEES
All trustees hold office until the next annual meeting of shareholders and
the election and qualification of their successors. The name, principal
occupation for the last five years, selected biographical information and the
period of service as a trustee of the Company of each of the trustees are set
forth below.
SAMUEL ZELL has been Chairman of the Board of Trustees since July 15, 1997.
Mr. Zell is chairman of the board of directors of EGI, American Classic
Voyages Co., an owner and operator of cruise lines ("American Classic"),
Anixter International Inc., a provider of integrated network and cabling
systems ("Anixter"), Manufactured Home Communities, Inc., a REIT specializing
in the ownership and management of manufactured home communities ("MHC") and
Jacor Communications, Inc., an owner of radio stations ("Jacor"). He is
chairman of the board of trustees of Equity Residential Properties Trust, a
REIT specializing in the ownership and management of multi-family housing, and
of Equity Office Properties Trust, a REIT specializing in the ownership and
management of office buildings. Mr. Zell is also a director of Quality Food
Centers, Inc., an owner and operator of supermarkets ("Quality Food"), Sealy
Corporation, a bedding manufacturer ("Sealy"), Chart House 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.
JEFFREY A. ALTMAN has been a trustee of the Company since November 4, 1997.
Since November 1996, Mr. Altman has been a senior vice president of Franklin
Mutual Advisers, Inc., formerly Heine Securities Corporation, a registered
investment adviser ("FMA"), and a vice president of Franklin Mutual Series
Fund Inc., a mutual fund with assets in excess of $25 billion, advised by FMA.
From August 1988 to October 1996, Mr. Altman was an analyst with FMA. Mr.
Altman is also the chairman of the board of trustees of Value Property Trust,
a self administered REIT engaged in the business of managing its portfolio of
real estate investments, and a trustee of Resurgence Properties Inc., a
company engaged in diversified real estate activities.
MARTIN L. EDELMAN has been a trustee of the Company since February 4, 1997.
Mr. Edelman has been a director of Chartwell Leisure Inc., a publicly traded
owner and operator of hotel properties ("Chartwell"), since November 1994 and
has been president of Chartwell since January 1996. He has also been a
director of HFS Incorporated and a member of that corporation's executive
committee since November 1993. Mr. Edelman has
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been of counsel to Battle Fowler LLP, a New York City law firm that provides
services to the Company, since January 1994 and was a partner with that firm
from 1972 through 1993. Mr. Edelman also serves as a director of Avis Rent a
Car, Inc. and G. Soros Realty, Inc.
GARY R. GARRABRANT has been a trustee of the Company since January 2, 1997.
Mr. Garrabrant was the vice chairman of the Company from February 1997 until
July 15, 1997. Mr. Garrabrant is executive vice president of EGI and managing
partner of EGI Capital Markets, L.L.C. He joined EGI as senior vice president
in January 1996. Previously, Mr. Garrabrant was director of Sentinel
Securities Corporation in 1995 and co-founded Genesis Realty Capital
Management in 1994, both of which were based in New York and specialized in
real estate securities investment management. From 1989 to 1994, he was
associated with The Bankers Trust Company. Mr. Garrabrant is a director of
Meritage Hospitality Group Inc.
CRAIG M. HATKOFF has been a trustee and a vice chairman of the Company since
July 15, 1997. Mr. Hatkoff is a founder and has been a managing partner of
Victor Capital since 1989. Mr. Hatkoff was a managing director and co-head of
Chemical Realty Corporation, the real estate investment banking arm of
Chemical Banking Corporation, from 1982 until 1989. From 1978 to 1982, Mr.
Hatkoff was the head of new product development in Chemical Bank's Real Estate
Division, where he previously served as a loan officer.
JOHN R. KLOPP has been a trustee of the Company since January 2, 1997, the
chief executive officer of the Company since February 1997 and a vice chairman
of the Company since July 15, 1997. Mr. Klopp is a founder and has been a
managing partner of Victor Capital since 1989. Mr. Klopp was a managing
director and co-head of Chemical Realty Corporation from 1982 until 1989. From
1978 to 1982, Mr. Klopp held various positions with Chemical Bank's Real
Estate Division, where he was responsible for originating, underwriting and
monitoring portfolios of construction and permanent loans. He is a director of
Metropolis Realty Trust, Inc., a Manhattan office REIT.
SHELI Z. ROSENBERG has been a trustee of the Company since July 15, 1997.
Ms. Rosenberg is the chief executive officer, president and a director of EGI.
She was a principal of the law firm Rosenberg & Liebentritt P.C. from 1980
until September 1997. Ms. Rosenberg is a director of Jacor, American Classic,
MHC, Sealy, Anixter, Quality Food, CVS Corporation, a drugstore chain,
Illinois Power Co., a supplier of electricity and natural gas in Illinois, and
its holding company, Illinova Corp. She is also a trustee of Equity
Residential Properties Trust and of Equity Office Properties Trust. 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
that resulted in its liquidation on November 15, 1995.
LYNNE B. SAGALYN has been a trustee of the Company since July 15, 1997. Dr.
Sagalyn has been a professor and the coordinator of the M.B.A. Real Estate
Program at the Columbia University Graduate School of Business since 1992.
From 1991 to 1992, she was a visiting professor at Columbia. From 1987 to
1991, she was an associate professor of Planning and Real Estate Development
at the Massachusetts Institute of Technology. She is also on the faculty of
the Weimer School for Advanced Studies in Real Estate and Land Economics. Dr.
Sagalyn is a director of United Dominion Realty Trust (NYSE) and The Retail
Initiative and on an advisory board for Initiatives for a Competitive Inner
City.
EXECUTIVE AND SENIOR OFFICERS
Executive officers and other officers are elected or appointed by, and serve
at the pleasure of, the Board of Trustees. The following sets forth the
positions with the Company and selected biographical information for the
executive and senior officers of the Company who are not trustees.
CAROL J. EGLOW has been a managing director of the Company since July 15,
1997. Prior to that time, Ms. Eglow served as a principal of Victor Capital
and had been employed in various positions at such firm since June 1989. She
was previously employed in various positions at Chemical Realty Corporation
and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
47
<PAGE>
JEREMY FITZGERALD has been a managing director of the Company since July 15,
1997. Prior to that time, Ms. FitzGerald served as a principal of Victor
Capital and had been employed in various positions at such firm since May
1990. She was previously employed in various positions at PaineWebber
Incorporated.
MARC HOLLIDAY has been a managing director of the Company since July 15,
1997. Prior to that time, Mr. Holliday served as a principal of Victor Capital
and had been employed in various positions at such firm since January 1991. He
was previously employed with Westpac Banking Corporation.
DONALD J. MEYER has been a managing director and Chief Investment Officer of
the Company since July 15, 1997. From 1979 through July 1997, Mr. Meyer held
various positions at The First National Bank of Chicago ("First Chicago").
From 1989 until 1990, Mr. Meyer served as senior credit officer for real
estate at First Chicago. From 1990 to 1993, Mr. Meyer, at different times, was
the head of First Chicago's real estate enhancement division and the asset
disposition department. Mr. Meyer was the senior credit officer for product
risk management at First Chicago from 1993 until 1995. From 1995 until 1997,
Mr. Meyer was head of structured investments and managed First Chicago's
investments in non-investment grade tranches of commercial mortgage backed
securities. In 1991, Mr. Meyer became a senior vice president at First
Chicago.
EDWARD L. SHUGRUE III has been the chief financial officer of the Company
since September 30, 1997 and a managing director and assistant secretary of
the Company since July 15, 1997. Prior to that time, Mr. Shugrue served as a
principal of Victor Capital since January 1997. He previously served as
director of real estate for and a vice president of River Bank America from
April 1994 until June 1996 after serving as a vice president of the bank since
January 1992. He was previously employed in various positions at Bear, Stearns
& Co. Inc.
COMMITTEES OF THE BOARD OF TRUSTEES
The Board of Trustees has four standing committees: an executive committee,
an audit committee, a compensation committee and a performance compensation
committee.
Executive Committee: The executive committee is currently comprised of
Messrs. Hatkoff, Garrabrant and Klopp and Ms. Rosenberg, with Mr. Hatkoff
serving as chairman of the executive committee. The executive committee is
authorized to exercise all the powers and authority of the Board of Trustees
in the management of the business and affairs of the Company except those
powers reserved, by law or resolution, to the Board of Trustees.
Audit Committee: The audit committee is currently comprised of Mr. Altman
and Ms. Sagalyn, with Ms. Sagalyn serving as chairman of the audit committee.
Mr. Hatkoff serves as a non-voting member of the audit committee. The audit
committee makes recommendations to the Board of Trustees regarding the
selection of the Company's independent auditors, reviews the plan, scope and
results of the audit, reviews with the independent auditors and management the
Company's policies and procedures with respect to internal accounting and
financial controls, changes in accounting policy and the scope of the non-
audit services which may be performed by the independent auditors.
Compensation Committee: The compensation committee is currently comprised of
Mss. Rosenberg and Sagalyn and Messrs. Altman, Edelman and Klopp, with Ms.
Rosenberg serving as chairman of the compensation committee. The compensation
committee establishes the compensation and benefit arrangements for the
officers and the key employees of the Company and the general policies
relating to compensation and benefit arrangements of other employees of the
Company, except to the extent that power is vested in the performance
compensation committee. The compensation committee also administers the share
plans and compensation programs of the Company.
Performance Compensation Committee: The performance compensation committee
is currently comprised of Mss. Rosenberg and Sagalyn and Mr. Altman, with Ms.
Rosenberg serving as chairman of the performance compensation committee. The
performance compensation committee establishes awards under and administers
the Company's share plans and compensation programs insofar as they relate to
executive officers of the Company.
48
<PAGE>
COMPENSATION OF TRUSTEES
The Company does not intend to pay its trustees any cash fees for their
services as such, but rather intends to compensate non-employee trustees with
an annual award of share units under the Trustee Share Plan with a value equal
to $30,000. The number of share units to be awarded to each trustee, which
will be convertible into an equal number of Class A Common Shares according to
individual schedules set by each trustee, will be determined quarterly in
arrears by dividing one-quarter of the annual retainer amount ($7,500) by the
average closing price of the Class A Common Shares for a specified period in
the preceding month. The share units will be vested when issued. There is no
separate compensation for service on committees of the Board of Trustees. All
trustees are also reimbursed for travel expenses incurred in attending Board
and committee meetings.
The Company entered into a consulting agreement, dated as of July 15, 1997,
with Gary R. Garrabrant, a trustee of the Company. The consulting agreement
has a term of one year and provides for a consulting fee of $150,000. Pursuant
to the agreement, Mr. Garrabrant provides consulting services for the Company,
including strategic planning, identifying and negotiating mergers,
acquisitions, joint ventures and strategic alliances, and advising as to
capital structure matters. Pursuant to the agreement, Mr. Garrabrant is also
entitled to participate in the Company's Incentive Share Plan on such basis as
may be determined by the compensation committee of the Company's Board of
Trustees.
EXECUTIVE COMPENSATION
The Company administers a compensation program for the Company's executive
officers that it believes is designed to appropriately compensate and provide
incentives for its executive officers. Executive compensation is comprised of
three elements: annual base salary, annual bonus compensation and long-term
incentive compensation. Long-term incentive compensation is currently provided
in the form of grants of share options under the Company's Incentive Share
Plan. The following table sets forth the current annual base salaries of the
chief executive officer and the other executive officers of the Company as
well as the number of options to purchase Class A Common Shares granted to
them on July 16, 1997. The options were granted with an exercise price of
$6.00 per share, which price represented the fair market value of the Class A
Common Shares on the date of grant and vest in equal increments on each of the
first, second and third anniversaries of the date of grant.
<TABLE>
<CAPTION>
1997 ANNUAL NUMBER OF
NAME AND PRINCIPAL POSITIONS BASE SALARY($) OPTIONS
---------------------------- -------------- ---------
<S> <C> <C>
John R. Klopp.................................. 500,000 75,000
Vice Chairman and Chief Executive Officer
Craig M. Hatkoff............................... 500,000 75,000
Vice Chairman and Chairman of the Executive
Committee
Donald J. Meyer................................ 300,000 75,000
Managing Director and Chief Investment Officer
Edward L. Shugrue III.......................... 250,000 50,000
Managing Director and Chief Financial Officer
</TABLE>
EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with John R. Klopp and Craig
M. Hatkoff. The employment agreements provide for five-year terms of
employment commencing as of July 15, 1997. On the fifth anniversary of the
commencement of the employment agreements, and on each succeeding anniversary,
the terms of the employment agreements shall be automatically extended for one
additional year unless, not later than three months prior to such anniversary
date, either party shall have notified the other that it will not extend the
term of the agreement. The employment agreements provide for base annual
salaries of $500,000, which will be increased each calendar year to reflect
increases in the cost of living and will otherwise be subject to increase in
the discretion of the Board of Trustees. Mr. Klopp and Mr. Hatkoff are also
entitled to annual incentive cash bonuses to be determined by the Board of
Trustees based on individual performance and the profitability of the Company.
Mr. Klopp and Mr. Hatkoff are also participants in the Incentive Share Plan
and other employee benefit plans of the Company.
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<PAGE>
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 either 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 for one full calendar year; (ii)
continued welfare benefits for two years; and (iii) automatic vesting of all
unvested share options such that all of the employee's share options would
become immediately exercisable. Each vested option will remain exercisable for
a period of one year following the employee's termination. See "--1997 Long-
Term Incentive Share Plan." The employment agreements provide for a non-
competition period of one year if Mr. Klopp or Mr. Hatkoff terminates his
employment voluntarily or is terminated for cause.
The Company is a party to an employment agreement with Donald J. Meyer which
provides for a two year term of employment commencing as of July 15, 1997. On
the second anniversary of the commencement of the employment agreement, and on
each succeeding anniversary, the terms of the employment agreement 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
agreement provides for a base annual salary of $300,000, minimum annual
bonuses of $150,000 at the end of 1997 and 1998, and participation in the
Incentive Share Plan and other benefit plans of the Company. Mr. Meyer is also
entitled to an annual incentive cash bonus to be determined by the Board of
Trustees based on individual performance and the profitability of the Company.
If the employment of Mr. Meyer is terminated by the Company without cause, as
that term is defined in the agreement, or is terminated voluntarily by Mr.
Meyer for good reason, as that term is defined in the agreement, the Company
shall be required to pay Mr. Meyer (i) a severance payment equal to the base
salary payable to Mr. Meyer over the remainder of the term of the employment
agreement had Mr. Meyer not been so terminated plus the minimum annual bonus
payable to Mr. Meyer for both years of the original term of the agreement, to
the extent not previously paid. If the employment of Mr. Meyer is terminated
by the Company for cause, as that term is defined in the agreement, or
terminated voluntarily by Mr. Meyer without good reason, as that term is
defined in the agreement, Mr. Meyer shall be entitled to receive only his base
salary and benefits accrued through the termination date.
The Company has assumed an obligation to pay to Mr. Shugrue the remaining
$50,000 balance of a nondiscretionary bonus granted by Victor Capital for
payment during 1997.
INCENTIVE COMPENSATION PLAN
The Company intends to establish an incentive compensation plan for key
officers of the Company and its subsidiaries. This plan will provide for the
payment of cash bonuses to participating officers after evaluating the
officer's performance and the overall performance of the Company. The chief
executive officer will make recommendations to the compensation committee of
the Board of Trustees, which will make the final determination of the award of
bonuses. The compensation committee will determine such bonuses, if any, of
the chief executive officer.
1997 LONG-TERM INCENTIVE SHARE PLAN
On May 23, 1997, the Board of Trustees of the Company adopted the 1997 Long-
Term Incentive Share Plan, which became effective upon shareholder approval on
July 15, 1997 at the 1997 Annual Meeting. The purpose of the Incentive Share
Plan is to promote the success of the Company and its subsidiaries by
providing incentives to eligible employees and other participants that link
their compensation to the long-term financial success of the Company and its
subsidiaries and to growth in share value. The Incentive Share Plan permits
the grant of nonqualified share option ("NQSO"), incentive share option
("ISO"), restricted share, share appreciation right ("SAR"), performance unit,
performance share and share unit awards. The Company has reserved an aggregate
of 2,000,000 Class A Common Shares for issuance pursuant to awards under the
Incentive Share Plan and the Trustee Share Plan. The maximum number of shares
that may be subject of awards to any employee during the term of the plan may
not exceed 500,000 shares and the maximum amount payable in cash to any
employee with
50
<PAGE>
respect to any performance period pursuant to any performance unit or
performance share award is $1,000,000. As of the date of this Prospectus, the
Company issued ISOs and NQSOs pursuant to the Incentive Share Plan to purchase
an aggregate of 607,000 Class A Common Shares with an exercise price of $6.00
per share.
The Incentive Share Plan is administered by the compensation committee (the
"Compensation Committee") of the Board of Trustees except that power with
respect to awards to executive officers is vested in the performance
compensation committee which is comprised of members of the compensation
committee (the "Performance Committee" and together with the Compensation
Committee, the "Committees") who qualify as "Non-Employee Directors" for
purposes of Rule 16b-3 under the Exchange Act and as "outside directors" for
purposes of Section 162(m) of the Code. The Committees have the authority to
select employees to whom awards may be granted, to determine the type of
awards as well as the number of Class A Common Shares to be covered by each
award, and to determine the terms and conditions of any such awards. The
Committees also have the authority to construe and interpret the plan,
establish, amend or waive rules and regulations for its administration,
accelerate the exercisability of any award, and amend the terms and conditions
of any outstanding option, SAR or other award. Employees of and consultants or
service providers to the Company or any subsidiary, including officers and
trustees who are employees of the Company or any subsidiary, who, in the
opinion of the Committees, contribute significantly to the growth and
profitability of the Company and its subsidiaries are eligible for awards
under the Incentive Share Plan.
The Incentive Share Plan has been designed to comply with Section 162(m) of
the Code, which generally denies a tax deduction for annual compensation
exceeding $1,000,000 paid to the chief executive officer and the four other
most highly compensated officers of a public company ("Covered Employees").
Certain types of compensation, including "performance-based compensation," are
generally excluded from this deduction limit. It is contemplated that all
Awards made under the Incentive Share Plan, with the exception of the share
unit awards, will constitute "performance-based compensation" under Section
162(m) of the Code. Share unit awards will count toward the annual $1,000,000
deduction limit.
With respect to options granted under the plan, the purchase price per share
of Class A Common Shares covered by an option shall be determined by the
Committees but may not be less than the fair market value of the underlying
Class A Common Shares on the date of grant. The Certificate of Designation
contains a similar restriction. ISOs may only be granted to employees of the
Company or its Subsidiaries. All ISOs must be granted at fair market value or
at 110% of fair market value in the case of grants to 10% shareholders. No
ISOs shall be exercisable more than ten years after their date of grant and
five years after grant in the case of a 10% shareholder. Payment of an option
may be made with cash, with previously owned Class A Common Shares, by
foregoing compensation in accordance with Committee rules or by a combination
of these. SARs may be granted under the plan in lieu of options, in addition
to options, independent of options or as a combination of the foregoing. A
holder of a SAR is entitled upon exercise to receive Class A Common Shares or
cash, as the Committees may determine, equal in value on the date of exercise
to the amount by which the fair market value of one Class A Common Share on
the date of exercise exceeds the exercise price fixed by the Committees on the
date of grant (which price shall not be less than 100% if the market price of
a Class A Common Share on the date of grant) multiplied by the number of
shares in respect of which the SARs are exercised.
Restricted shares may be granted under the Incentive Share Plan in such
amounts and with such periods of restriction as the Committees may designate.
In the case of covered employees, the Committees may condition the vesting or
lapse of the period of restriction upon the attainment of one or more of the
performance goals utilized for purposes of performance units or performance
shares. Restricted shares entitle the holder thereof to participate as a
shareholder of the Company; however, the holder may not sell, transfer, pledge
or otherwise encumber such shares prior to the time it vests. A holder of
restricted shares forfeits all unpaid accumulated dividends and all shares of
restricted shares that have not vested prior to the date that such holder's
employment with the Company is terminated by such holder for any reason or by
the Company for cause. The Incentive Share Plan authorizes the grant of
performance units and performance shares that may be earned by employees if
specified long-term Company goals are achieved over a period of time selected
by the Committees. The
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<PAGE>
performance goals must be based on the attainment by the Company or one of its
subsidiaries of certain objective and/or subjective measures that may include
one or more of the following: total shareholder return, return on equity,
return on capital, earnings per share, cash flow per share, market share,
share price, revenues, costs, net income, cash flow and retained earnings. At
the conclusion of the relevant performance period, the Committees determine
the extent to which the specified performance goals have been met. The
Incentive Share Plan also authorizes the grant of share units which provide
for a derivative interest in a Class A Common Share based on a share
equivalent. Grants of share units may be made at any time and from time to
time on terms determined by the Committees. Share units shall be payable in
Class A Common Shares upon the occurrence of certain trigger events set forth
on the participant's election form in his or her complete discretion. The
terms and conditions of the trigger events may vary by share unit award, by
the participant, or both. A participant is entitled to receive the Class A
Common Shares in his or her share unit account to which a share unit award
relates upon the occurrence of the applicable trigger event.
Upon a change in control of the Company, all share-based awards, such as
ISOs, NQSOs, SARs, restricted shares and share units, shall vest 100%, and all
performance-based awards, such as performance units and performances shares,
shall immediately be paid out in cash, based upon the extent, as determined by
the Committees, to which the performance goals have been met through the
effective date of the change in control or based upon the assumed achievement
of such goals, whichever is higher. No award granted under the Incentive Share
Plan may be sold, transferred, assigned, pledged or hypothecated, other than
by will or by the laws of descent and distribution. Generally, all rights to
any award shall be exercisable only by the participant during his lifetime.
All outstanding awards granted under the plan are forfeited immediately if a
participant is terminated for cause. Upon termination due to death or
disability, all outstanding and vested options and SARs may be exercised
within one year but in no event after the expiration date. In the case of
retirement or termination for any other reason, all outstanding and vested
options and SARs may be exercised within three months but in no event after
the expiration date.
The Incentive Share Plan may be amended, altered or discontinued by the
Board of Trustees, but except as specifically provided therein, no amendment,
alteration or discontinuance may be made which would in any manner adversely
affect any award theretofore granted under the plan, without the written
consent of the participant. Except as expressly provided in the Incentive
Share Plan, the plan may not be amended without shareholder approval to the
extent such approval is required by law or the rules of a securities exchange
on which the Company's Class A Common Shares are listed.
1997 NON-EMPLOYEE TRUSTEE SHARE PLAN
On May 23, 1997, the Board of Trustees of the Company adopted the 1997 Non-
Employee Trustee Share Plan, which became effective upon shareholder approval
on July 15, 1997 at the 1997 Annual Meeting. The purpose of the Trustee Share
Plan is to promote the success of the Company by providing incentives to non-
employee trustees to link their compensation to the long-term financial
success of the Company and to growth in share value. The plan is designed to
provide flexibility to the Company in its ability to attract and retain the
services of trustees upon whose judgment, interest and special effort the
successful conduct of the Company's operations is largely dependent. The
Trustee Share Plan permits the grant of NQSO, restricted share, SAR,
performance unit, performance share and share unit awards. The Company has
reserved an aggregate of 2,000,000 Class A Common Shares for issuance pursuant
to awards under the Trustee Share Plan and the Incentive Share Plan. As of the
date hereof, the Company issued NQSOs pursuant to the Trustee Plan to purchase
25,000 Class A Common Shares to each of Martin L. Edelman and Lynne B.
Sagalyn. The Company intends to grant an award of share units to each of its
non-employee trustees. See "--Compensation of Trustees."
The Trustee Share Plan is administered by the Board of Trustees, which,
among other things, has the authority to select trustees to whom awards may be
granted, to determine the type of awards as well as the number of Class A
Common Shares to be covered by each award and to determine the terms and
conditions of any such awards. The Board of Trustees also has the authority to
construe and interpret the plan, establish, amend
52
<PAGE>
or waive rules and regulations for its administration, accelerate the
exercisability of any award and amend the terms and conditions of any
outstanding award. Only trustees of the Company who are not, and who have not
been at any time within the preceding three years, employees of the Company or
any of its subsidiaries are eligible to participate in the Trustee Share Plan.
Shares available under the Trustee Share Plan can be divided among the various
types of awards and among the participants as the Compensation Committee
determines.
The purchase price per Class A Common Share covered by a NQSO granted under
the Trustee Share Plan shall be determined by the Board of Trustees. Payment
of a NQSO may be made with cash, with previously owned Class A Common Shares,
by foregoing compensation in accordance with Board rules or by a combination
of these. SARs may be granted under the plan in lieu of NQSOs, in addition to
NQSOs, independent of NQSOs or as a combination of the foregoing. A holder of
a SAR is entitled upon exercise to receive Class A Common Shares or cash, as
the Board of Trustees may determine, equal in value on the date of exercise to
the amount by which the fair market value of one Class A Common Share on the
date of exercise exceeds the exercise price fixed by the Board on the date of
grant (which price shall not be less than 100% of the market price of a Class
A Common Share on the date of grant) multiplied by the number of shares in
respect of which the SARs are exercised.
Restricted shares may be granted under the Trustee Share Plan in such
amounts and with such periods of restriction as the Board of Trustees may
designate. The Board of Trustees may condition the vesting or lapse of the
period of restriction upon the attainment of one or more of the performance
goals utilized for purposes of performance units or performance shares.
Restricted shares entitle the holder thereof to participate as a shareholder
of the Company; however, the holder may not sell, transfer, pledge or
otherwise encumber such shares prior to the time it vests. A holder of
restricted shares forfeits all unpaid accumulated dividends and all shares of
restricted shares that have not vested prior to the date that such holder
ceases to be a Trustee of the Company for any reason. The Trustee Share Plan
authorizes the Board to grant performance units and performance shares which
may be earned if specified long-term Company goals are achieved over a period
of time selected by the Board. The performance goals must be based on the
attainment by the Company of certain objective and/or subjective performance
measures which may include one or more of the following: total shareholder
return, return on equity, return on capital, earnings per share, cash flow per
share, market share, share price, revenues, costs, net income, cash flow and
retained earnings. Prior to the grant of performance units or performance
shares, the Board of Trustees may establish the performance goals (from among
the performance measures described above relating to restricted shares) that
must be satisfied before a payout of such awards is made. At the conclusion of
the relevant performance period, the Board of Trustees will determine the
extent to which the specified performance goals have been met. The Trustee
Share Plan also authorizes the grant of share units at any time and from time
to time on such terms as shall be determined by the Board of Trustees. Share
units shall be payable in Class A Common Shares upon the occurrence of certain
trigger events set forth on the participant's election form in his or her
complete discretion. The terms and conditions of the trigger events may vary
by share unit award, by the participant, or both. A participant is entitled to
receive the Class A Common Shares in his or her share unit account to which a
share unit award relates upon the occurrence of the applicable trigger event.
Upon a change in control of the Company, all NQSOs, SARs, share units and
restricted shares shall vest 100% and all performance units and performance
shares shall immediately be paid out in cash, based upon the extent, as
determined by the Board of Trustees, to which the performance goals have been
met through the effective date of the change in control or based upon the
assumed achievement of such goals, whichever is higher. Generally, no award
under the Trustee Share Plan may be sold, transferred, assigned, pledged or
hypothecated, other than by will or by the laws of descent and distribution
and all rights to any award shall be exercisable only by the participant
during his or her lifetime. NQSOs may, in the Board's discretion, be
transferrable to members of the optionee's immediate family, a trust
established for the benefit of one or more such family members or a
partnership in which such family members are the only partners. The optionee
may not receive any consideration for such transfers. All outstanding awards
granted under the plan will be forfeited immediately if the trustee is
removed. Upon death or disability, all outstanding and vested NQSOs and SARs
53
<PAGE>
may be exercised within one year but in no event after the expiration date. If
a trustee retires or terminates service for any other reason, all outstanding
and vested NQSOs and SARs may be exercised within three months but in no event
after the expiration date.
The Trustee Share Plan may be amended, altered or discontinued by the Board
of Trustees, but except as specifically provided therein, no amendment,
alteration or discontinuance may be made which would in any manner adversely
affect any award theretofore granted without the written consent of the
participant. Except as expressly provided in the Trustee Share Plan, the plan
may not be amended without shareholder approval to the extent such approval is
required by law or the rules of a securities exchange on which the Company's
Class A Common Shares are listed.
54
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of December 10, 1997 certain information
with respect to the beneficial ownership of Class A Common Shares and Class A
Preferred Shares, and the voting power possessed thereby (based on 9,138,325
Class A Common Shares and 12,267,658 Class A Preferred Shares outstanding on
that date), by (i) each person known to the Company to be the beneficial owner
of more than 5% of each of the outstanding Class A Common Shares and the
Class A Preferred Shares, (ii) each trustee and named executive officer of the
Company who is a beneficial owner of any Class A Common Shares and (iii) all
trustees and executive officers of the Company as a group, and as adjusted at
that date to reflect the sale of the Class A Common Shares offered hereby
(assuming the sale of 9,000,000 Class A Common Shares in the Offering). Such
information (other than with respect to trustees and officers of the Company)
is based on a review of statements filed with the Commission pursuant to
Sections 13(d), 13(f) and 13(g) of the Exchange Act with respect to the
Company's Class A Common Shares.
<TABLE>
<CAPTION>
CLASS A COMMON SHARES CLASS A PREFERRED SHARES
------------------------------------------- ---------------------------------------
AMOUNT AND NATURE AMOUNT AND NATURE AMOUNT AND NATURE AMOUNT AND NATURE
OF BENEFICIAL OF BENEFICIAL OF BENEFICIAL OF BENEFICIAL PERCENT
OWNERSHIP(1) PRIOR OWNERSHIP(1) AFTER OWNERSHIP(1) PRIOR OWNERSHIP(1) AFTER OF TOTAL
TO THE OFFERING THE OFFERING TO THE OFFERING THE OFFERING VOTING
--------------------- --------------------- ------------------- ------------------- POWER
FIVE PERCENT SHAREHOLDERS, PERCENT PERCENT PERCENT PERCENT AFTER THE
TRUSTEES AND EXECUTIVE OFFICERS NUMBER OF CLASS NUMBER OF CLASS NUMBER OF CLASS NUMBER OF CLASS OFFERING
- ------------------------------- --------- -------- --------- -------- ---------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Veqtor Finance
Company, LLC(2)(3)
.................. 6,959,593(3) 76.2% 6,959,593(3) 38.4% 12,267,658 100% 12,267,658 100% 63%
c/o Capital Trust
605 Third Avenue,
26th Floor
New York, New York
10016
Jeffrey A. Altman.. -- -- -- -- -- -- -- -- --
Martin L. Edelman.. -- -- -- -- -- -- -- -- --
Gary R.
Garrabrant(4)..... -- -- -- -- -- -- -- -- --
Craig M.
Hatkoff(3)(4)..... -- -- -- -- -- -- -- -- --
John R.
Klopp(3)(4)....... -- -- -- -- -- -- -- -- --
Sheli Z.
Rosenberg(4)...... -- -- -- -- -- -- -- -- --
Lynne B. Sagalyn... -- -- -- -- -- -- -- -- --
Samuel Zell(3)(4).. -- -- -- -- -- -- -- -- --
Donald J. Meyer.... -- -- -- -- -- -- -- -- --
Edward L. Shugrue
III............... -- -- -- -- -- -- -- -- --
All executive
officers and
trustees as a
group (10
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.
(2) CTILP and V2 are the sole managing members of Veqtor. The general partner
of CTILP is SZ Investments LLC, the managing member of which is Zell
General Partnership, Inc. ("Zell GP"). The sole stockholder of Zell GP is
the Samuel Zell Revocable Trust (the "Zell Trust"). Mr. Samuel Zell serves
as the trustee of the Zell Trust. Messrs. John R. Klopp and Craig M.
Hatkoff are the sole members of V2.
(3) John R. Klopp, Craig M. Hatkoff and Samuel Zell collectively will
indirectly control the affairs of Veqtor. Each of Messrs. Hatkoff, Klopp
and Zell disclaim beneficial ownership of the Common Shares and Preferred
Shares owned by Veqtor.
(4) Messrs. Zell, Klopp, Hatkoff and Garrabrant and Ms. Rosenberg hold
indirect economic ownership interests in Veqtor equal to approximately
34.2%, 25%, 25%, 4.5% and 4.5%, respectively.
55
<PAGE>
BUY/SELL AGREEMENT
Veqtor, CTILP, V2 and Messrs. Klopp and Hatkoff are parties to an agreement,
dated July 15, 1997, that contains buy/sell provisions pursuant to which (i)
one member of Veqtor may purchase from or sell to the other member its
interests in Veqtor or (ii) one member of V2 or CTILP may purchase the other
V2 member's interest in V2 (the "Buy/Sell Agreement"). Pursuant to the
agreement, from and after July 15, 2000, either CTILP or V2 as the initiating
party (the "Initiating Party") may initiate the buy/sell process by notifying
(the "Buy/Sell Notice") the other party (the "Responding Party") of its desire
either to sell for cash all of its Veqtor Common Units to the Responding Party
or to purchase for cash all of the Veqtor Common Units owned by the Responding
Party, in each case, at the per unit price specified by the Initiating Party
(the "Specified Price"). Upon receipt of the Buy/Sell Notice, the Responding
Party must within 150 days elect either to sell its common interest units in
Veqtor ("Veqtor Common Units") to the Initiating Party or purchase the
Initiating Party's Veqtor Common Units at the Specified Price. If the
Responding Party fails to respond to the Buy/Sell Notice, it shall be deemed
to have elected to sell its Veqtor Common Units at the Specified Price.
The Buy/Sell Agreement provides that upon the termination of employment with
the Company of either John R. Klopp or Craig M. Hatkoff (including through
death or disability) other than by voluntary termination (the "Termination
Event") (the "Departing Person"), whomever of Messrs. Klopp or Hatkoff has not
been the subject of the Termination Event (the "Remaining Person") shall have
the right to purchase all of the interests in V2 then held by the Departing
Person for cash at their fair market value as defined in the Buy/Sell
Agreement ("Fair Market Value"). If the Remaining Person does not purchase the
Departing Person's interest in V2, the Buy/Sell Agreement provides that CTILP
shall have the right to purchase for cash from V2 50% of the Veqtor Common
Units then held by V2 at their fair market value, upon which purchase V2 shall
distribute to the Departing Person (or his estate or representative) an amount
equal to the net proceeds of such sale reduced by 50% of V2's aggregate
liabilities in full redemption of the interest in V2 then held by the
Departing Person (or his estate or representative). If CTILP does not elect to
purchase the Veqtor Common Units held by V2 pursuant to the foregoing, (i)
Veqtor must distribute to V2 50% of its assets that V2 would be entitled to
receive in a liquidation of Veqtor (whereupon V2's economic interest in Veqtor
shall be correspondingly reduced) and (ii) V2 must distribute to the Departing
Person 50% of such assets reduced by 50% of V2's aggregate liabilities in full
redemption of the Departing Person's interest in V2.
Pursuant to the Buy/Sell Agreement, upon the voluntary termination of
employment with the Company of either of Messrs. Klopp or Hatkoff (the
"Voluntarily Departing Person"), CTILP shall have the right to purchase from
V2 50% of the Veqtor Common Units then held by V2 for cash at their fair
market value, upon which purchase V2 shall distribute to the Voluntarily
Departing Individual an amount equal to the net proceeds of such sale reduced
by 50% of V2's aggregate liabilities in full redemption of the interest in V2
then held by the Voluntarily Departing Individual. If CTILP does not purchase
the Veqtor Common Units pursuant to the foregoing, the agreement provides that
whomever of Messrs. Klopp or Hatkoff is not the Voluntarily Departing
Individual (the "Voluntarily Remaining Member") shall have the right to
purchase all of the interest in V2 then held by the Voluntarily Departing
Individual for cash at its Fair Market Value. If the Voluntarily Remaining
Member does not purchase from the Voluntarily Departing Individual all of the
interest in V2 then held by the Voluntarily Departing Individual for cash at
its Fair Market Value pursuant to the foregoing, (i) Veqtor must distribute to
V2 50% of its assets that V2 would be entitled to receive in a liquidation of
Veqtor (whereupon V2's economic interest in Veqtor shall be correspondingly
reduced) and (ii) V2 must distribute to the Voluntarily Departing Person 50%
of such assets reduced by 50% of V2's aggregate liabilities in full redemption
of the Voluntarily Departing Person's interest in V2.
Pursuant to the Buy/Sell Agreement, upon the termination of employment with
the Company of both Messrs. Klopp and Hatkoff, within any 30-day period, for
any or no reason, whether voluntary or involuntary, including, without
limitation, by reason of death or disability, CTILP shall have the right to
purchase from V2 all of the Veqtor Common Units then held by V2 for cash at
their Fair Market Value. If CTILP does not purchase the Veqtor Common Units
pursuant to the foregoing, Veqtor shall distribute to V2 100% of its assets
that V2 would be entitled to receive in a liquidation of Veqtor in full
redemption of 100% of the Veqtor Common Units then held by V2.
56
<PAGE>
Pursuant to the Buy/Sell Agreement, upon the termination of employment with
the Company of either of Messrs. Klopp or Hatkoff for any or no reason,
whether voluntary or involuntary, including, without limitation, by reason of
his death or disability, following by more than 30 days the prior termination
of employment with the Company of the other individual for any or no reason,
whether voluntary or involuntary, including, without limitation, by reason of
his death or disability, CTILP shall have the right to purchase from V2 all of
the Veqtor Common Units then held by V2 for cash at their Fair Market Value.
If CTILP does not purchase the Veqtor Common Units pursuant to the foregoing,
Veqtor shall distribute to V2 100% of its assets that V2 would be entitled to
receive in a liquidation of Veqtor in full redemption of 100% of the Veqtor
Common Units then held by V2.
The Buy/Sell Agreement prohibits the transfer of Veqtor Common Units and
interests in V2 except to permitted transferees as defined in the agreement or
pursuant to the right of first refusal provision contained in the agreement.
The Buy/Sell Agreement contains provisions governing the management of Veqtor.
Pursuant to such provisions, in the event that V2 and CTILP do not hold the
same number of Veqtor Common Units, then, notwithstanding anything to the
contrary in the operating agreement governing Veqtor (the "Veqtor Operating
Agreement"), all matters to be determined by V2 and CTILP as the managing
members of Veqtor shall be determined as between V2 and CTILP by an
affirmative vote of a majority of the Veqtor Common Units then held by V2 and
CTILP, and V2 and CTILP shall be bound to act on such matter as managing
members in the manner determined by such vote. The agreement provides that no
permitted transferee or other third-party transferee shall be entitled to be
appointed, or otherwise act as, a managing member of Veqtor.
The Buy/Sell Agreement provides that notwithstanding anything to the
contrary in the Veqtor Operating Agreement, as long as V2 and CTILP hold the
same number of Veqtor Common Units, each shall be entitled to direct the
nomination of an equal number of trustees/directors of the Company, and if
Veqtor shall be entitled to nominate an odd number of trustees/directors, V2
and CTILP shall jointly select one of the trustee/director nominees. If V2 and
CTILP do not hold the same number of Veqtor Common Units, then,
notwithstanding anything to the contrary in the Veqtor Operating Agreement, V2
and CTILP each shall be entitled to direct the nomination of a number of
trustees/directors equal to their relative percentage holdings of Veqtor
Common Units multiplied by the total number of trustees/directors which Veqtor
is then entitled to nominate (rounded to the nearest whole number).
NON-COMPETE AGREEMENT
Samuel Zell and certain of his affiliates, including EGI, have and will
continue to have a broad range of investment interests and will continue to be
associated with companies directly or indirectly involved in real estate
investment activities. However, pursuant to the limited liability company
agreement of Veqtor, CTILP (which is controlled by Mr. Zell) and V2 have
agreed that, except through the Company, each of them and certain of their
owners shall not before May 20, 2000 form, organize or acquire control of any
enterprise whose primary purpose is to engage in any of the businesses which
are the primary focus of the Company's business plan. Mr. Zell has informed
the Company that notwithstanding the limited duration of the foregoing non-
competition provisions neither he nor any of his affiliates over which he
exercises management control currently intends to compete with the Company in
its proposed specialty finance company operations.
57
<PAGE>
CERTAIN TRANSACTIONS
INTEREST PURCHASE AGREEMENT
In connection with the Acquisition, the Company entered into an interest
purchase agreement, dated as of June 16, 1997, with John R. Klopp, Craig M.
Hatkoff and Valentine Wildove & Company, Inc., pursuant to which the Company
acquired interests in Victor Capital and certain of its affiliated entities
for a purchase price of $5.0 million. The purchase price under the interest
purchase agreement is payable by the delivery by the Company to the sellers of
the non-interest-bearing Acquisition Notes. The Acquisition Notes provide for
ten semi-annual principal amortization payments in equal installments. Mr.
Klopp and Mr. Hatkoff, each of whom is an officer and a trustee of the
Company, each received an Acquisition Note in the principal amount of
$2,162,500. Valentine Wildove & Company, Inc., in which Messrs. Klopp and
Hatkoff are each 50% owners, received $675,000 in principal amount of the
Acquisition Notes.
The interest purchase agreement provides that the sellers will indemnify the
Company for all damages as a result of any breach of any representation,
warranty, covenant or agreement of the sellers contained in the interest
purchase agreement.
INVESTMENT AGREEMENT
Pursuant to the terms of the Investment Agreement, on July 15, 1997, the
Company sold 12,267,658 Class A Preferred Shares to Veqtor for an aggregate
purchase price of $33.0 million. The Investment Agreement 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 Class A Preferred Shares or Class B Preferred Shares, if any. The
Company has agreed that, so long as any Class A Preferred Shares or Class B
Preferred Shares remain outstanding, without the affirmative vote of the
holders of more than 50% of the Class A Preferred Shares and Class B Preferred
Shares then outstanding, voting as a single class, the Company will not incur
any further indebtedness if the Company's debt to equity ratio would then
exceed 5:1.
The Company has also agreed in the Investment Agreement only to issue shares
that are Junior Shares and only to issue Class B Preferred Shares upon the
conversion of any Class A Preferred Shares or with the affirmative vote of the
holders of a majority of the outstanding Preferred Shares. "Junior Shares" are
defined as common shares and any other class or series of shares of the
Company now or hereafter authorized, issued or outstanding that are subject,
under the terms of the 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 and Class B Preferred
Shares shall have been paid in full; (ii) in the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, the
holders of Class A Preferred Shares and Class B Preferred Shares shall be
entitled to receive out of the assets of the Company available for
distribution to shareholders the liquidation preference with respect to the
Class A Preferred Shares and Class B Preferred Shares and any accrued and
unpaid dividends thereon before any payment shall be made or any assets
distributed to the holders of such other class or series of shares of the
Company; and (iii) shares of such class or series are not required to be
redeemed under any circumstances, either at the option of the Company or of
any holder thereof, unless all of the outstanding Class A Preferred Shares and
Class B Preferred Shares have theretofore been redeemed or converted.
The Investment Agreement provides for certain registration rights with
respect to securities of the Company held by Veqtor at the time of the
Investment, to the extent such securities (whether or not converted into other
securities of the Company) continue to be held by Veqtor or the Institutional
Investors (or their respective transferees). The holders of such registrable
securities will have the right from time to time to request that the Company
prepare and file up to three registration statements under the Securities Act
covering all or any portion of such registrable securities. In addition, if
the Company proposes to file a registration statement at any time,
58
<PAGE>
the Company has agreed to use its best efforts, upon Veqtor's and the other
holders' request, to cause any shares held by Veqtor and the other holders to
be included in such registration. All such registration rights have been
waived in connection with the Offering. In connection with any securities
registration, Veqtor and the other holders, respectively, have agreed to pay
all underwriting discounts and selling commissions on the shares registered on
behalf of Veqtor and the other holders. All other costs of registration are to
be paid by the Company.
As a result of the Investment and its purchase of the Class A Common Shares
from CRIL, Veqtor holds an aggregate of 19,227,251 of the Company's
outstanding shares, representing approximately 90% of the total number of
outstanding shares of the Company before the Offering and approximately 63% of
the total number of shares of the Company after completion of the Offering
(assuming the sale of 9,000,000 Class A Common Shares in the Offering).
Certain members of the Company's Board of Trustees, including Messrs. Zell,
Klopp, Hatkoff and Garrabrant and Ms. Rosenberg, hold indirect economic
ownership interests in Veqtor equal to approximately 34.2%, 25%, 25%, 4.5% and
4.5%, respectively.
REIMBURSEMENT AGREEMENT
Pursuant to an expense reimbursement arrangement with EGI, the Company has
agreed to reimburse EGI the costs for certain general administrative services
to the Company, including, among others, certain legal, tax, shareholder
relations and insurance acquisition services, which are provided by employees
of EGI. As of September 30, 1997, the Company had paid or accrued
approximately $22,000 to EGI.
SHARING AGREEMENT
Pursuant to an oral agreement with The Peregrine Real Estate Trust (the
"Former Parent"), costs for certain general administrative services, including
executive services (including the services of Mr. Morrow), accounting
services, treasury services, financial reporting and internal bookkeeping
services, shareholder relations and directors' and officers' insurance were
shared with the Former Parent. The shared costs were allocated to the Company
and the Former Parent based upon their respective asset values (real property
and notes receivable), subject to annual negotiation. Pursuant to this
agreement, approximately $435,000 and $258,000 was 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
and all amounts owed thereunder were paid.
ASSET MANAGEMENT AGREEMENTS
VP Metropolis Services, LLC, a wholly-owned subsidiary of the Company
("VPM"), is a party to an asset management agreement (the "VPM Asset
Management Agreement") with MVB Metropolis Properties, L.P. ("MVB") pursuant
to which VPM has agreed to manage, service and administer certain real estate
assets owned by MVB and its affiliates, initially including a New York City
property consisting of 46 condominium units and a pool of 18 mortgages secured
by properties located throughout the United States. John R. Klopp and Craig M.
Hatkoff, both trustees of the Company, are each 25.05% owners of VP-LP, LLC,
which owns a 1.0% interest in MVB. In addition, Mr. Klopp is a vice president
of MVB Metropolis Corp., the general partner and a 1.0% owner of MVB. Pursuant
to the VPM Asset Management Agreement, fees of $28,272, $247,219, $149,069 and
$128,362 were paid to VPM during 1994, 1995, 1996 and the nine months ended
September 30, 1997, respectively.
Victor Asset Management Partners, LLC, a wholly-owned subsidiary of the
Company ("VAMP"), is a party to an asset management agreement (the "VAMP Asset
Management Agreement I") with S.H. Mortgage Acquisition, LLC ("S.H. Mortgage
Acquisition") pursuant to which VAMP has agreed to manage, service and
administer certain real estate assets owned by S.H. Mortgage Acquisition and
its affiliates, initially including 21 loans secured by various properties and
other assets located in New Jersey. Messrs. Klopp and Hatkoff are managing
members of VP-NJ, LLC, which owns a 1.0% interest in and is the managing
member of S.H. Mortgage Acquisition. Pursuant to the VAMP Asset Management
Agreement I, fees of $126,406, $401,912 and $282,371 were paid to VAMP during
1995, 1996 and the nine months ended September 30, 1997, respectively.
59
<PAGE>
VAMP is also a party to an asset management agreement (the "VAMP Asset
Management Agreement II") with RE Acquisition, LLC ("RE Acquisition") pursuant
to which VAMP has agreed to manage, service and administer certain real estate
assets owned by RE Acquisition, initially including a pool of five mortgages
and other rights relating to real properties located in New York and New
Jersey. Messrs. Klopp and Hatkoff are managing members of VPC Partners, LLC,
which owns a 0.7772% interest in RE Acquisition. In addition, Mr. Klopp is a
manager of RE Acquisition. Pursuant to the VAMP Asset Management Agreement II,
fees of $338,105 were paid to VAMP during the nine months ended September 30,
1997.
RELATIONSHIPS WITH MR. EDELMAN
Mr. Edelman, who is a trustee of the Company, is of counsel to Battle Fowler
LLP, a New York City law firm that is representing the Company in various
matters relating to the sale of the Class A Common Shares offered hereby and
has represented the Company and certain affiliates thereof, including Victor
Capital, in the past with respect to various legal matters. The Company
expects to continue to engage Battle Fowler LLP after the closing of the
Offering.
The Company believes that the terms of the foregoing transactions are no
less favorable than could be obtained by the Company from unrelated parties on
an arms-length basis.
DESCRIPTION OF CAPITAL SHARES
Pursuant to the Restated Declaration, the authorized capital shares of the
Company consist of an unlimited number of preferred shares of beneficial
interest in the Company and common shares of beneficial interest in the
Company issuable in classes or series, comprised of (i) Class A Preferred
Shares, (ii) Class B Preferred Shares, (iii) Class A Common Shares and (iv)
Class B Common Shares. As of December 10, 1997, there were 12,267,658 Class A
Preferred Shares issued and outstanding, no Class B Preferred Shares issued
and outstanding, 9,138,325 Class A Common Shares issued and outstanding and no
Class B Common Shares issued and outstanding. The Certificate of Designation
has currently fixed the number of authorized Class A Preferred Shares and the
Class B Preferred Shares at 12,639,405 each. 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 interest and common shares of beneficial
interest from time to time, including additional Class A Preferred Shares,
Class B Preferred Shares, Class A Common Shares and Class B Common Shares. The
Investment Agreement, however, provides 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.
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 filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
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
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Common Shares or Class B Common Shares, however, unless simultaneously the
same dividend is declared or paid on each share of the other classes of Class
A Common Shares and Class B Common Shares except that if dividends are
declared that are payable in common shares, such dividends shall be payable at
the same rate on each class or series of Class A Common Shares and Class B
Common Shares and shall be payable only in Class A Common Shares to holders of
Class A Common Shares and in Class B Common Shares to holders of Class B
Common Shares.
Liquidation Rights. In the event of the liquidation of the Company and the
distribution of its assets, after the payment in full or the setting apart for
payment to all creditors of the Company of the amounts to which they shall be
entitled and subject to such preferential amounts, if any, to which the
holders of preferred shares at the time outstanding shall be entitled, the
remaining assets of the Company available for payment and distribution to
holders of Class A Common Shares and Class B Common Shares shall, subject to
any participating or similar rights of preferred shares at the time
outstanding, be distributed ratably, in accordance with the number of Class A
Common Shares and Class B Common Shares held by each such holder, among the
holders of Class A Common Shares and Class B Common Shares at the time
outstanding.
Voting Rights. The Class B Common Shares do not have voting rights and are
not counted in determining the presence of a quorum for the transaction of
business at any meeting of the shareholders.
Except as otherwise provided by law and subject to the special voting rights
of any outstanding preferred shares, the approval of all matters brought
before the shareholders requires the affirmative vote of the holders of a
majority in voting power of the voting shares (including the Class A Common
Shares) that are present in person or represented by proxy and voting as a
single class.
Conversion Rights. Each Class A Common Share is convertible at the option of
the holder thereof at any time and from time to time into one fully paid and
nonassessable Class B Common Share and, subject to delivery of the
certification described below, each Class B Common Share is convertible at the
option of the holder thereof at any time and from time to time into one fully
paid and nonassessable Class A Common Share. If Class B Common Shares are to
be converted into Class A Common Shares, the holder of the Class B Common
Shares must certify to the Company that the shareholder either (a) will not,
together with any other person (other than the Company) who previously held
voting shares of the Company now held by the shareholder, upon the issuance of
such Class A Common Shares, own more than 4.9% of any class of voting shares
of the Company or (b) is not limited by the BHCA to holding no 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 rate 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, as well as 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
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for such conversion or exchange, the terms, prices, rates, adjustments and any
other terms and conditions thereof; (vi) the extent, if any, to which the
holders of the Preferred Shares of such class or series shall be entitled to
vote with respect to the election of Trustees or on other issues, including,
without limitation, the extent, if any, to which such holders shall be
entitled, voting as a class or series or jointly with other classes or series,
to elect one or more Trustees upon the happening of a specified event or
otherwise, or entitled to multiple votes per Preferred Share; (vii) the
restrictions, if any, on the issue or reissue of Preferred Shares of such
class or series or any other classes or series; (viii) the extent, if any, to
which the holders of the Preferred Shares of such class or series shall be
entitled to preemptive rights; (ix) the rights of the holders of the Preferred
Shares of such class or series upon the termination of the Company or any
distribution of its assets, including, without limitation, any preferential
amount payable upon such Preferred Shares or any other rights of holders of
such Preferred Shares in the event of the liquidation, dissolution or winding
up of the Company or the distribution of its assets and (x) the terms of any
other provisions to be applicable to such Preferred Shares and such other
powers, preferences, rights, limitations or restrictions as the Board of
Trustees shall determine.
In connection with the Investment, the Board of Trustees adopted a
resolution which is set forth in the Certificate of Designation providing for
the creation of two classes of the Company's Preferred Shares, consisting of
12,639,405 Class A Preferred Shares and 12,639,405 Class B Preferred Shares.
In connection with the closing of the Investment, Veqtor purchased from the
Company 12,267,658 Class A Preferred Shares for an aggregate purchase price of
approximately $33.0 million.
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 a per share price of
$2.69. Such dividends shall accrue (whether or not declared) and, to the
extent not paid for any dividend period, will be cumulative. Dividends on the
Preferred Shares are payable, when and as declared, semi-annually, in arrears,
no later than 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 both classes of Preferred Shares. The Certificate
of Designation provides that, unless all dividends and other amounts then
accrued with respect to the Preferred Shares are paid in full, the Company may
not declare or pay or set apart for payment any dividends or make any other
distributions on, or make any payment on account of the purchase, redemption,
exchange or other retirement of, any other shares of the Company (other than
payment in or in exchange for Junior Shares (as defined above)).
Liquidation Preference. In the event of the liquidation of the Company and
the distribution of its assets, the holders of the Preferred Shares are
entitled to receive out of assets of the Company available for distribution to
shareholders an amount per share equal to $2.69 plus the amount of all
dividends per share accrued and unpaid thereon through the date of final
distribution to shareholders, whether or not declared, before any payment
shall be made or any assets distributed to the holders of any other class or
series of shares of the Company.
Voting Rights. The Class A Preferred Shares are entitled to vote together
with the holders of the Class A Common Shares as a single class on all matters
submitted to a vote of shareholders. Each Class A Preferred Share entitles the
holder thereof to a number of votes per share equal to the number of Class A
Common Shares into which such Class A Preferred Share is then convertible.
Except as described below, the Class B Preferred Shares do not have voting
rights and are not counted in determining the presence of a quorum for the
transaction of business at a shareholders' meeting.
The holders of a majority of the outstanding Preferred Shares, voting
together as a single class, but voting together as a separate class from the
common shares, have, with certain exceptions, the right to approve any merger,
consolidation or transfer of all or substantially all of the assets of the
Company.
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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); or incur any indebtedness if the Company's
debt to equity ratio would exceed 5:1.
Conversion Right. Each Class A Preferred Share is convertible at the option
of the holder thereof at any time and from time to time in whole or in part
into an equal number of Class B Preferred Shares or into a number of Class A
Common Shares equal to the ratio of (x) $2.69 plus an amount equal to all
dividends per share accrued and unpaid thereon as of the date of such
conversion to (y) the Conversion Price in effect as of the date of such
conversion. Each Class B Preferred Share is convertible at the option of the
holder thereof at any time and from time to time in whole or in part into an
equal number of Class A Preferred Shares or into a number of Class B Common
Shares equal to the ratio of (x) $2.69 plus an amount equal to all dividends
per share accrued and unpaid thereon as of the date of such conversion to (y)
the Conversion Price in effect as of the date of such conversion. If Class B
Preferred Shares are to be converted into Class A Preferred Shares, the holder
of the Class B Preferred Shares must certify to the Company that the
shareholder either (a) will not, together with any other person (other than
the Company) who previously held voting shares of the Company now held by the
shareholder, upon the issuance of such Class A Preferred Shares, own more than
4.9% of any class of voting shares of the Company or (b) is not limited by the
BHCA to holding no 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
from the issuance of additional shares at a price less than $2.69 per share.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have outstanding an
aggregate of 18,138,325 Class A Common Shares (based on the number of Class A
Common Shares outstanding as of December 10, 1997), assuming no exercise of
outstanding options. Of the total number of outstanding Class A Common Shares,
the 9,000,000 Class A Common Shares sold in the Offering, together with the
outstanding Class A Common Shares currently held by the public shareholders,
will be freely tradable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act (which sales would be subject
to certain volume limitations and other restrictions described below). In
addition, Veqtor holds 6,959,593 Class A Common Shares and 12,267,658 Class A
Preferred Shares that are convertible into an equal number of Class A Common
Shares, all of which are eligible for resale in the public market, subject to
certain volume and other restrictions under Rule 144 and the "lock-up"
discussed below.
In general, under Rule 144 as currently in effect, a person, including a
person who may be deemed an "affiliate" of the Company, who has held
restricted shares for at least one year may sell such shares, subject to
certain volume limitations and other restrictions, without registering them
under the Act. The Company has agreed that during the period ending 180 days
after the date of this Prospectus, and each of the Company's trustees,
executive officers and affiliates and Veqtor has agreed that during the period
ending one year after the date of this Prospectus, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters,
each of them will not, subject to certain exceptions, (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of, directly or indirectly, any Class A Common
Shares or any securities convertible into or exercisable or exchangeable for
Class A Common Shares or (2) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Class A Common Shares, whether any such transaction described
in clause (1) or (2) above is to be settled by delivery of Class A Common
Shares or such other securities, in cash or otherwise. See "Underwriting." In
addition, the Company's trustees and executive officers and affiliates and
Veqtor have agreed that during the period commencing on the date hereof and
ending one year after the date of this Prospectus, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters,
they will not make any demand for or exercise any right with respect to the
registration of any Class A Common Shares or any security convertible into or
exercisable or exchangeable for Class A Common Shares. Rule 144 generally also
permits sales of restricted shares, without any volume limitations, by a
person who has not been an "affiliate" of the Company for at least three
months preceding the sale of such shares and who has held those restricted
shares for at least two years. Pursuant to the terms of the Investment
Agreement, Veqtor and the other holders of the Company's registrable
securities as defined in the Investment Agreement (or their assignees) will be
entitled to certain demand registration rights with respect to the shares they
hold. In addition to these demand registration rights, Veqtor and other
holders of the Company's registrable securities (or their assignees) will be,
subject to certain limitations, entitled to register their shares in
connection with registration statements prepared by the Company to register
the Company's equity securities. All such registration rights have been waived
in connection with the Offering. See "Certain Transactions--Investment
Agreement."
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CERTAIN FEDERAL INCOME TAX
CONSEQUENCES TO NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Class A
Common Shares by a holder who is not a United States person (a "Non-U.S.
Holder"). For this purpose, the term "United States person" is defined as any
person who is a citizen or resident of the United States, a corporation or a
partnership or other entity created or organized in the United States or under
the laws of the United States or of any state, or an estate or trust whose
income is includible in gross income for United States federal income tax
purposes regardless of source. This discussion does not address all aspects of
United States federal income and estate taxes and does not deal with foreign,
state and local consequences that may be relevant to such Non-U.S. Holders in
light of their personal circumstances, or to certain types of Non-U.S. Holders
which may be subject to special treatment under United States federal income
tax laws (for example, insurance companies, tax-exempt organizations,
financial institutions or broker-dealers). Furthermore, this discussion is
based on provisions of the Code, existing and proposed regulations promulgated
thereunder and administrative and judicial interpretations thereof, as of the
date hereof, all of which are subject to change, possibly with retroactive
effect. Each prospective purchaser of Class A Common Shares is advised to
consult a tax advisor with respect to current and possible future tax
consequences of acquiring, holding and disposing of Class A Common Shares as
well as any tax consequences that may arise under the laws of any U.S. state,
municipality or other taxing jurisdiction.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a non-resident alien) by virtue of being present in the
United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during the three-year period ending in the current
calendar year (counting for such purposes all of the days present in the
current year, one-third of the days present in the immediately preceding year,
and one-sixth of the days present in the second preceding year). Resident
aliens are subject to U.S. federal tax as if they were U.S. citizens.
DIVIDENDS
The Company has not paid cash dividends on its Class A Common Shares since
1994 and does not anticipate paying any cash dividends on its Class A Common
Shares in the foreseeable future. It is the current policy of the Board to
reinvest earnings in the Company to the extent that such earnings are in
excess of dividend requirements on its Class A Preferred Shares. The payment
of any cash dividends in the future will depend upon the Company's earnings,
financial condition and capital needs and on other factors deemed relevant by
the Board. See "Dividend Policy." In the event, however, that dividends are
paid on shares of Class A Common Shares, dividends paid to a Non-U.S. Holder
of Class A Common Shares will be subject to withholding of United States
federal income tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are effectively connected
with the conduct of a trade or business of the Non-U.S. Holder within the
United States and the Non-U.S. Holder provides the payor with proper
documentation or, if a tax treaty applies, the dividends are attributable to a
U.S. permanent establishment of the Non-U.S. Holder. In order to claim the
benefit of an applicable tax treaty rate, a Non-U.S. Holder may be required to
file with the Company or its dividend paying agent a reduced treaty rate
certificate. Dividends that are effectively connected with the conduct of a
trade or business within the United States or, if a tax treaty applies, are
attributable to such a United States permanent establishment, are subject to
United States federal income tax on a net income basis (that is, after
allowance for applicable deductions) at applicable graduated individual or
corporate rates. Any such effectively connected dividends received by a
foreign corporation may, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of
such country for purposes of the withholding discussed above (unless the
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payor has knowledge to the contrary) and, under the current interpretation of
United States Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. However, for dividends paid after December
31, 1998, recently issued United States Treasury regulations require that a
Non-U.S. Holder of Class A Common Shares who wishes to claim the benefit of an
applicable treaty rate satisfy applicable certification and other
requirements.
A Non-U.S. Holder of Class A Common Shares eligible for a reduced rate of
United States withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for
refund with the Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF CLASS A COMMON SHARES
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Class A Common Shares unless (i)(a) the gain is effectively connected with a
trade or business of the Non-U.S. Holder in the United States or (b) if a
treaty applies, the gain is attributable to a United States permanent
establishment of the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder
who is an individual and holds the Class A Common Shares as a capital asset,
such holder is present in the United States for 183 or more days in the
taxable year of the sale or other disposition and certain other conditions are
met, (iii) the Company is or has been a "U.S. real property holding
corporation" for United States federal income tax purposes within the
preceding five years, or (iv) the Non-U.S. Holder is subject to tax pursuant
to certain provisions of the Code applicable to expatriates. The Company
believes that it is a "U.S. real property holding corporation" for United
States federal income tax purposes. A Non-U.S. Holder that falls under clause
(iii) will generally be taxed on the net gain derived from a sale at the
United States federal income tax rates (including withholding tax generally at
a rate of 10% of cash proceeds) generally applicable to U.S. persons. An
exception from United States taxation as a result of this status may be
available for persons who have not owned beneficially more than 5% of a class
of shares regularly traded on an established securities market.
If an individual Non-U.S. Holder falls under clause (i) above, such
individual generally will be taxed on the net gain derived from a sale in a
manner similar to a United States person. If an individual Non-U.S. Holder
falls under clause (ii) above, such individual generally will be subject to a
flat 30% tax on the gain derived from a sale, which may be offset by certain
United States capital losses (notwithstanding the fact that such individual is
not considered a resident of the United States). Thus, Non-U.S. Holders who
have spent (or expect to spend) 183 days or more in the United States in the
taxable year in which they contemplate a sale of Class A Common Shares are
urged to consult their tax advisors as to the tax consequences of such sale.
If a Non-U.S. Holder that is a corporation falls under clause (i) above, it
generally will be taxed on its net gain at the United States federal income
tax rates generally applicable to U.S. corporations and, in addition, will be
subject to the branch profits tax equal to 30% of its "effectively connected
earnings and profits" within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable income tax treaty.
FEDERAL ESTATE TAX
Class A Common Shares held by an individual Non-U.S. Holder at the time of
death (or, in certain cases, transferred prior to the Non-U.S. Holder's death)
will be included in such holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends. These information reporting requirements apply even if
withholding was not required because the dividends were effectively connected
with a trade or business in the United States of the Non-U.S. Holder or
withholding was reduced by an applicable income tax
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treaty. Copies of the information returns reporting such dividends and
withholding may be made available to the tax authorities in the country in
which the Non-U.S. Holder resides or is established under the provisions of an
applicable income tax treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting
requirements) generally will not apply to dividends paid to Non-U.S. Holders
outside the United States that are either subject to the 30% withholding
discussed above or that are not so subject because a tax treaty applies that
reduces such 30% withholding. In that regard, under current United States
Treasury regulations, backup withholding will not apply to dividends paid on
Class A Common Shares to a Non-U.S. Holder at an address outside the United
States unless the payor has knowledge that the payee is a United States
person. However, for dividends paid after December 31, 1998, recently issued
United States Treasury regulations provide that a Non-U.S. Holder will be
subject to backup withholding unless applicable certification or other
requirements are met. Backup withholding and information reporting generally
will apply to dividends paid to addresses inside the United States on Class A
Common Shares to beneficial owners that are not "exempt recipients" and that
fail to provide in the manner required certain identifying information.
In general, backup withholding and information reporting will not apply to a
payment of the proceeds of a sale of Class A Common Shares by or through a
foreign office of a broker. If, however, such broker is, for United States
federal income tax purposes, a U.S. person, a controlled foreign corporation,
a foreign person that derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States or,
effective after December 31, 1998, certain brokers that are foreign
partnerships with U.S. partners or that are engaged in a U.S. trade or
business, such payments will not be subject to backup withholding but will be
subject to information reporting, unless (i) such broker has documentary
evidence in its records that the beneficial owner is a Non-U.S. Holder and
certain other conditions are met, or (ii) the beneficial owner otherwise
establishes an exemption.
Payment by a United States office of a broker of the proceeds of a sale of
Class A Common Shares is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury
that it is a Non-U.S. Holder, or otherwise establishes an exemption. Any
amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below for whom Morgan Stanley & Co. Incorporated, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Morgan Grenfell Inc.
are acting as U.S. Representatives, and the International Underwriters named
below for whom Morgan Stanley & Co. International Limited, Merrill Lynch
International and Morgan Grenfell & Co. Limited are acting as International
Representatives, have severally agreed to purchase, and the Company has agreed
to sell to them, severally, the respective number of Class A Common Shares set
forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.............................. 1,813,334
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................. 1,813,333
Deutsche Morgan Grenfell Inc. ................................. 1,813,333
ABN Amro Chicago Corporation................................... 140,000
J.C. Bradford & Co. ........................................... 70,000
BT Alex. Brown Incorporated.................................... 140,000
CIBC Oppenheimer Corp. ........................................ 140,000
A.G. Edwards & Sons, Inc. ..................................... 140,000
EVEREN Securities, Inc. ....................................... 70,000
Furman Selz LLC................................................ 140,000
Genesis Merchant Group Securities LLC.......................... 70,000
Goldman, Sachs & Co. .......................................... 140,000
Jefferies & Company, Inc. ..................................... 70,000
Jensen Securities Co. ......................................... 70,000
Edward D. Jones & Co., L.P. ................................... 70,000
Legg Mason Wood Walker, Incorporated........................... 70,000
McDonald & Company Securities, Inc. ........................... 70,000
NationsBanc Montgomery Securities, Inc. ....................... 140,000
Piper Jaffray Inc. ............................................ 70,000
Raymond James & Associates, Inc. .............................. 70,000
The Robinson-Humphrey Company, LLC............................. 70,000
Sands Brothers & Co., Ltd. .................................... 70,000
Sutro & Co. Incorporated....................................... 70,000
Talon Securities, Inc. ........................................ 70,000
---------
Subtotal....................................................... 7,400,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited..................... 533,334
Merrill Lynch International.................................... 533,333
Morgan Grenfell & Co. Limited.................................. 533,333
---------
Subtotal....................................................... 1,600,000
---------
Total........................................................ 9,000,000
=========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively
referred to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Class A Common Shares
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of
68
<PAGE>
the Class A Common Shares offered hereby (other than those covered by the U.S.
Underwriters' over-allotment option described below) if any such shares are
taken. Pursuant to the Agreement between U.S. and International Underwriters,
each U.S. Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Shares (as defined herein) for the
account of anyone other than a United States or Canadian Person (as defined
herein) and (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any Shares or distribute any prospectus relating to
the Shares outside the United States or Canada or to anyone other than a
United States or Canadian Person.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Shares for the account of any United
States or Canadian Person and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares in the United States or Canada or to any United States
or Canadian Person. With respect to any Underwriter that is a U.S. Underwriter
and an International Underwriter, the foregoing representations and agreements
(i) made by it in its capacity as a U.S. Underwriter apply only to it in its
capacity as a U.S. Underwriter and (ii) made by it in its capacity as
an International Underwriter apply only to it in its capacity as an
International Underwriter. The foregoing limitations do not apply to
stabilization transactions or to certain other transactions specified in the
Agreement between U.S. and International Underwriters. As used herein, "United
States or Canadian Person" means any national or resident of the United States
or Canada, or any corporation, pension, profit-sharing or other trust or other
entity organized under the laws of the United States or Canada or of any
political subdivision thereof (other than a branch located outside the United
States and Canada of any United States or Canadian Person), and includes any
United States or Canadian branch of a person who is otherwise not a United
States or Canadian Person. All Class A Common Shares to be purchased by the
Underwriters under the Underwriting Agreement are referred to herein as the
"Shares."
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of
any number of Shares as may be mutually agreed. The per share price of any
Shares so sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per
share amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any Shares, directly or indirectly, in any
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada in contravention of the securities laws
thereof and has represented that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing
such Shares, such dealer represents and agrees that it has not offered or
sold, and will not offer or sell, directly or indirectly, any of such Shares
in any province or territory of Canada or to, or for the benefit of, any
resident of any province or territory of Canada in contravention of the
securities laws thereof and that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such Shares a notice containing substantially the same statement as is
contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not
offered or sold and, prior to the date six months after the closing date for
the sale of the Shares to the International Underwriters, will not offer or
sell, any Shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply
with all applicable
69
<PAGE>
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Shares in, from or otherwise involving the United
Kingdom; and (iii) it has only issued or passed on and will only issue or pass
on in the United Kingdom any document received by it in connection with the
offering of the Shares to a person who is of a kind described in Article 11(3)
of the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996 or is a person to whom such document may otherwise lawfully be
issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or
sales to Japanese International Underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with applicable provisions of
Japanese law. Each International Underwriter has further agreed to send to any
dealer who purchases from it any of the Shares a notice stating in substance
that, by purchasing such Shares, such dealer represents and agrees that it has
not offered or sold, and will not offer or sell, any of such Shares, directly
or indirectly, in Japan or to or for the account of any resident thereof,
except for offers or sales to Japanese International Underwriters or dealers
and except pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law, and that such dealer will send to any other dealer
to whom it sells any of such Shares a notice containing substantially the same
statement as is contained in this sentence.
The Underwriters initially propose to offer part of the Shares directly to
the public at the public offering price set forth on the cover page hereof and
part to certain dealers at a price that represents a concession not in excess
of $.39 a share under the public offering price. Any Underwriter may allow,
and such dealers may reallow, a concession not in excess of $.10 a share to
other Underwriters or to certain other dealers. After the initial offering of
the Shares, the offering price and other selling terms may from time to time
be varied by the Representatives.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
1,350,000 additional Class A Common Shares at the public offering price set
forth on the cover page hereof, less underwriting discounts and commissions.
The U.S. Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
Class A Common Shares offered hereby. To the extent such option is exercised,
each U.S. Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional Class A Common
Shares as the number set forth next to such U.S. Underwriter's name in the
preceding table bears to the total number of Class A Common Shares set forth
next to the names of all U.S. Underwriters in the preceding table.
At the request of the Company, the U.S. Underwriters have reserved up to
400,000 Class A Common Shares (the "Reserved Shares") for sale at the public
offering price to certain employees of the Company, the Company's business
affiliates and other parties who have expressed an interest in purchasing
Class A Common Shares. The number of Class A Common Shares available to the
general public will be reduced to the extent these persons purchase the
Reserved Shares. Any Reserved Shares that are not so purchased by such persons
at the completion of the Offering will be offered by the U.S. Underwriters to
the general public on the same terms as the other shares offered by this
Prospectus.
The Class A Common Shares are listed on the NYSE and Pacific Stock Exchange
under the symbol "CT."
The Company has agreed that during the period ending 180 days after the date
of this Prospectus, and each of the Company's trustees, executive officers and
affiliates and Veqtor has agreed that during the period ending one year after
the date of this Prospectus, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, each of them will
not (i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to
70
<PAGE>
purchase, lend, or otherwise transfer or dispose of, directly or indirectly,
any Class A Common Shares or any securities convertible into or exercisable or
exchangeable for Class A Common Shares or (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Class A Common Shares, whether any
such transaction described in clause (i) or (ii) above is to be settled by
delivery of Class A Common Shares or such other securities, in cash or
otherwise. The restrictions described in this paragraph do not apply to (w)
the sale of the Shares to the Underwriters, (x) the issuance by the Company of
shares pursuant to the Company's Incentive Share Plan or its Trustee Share
Plan, (y) the issuance by the Company of shares upon conversion of outstanding
Class A Preferred Shares or (z) the issuance by the Company of Class A Common
Shares or any securities convertible into or exercisable or exchangeable for
Class A Common Shares in connection with an acquisition, by merger or
consolidation with, or by purchase of a substantial portion of the assets of,
or by any other manner, of any business or any corporation, partnership,
association or other business organization or division thereof which is not
affiliated with Veqtor, EGI, V2 or Messrs. Zell, Klopp or Hatkoff.
In order to facilitate the offering of the Class A Common Shares, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Shares. Specifically, the Underwriters
may over-allot in connection with the Offering, creating a short position in
the Class A Common Shares for their own account. In addition, to cover over-
allotments or to stabilize the price of the Class A Common Shares, the
Underwriters may bid for, and purchase, Class A Common Shares in the open
market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an Underwriter or a dealer for distributing the Class A Common
Shares in the offering, if the syndicate repurchases previously distributed
Class A Common Shares in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Class A Common Shares above independent
market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
From time to time, certain of the Underwriters and their affiliates have
provided, and continue to provide, investment and commercial banking services
to the Company and certain of its affiliates. GACC, an affiliate of Deutsche
Morgan Grenfell Inc., one of the U.S. Representatives, and Morgan Grenfell &
Co. Limited, one of the International Representatives, is the sole lender
under the Credit Facility. Until applied to fund investment or acquisition
opportunities, the net proceeds of the Offering may be used to temporarily
reduce the outstanding borrowings under the Credit Facility, which, including
accrued interest, totaled approximately $33.4 million on December 10, 1997.
See "Use of Proceeds." Since the amount to be repaid to GACC exceeds 10% of
the net proceeds from the sale of the Shares, the offering of the Shares is
being made pursuant to the provisions of Rule 2710(c)(8) of the Conduct Rules
of the National Association of Securities Dealers, Inc.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
71
<PAGE>
LEGAL MATTERS
The validity, authorization and issuance of the Class A Common Shares
offered hereby will be passed upon for the Company by Greenberg Glusker Fields
Claman & Machtinger LLP. Certain other matters in connection with the Offering
will be passed upon for the Company by Battle Fowler LLP. Martin L. Edelman,
who is a trustee of the Company, is also of counsel to Battle Fowler LLP.
Certain legal matters for the Underwriters will be passed upon by Davis Polk &
Wardwell.
EXPERTS
The consolidated financial statements of the Company as of and for the nine
months ended September 30, 1997, appearing elsewhere in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
in the Registration Statement and are included in reliance upon such report,
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements and schedules of the Company as of
December 31, 1996 and 1995 and for the three years ended December 31, 1996,
appearing elsewhere in this Prospectus and Registration Statement, have been
audited by Coopers & Lybrand L.L.P., independent auditors, as set forth in
their reports thereon appearing elsewhere herein and in the Registration
Statement and are included in reliance upon such reports, given upon the
authority of such firm as experts in accounting and auditing.
The combined financial statements of Victor Capital Group, L.P. (a Delaware
limited partnership) and affiliates as of June 30, 1997 and December 31, 1996
and 1995 and for the six months ended June 30, 1997 and 1996 and for each of
the three years in the period ended December 31, 1996, appearing elsewhere in
this Prospectus and Registration Statement, have been reviewed or audited by
David Berdon & Co. LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein and in the Registration Statement and are
included in reliance upon such reports, given upon the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements of Phoenix Four, Inc. and subsidiaries
as of and for the year ended December 31, 1996, appearing elsewhere in this
Prospectus and Registration Statement, have been audited by BDO Binder,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement and are included in reliance upon
such report, given upon the authority of such firm as experts in accounting
and auditing.
The statement of revenue and certain operating expenses of Apparel Center
Owners, Ltd. for the year ended December 31, 1996, appearing elsewhere in this
Prospectus and Registration Statement has been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement and are included in
reliance upon such report, given upon the authority of such firm as experts in
accounting and auditing.
The statement of revenues and certain operating expenses of 555 West 57th
Associates for the year ended December 31, 1996, appearing elsewhere in this
Prospectus and Registration Statement, has been audited by Tackman, Pilla,
Arnone and Company, P.C., independent public accountants, as set forth in
their report thereon appearing elsewhere herein and in the Registration
Statement and are included in reliance upon such report, given upon the
authority of such firm as experts in accounting and auditing.
The statement of revenues and certain operating expenses of 1325 Limited
Partnership for the year ended December 31, 1996, appearing elsewhere in this
Prospectus and Registration Statement, has been audited by Margolin, Winer &
Evens LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement and are included
in reliance upon such report, given upon the authority of such firm as experts
in accounting and auditing.
72
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company can be inspected without charge at the office of the Commission at the
Public Reference Section located at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and copies thereof may be
obtained from the Commission upon payment of the prescribed fees. The
Commission also maintains a site on the World Wide Web, the address of which
is http://www.sec.gov, that contains reports, proxy and information statements
and other information regarding issuers, such as the Company, that file
electronically with the Commission. Such reports, proxy statements and other
information concerning the Company can also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, N.Y. 10005, on which the
Company's Class A Common Shares are traded.
The Company has filed with the Commission a Registration Statement on Form
S-1 (of which this Prospectus is a part) under the Securities Act with respect
to the Class A Common Shares offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or other documents referred to are not necessarily
complete and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference and the exhibits
and schedules thereto. For further information with respect to the Company and
the Class A Common Shares offered hereby, reference is made to the
Registration Statement and such exhibits and schedules, which can be inspected
and copied at the public reference facilities and web site described above.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The financial information contained herein includes (i) certain historical
consolidated financial statements of Capital Trust and its subsidiaries, (ii)
certain historical financial statements of Victor Capital prior to its
acquisition by Capital Trust on July 15, 1997, and (iii) certain historical
financial statements of enterprises that are not affiliated by ownership or
control with Capital Trust but are borrowers under loans originated by Capital
Trust, which financial statements are included herein as supplemental
information in accordance with applicable Commission rules and regulations.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CAPITAL TRUST
Report of Independent Auditors........................................... F-3
Consolidated Balance Sheet as of September 30, 1997...................... F-4
Consolidated Statement of Operations for the Nine Months Ended September
30, 1997................................................................ F-5
Consolidated Statement of Shareholders' Equity for the Nine Months Ended
September 30, 1997...................................................... F-6
Consolidated Statement of Cash Flows for the Nine Months Ended September
30, 1997................................................................ F-7
Notes to Consolidated Financial Statements............................... F-8
Report of Independent Accountants........................................ F-25
Consolidated Balance Sheets as of December 31, 1996 and December 31,
1995.................................................................... F-26
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994..................................................... F-27
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994.................................. F-28
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994..................................................... F-29
Notes to Consolidated Financial Statements............................... F-30
VICTOR CAPITAL GROUP, L.P.
Independent Auditors' Report............................................. F-39
Independent Accountants' Report.......................................... F-40
Combined Balance Sheets as of December 31, 1996 and 1995 and June 30,
1997 (unaudited)........................................................ F-41
Combined Statements of Income for the Years Ended December 31, 1996, 1995
and 1994 and the Six Months Ended June 30, 1997 and 1996 (unaudited).... F-42
Combined Statements of Changes in Partners' and Members' Capital
(Deficiency), and Stockholder's Equity for the Years Ended December 31,
1996, 1995 and 1994 and the Six Months Ended June 30, 1997 (unaudited).. F-43
Combined Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994 and the Six Months Ended June 30, 1997 and 1996
(unaudited)............................................................. F-44
Notes to Combined Financial Statements................................... F-46
PHOENIX FOUR, INC.
Independent Auditor's Report............................................. F-52
Consolidated Statement of Assets, Liabilities and Stockholders' Equity at
December 31, 1996....................................................... F-53
Consolidated Statement of Income for the Year Ended December 31, 1996.... F-54
Consolidated Statement of Cash Flows for the Year Ended December 31,
1996.................................................................... F-55
Summary of Significant Accounting Policies............................... F-56
Notes to Consolidated Financial Statements............................... F-58
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statement of Assets, Liabilities and Stockholders' Equity at
September 30, 1997 (Unaudited).......................................... F-63
Consolidated Statement of Income for the Nine Months Ended September 30,
1997 (Unaudited)........................................................ F-64
Consolidated Statement of Cash Flows for the Nine Months Ended September
30, 1997 (Unaudited).................................................... F-65
Summary of Significant Accounting Policies............................... F-66
Notes to Consolidated Financial Statements............................... F-68
APPAREL CENTER OWNERS, LTD.
Report of Independent Public Accountants................................. F-73
Statement of Revenues and Certain Operating Expenses for the Year Ended
December 31, 1996 and the Nine Month Period Ended September 30, 1997
(Unaudited)............................................................. F-74
Notes to Statements of Revenues and Certain Operating Expenses........... F-75
555 WEST 57TH ASSOCIATES
Report of Independent Public Accountants................................. F-78
Statement of Revenues and Certain Operating Expenses for the Year Ended
December 31, 1996 and the Nine Months Ended September 30, 1997
(Unaudited)............................................................. F-79
Notes to Statement of Revenues and Certain Operating Expenses............ F-80
1325 LIMITED PARTNERSHIP
Report of Independent Accountants........................................ F-82
Statements of Revenues and Certain Operating Expenses for the Year Ended
December 31, 1996 and the Nine Months Ended September 30, 1997
(Unaudited)............................................................. F-83
Notes to Statements of Revenues and Certain Operating Expenses........... F-84
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Capital Trust and Subsidiaries
We have audited the accompanying consolidated balance sheet of Capital Trust
and Subsidiaries (the "Company") as of September 30, 1997 and the related
consolidated statement of operations, shareholders' equity and cash flows for
the nine months then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, based on our audit, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of the Company as of September 30, 1997, and the consolidated results
of their operations and their cash flows for the nine months then ended in
conformity with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
November 5, 1997
F-3
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents............................................ $ 4,063
Available-for-sale securities........................................ 13,030
Investment and lending transactions, net of $155 reserve for possible
credit losses....................................................... 88,358
Excess of purchase price over net tangible assets acquired, net...... 337
Deposits and other receivables....................................... 3,795
Prepaid and other assets............................................. 2,712
--------
Total assets..................................................... $112,295
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses.............................. $ 2,738
Notes payable...................................................... 4,867
Credit facility.................................................... 11,715
Repurchase obligation.............................................. 36,881
Deferred revenue................................................... 725
--------
Total liabilities................................................ 56,926
--------
Commitments and contingencies
Shareholders' equity:
Class A Preferred Shares, $1.00 par value, 12,639 shares autho-
rized, 12,268 shares issued and outstanding....................... 12,268
Class A Common Shares, $1.00 par value; unlimited shares autho-
rized, 9,138 shares issued and outstanding........................ 9,138
Additional paid-in capital......................................... 75,719
Unrealized gain on available-for-sale securities................... 459
Accumulated deficit................................................ (42,215)
--------
Total shareholders' equity....................................... 55,369
--------
Total liabilities and shareholders' equity....................... $112,295
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
Income from investment and lending transactions:
Interest and related income...................................... $ 1,863
Interest and related expenses.................................... 790
----------
Net income from investment and lending transactions............ 1,073
----------
Other revenues:
Advisory and asset management fees............................... 529
Rental income.................................................... 313
Other interest income............................................ 1,008
----------
Total other revenues........................................... 1,850
----------
Other expenses:
General and administrative....................................... 4,470
Other interest expense........................................... 144
Rental property expenses......................................... 123
Depreciation and amortization.................................... 52
----------
Total other expenses........................................... 4,789
----------
Loss before loss on sale of rental properties, provision for
possible credit losses and income taxes......................... (1,866)
Loss on sale of rental properties.................................. (432)
Provision for possible credit losses............................... (155)
----------
Loss before income taxes......................................... (2,453)
Provision for income taxes......................................... --
----------
Net loss......................................................... (2,453)
Less: Preferred Share dividend requirement......................... (679)
----------
Net loss allocable to Class A Common Shares...................... $ (3,132)
==========
Per share information:
Net loss per Class A Common Share
Primary and fully diluted...................................... $ (0.34)
==========
Weighted average Class A Common Shares outstanding
Primary and fully diluted...................................... 9,138,325
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED SHARES COMMON SHARES ADDITIONAL
---------------- ------------- PAID-IN UNREALIZED ACCUMULATED
NUMBER AMOUNT NUMBER AMOUNT CAPITAL GAIN DEFICIT TOTAL
---------------- ------ ------ ---------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... -- $ -- 9,138 $9,138 $55,117 $ (22) $(39,762) $24,471
Change in unrealized
gain on available-for-
sale securities........ -- -- -- -- -- 481 -- 481
Issuance of preferred
shares................. 12,268 12,268 -- -- 20,602 -- -- 32,870
Net loss................ -- -- -- -- -- -- (2,453) (2,453)
------- -------- ----- ------ ------- ----- -------- -------
Balance at September 30,
1997................... 12,268 $ 12,268 9,138 $9,138 $75,719 $459 $(42,215) $55,369
======= ======== ===== ====== ======= ===== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (2,453)
Adjustments to reconcile net loss to net cash used in operating ac-
tivities:
Depreciation and amortization..................................... 52
Unrealized gain on available-for-sale securities.................. 481
Loss on sale of properties........................................ 432
Provision for credit losses....................................... 155
Changes in assets and liabilities net of effects from subsidiaries
purchased:
Deposits and other receivables.................................... (804)
Prepaid and other assets.......................................... (2,846)
Deferred revenue.................................................. 725
Accounts payable and accrued expenses............................. 2,877
Other liabilities................................................. (64)
--------
Net cash used in operating activities............................... (1,445)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination and purchase of investment and lending transactions... (87,626)
Principal collections on investment and lending transactions...... 123
Purchases of equipment and leasehold improvements................. (421)
Proceeds from sale of rental properties........................... 8,153
Principal collections on available-for-sale securities............ 3,483
Acquisition of Victor Capital Group, L.P., net of cash acquired... (4,066)
--------
Net cash used in investing activities............................... (80,354)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase obligations.............................. 54,166
Termination of repurchase obligations............................. (17,285)
Proceeds from credit facility..................................... 11,715
Proceeds from notes payable....................................... 4,001
Repayment of notes payable........................................ (4,303)
Net proceeds from issuance of preferred shares.................... 32,870
--------
Net cash provided by financing activities........................... 81,164
--------
Net decrease in cash and cash equivalents........................... (635)
Cash and cash equivalents at January 1, 1997........................ 4,698
--------
Cash and cash equivalents at September 30, 1997..................... $ 4,063
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the period..................................... $ 858
========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH AND FINANCING TRANSACTIONS--SEE NOTE 15
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION
Capital Trust (the "Company") is a specialty finance company designed to
take advantage of high-yielding lending and investment opportunities in
commercial real estate and related assets. The Company makes or intends to
make investments in various types of income producing commercial real estate
including senior and junior commercial mortgage loans, preferred equity
investments, direct equity investments and subordinate interests in commercial
mortgage-backed securities ("CMBS"). The Company also provides real estate
investment banking, advisory and asset management services through its
subsidiary, Victor Capital Group, L.P. ("Victor Capital").
The Company, which was formerly known as California Real Estate Investment
Trust, was organized under the laws of the State of California pursuant to a
declaration of trust dated September 15, 1966. On December 31, 1996, 76% of
the Company's outstanding common shares of beneficial interest, $1.00 par
value ("Common Shares") were held by the Company's former parent ("Former
Parent"). On January 3, 1997, the Former Parent sold its entire 76% ownership
interest (consisting of 6,959,593 Common Shares) in the Company to CalREIT
Investors Limited Partnership ("CRIL"), an affiliate of Equity Group
Investments, Inc. ("EGI") and Samuel Zell, the Company's current chairman of
the board of trustees, for an aggregate price of approximately $20.2 million.
Prior to the purchase, which was approved by the then-incumbent board of
trustees, EGI and Victor Capital, a then privately held company owned by two
of the current trustees of the Company, presented to the Company's then-
incumbent board of trustees a proposed new business plan in which the Company
would cease to be a real estate investment trust ("REIT") and instead become a
specialty finance company as discussed above. EGI and Victor Capital also
proposed that they provide the Company with a new management team to implement
the business plan and invest, through an affiliate, a minimum of $30 million
in a new class of preferred shares to be issued by the Company. In connection
with the foregoing, the Company subsequently agreed that, concurrently with
the consummation of the proposed preferred equity investment, it would acquire
for $5 million Victor Capital's real estate investment banking, advisory and
asset management businesses, including the services of its experienced
management team. See Note 2.
On July 15, 1997, the proposed preferred share investment was consummated
and 12,267,658 class A 9.5% cumulative convertible preferred shares of
beneficial interest, $1.00 par value, in the Company ("Class A Preferred
Shares") were sold to Veqtor Finance Company, LLC ("Veqtor"), an affiliate of
Samuel Zell and the principals of Victor Capital for an aggregate purchase
price of $33 million. Concurrently with the foregoing transaction, Veqtor
purchased from CRIL the 6,959,593 Common Shares held by it for an aggregate
purchase price of approximately $21.3 million (which shares were reclassified
on that date as class A common shares of beneficial interest, $1.00 par value,
in the Company ("Class A Common Shares") pursuant to the terms of an amended
and restated declaration of trust, dated July 15, 1997, adopted on that date
(the "Amended and Restated Declaration of Trust")). See Note 10.
As a result of these transactions, a change of control of the Company
occurred with Veqtor beneficially owning 19,227,251, or approximately 90% of
the outstanding voting shares of the Company. Pursuant to the Amended and
Restated Declaration of Trust, the Company's name was changed to "Capital
Trust". As a result of the aforementioned events, the Company, as intended,
commenced full implementation of the new business plan and thereby terminated
its status as a REIT.
2. ACQUISITION OF VICTOR CAPITAL
On July 15, 1997, the Company consummated, for $5.0 million, the acquisition
of the real estate investment banking, advisory and asset management
businesses of Victor Capital and certain affiliated entities including the
following wholly-owned subsidiaries: VCG Montreal Management, Inc., Victor
Asset Management Partners, L.L.C., VP Metropolis Services, L.L.C., and 970
Management, LLC.
F-8
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Victor Capital provides services to real estate investors, owners,
developers and financial institutions in connection with mortgage financings,
securitizations, joint ventures, debt and equity investments, mergers and
acquisitions, portfolio evaluations, restructurings and disposition programs.
Victor Capital's wholly-owned subsidiaries provide asset management and
advisory services relating to various mortgage pools and real estate
properties. In addition, VCG Montreal Management, Inc. holds a nominal
interest in a Canadian real estate venture.
The purchase price of $5.0 million is evidenced by non-interest bearing
acquisition notes, payable in ten semi-annual equal installments of $500,000.
The acquisition notes have been discounted to $3.9 million based on an imputed
interest rate of 9.5%. The acquisition has been accounted for under the
purchase method of accounting. The excess of the purchase price of the
acquisition in excess of net tangible assets acquired approximated $342,000.
Had the acquisition occurred on January 1, 1997, pro forma revenues, net
loss (after giving effect to the Preferred Share dividend requirement) and net
loss per common share (primary and fully diluted) would have been: $6,534,000,
$2,451,000 and $0.27, respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
At December 31, 1996, the Company owned commercial rental property in
Sacramento, California through a 59% limited partner interest in Totem Square
L.P., a Washington limited partnership ("Totem"), and an indirect 1% general
partner interest in Totem through its wholly-owned subsidiary Cal-REIT Totem
Square, Inc. Totem Square Associates, an unrelated party, held the remaining
40% interest.
The consolidated financial statements of the Company include the accounts of
the Company and Victor Capital and related wholly-owned subsidiaries (included
in the consolidated statement of operations since their acquisition on July
15, 1997) and the results from the disposition of its rental property held by
Totem, which was sold on March 4, 1997 prior to commencement of the Company's
new business plan. See Note 1. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
Interest income for the Company's mortgage loans and investments is
recognized over the life of the investment using the interest method and
recognized on the accrual basis.
Fees received in connection with loan commitments are deferred until the
loan is advanced and are then recognized over the term of the loan as an
adjustment to yield. Fees on commitments that expire unused are recognized at
expiration.
Income recognition is generally suspended for loans at the earlier of the
date at which payments become 90 days past due or when, in the opinion of
management, a full recovery of income and principal becomes doubtful. Income
recognition is resumed when the loan becomes contractually current and
performance is demonstrated to be resumed.
Fees from professional advisory services are generally recognized at the
point at which all Company services have been performed and no significant
contingencies exist with respect to entitlement to payment. Fees from asset
management services are recognized as services are rendered.
Reserve for Possible Credit Losses
The provision for possible credit losses is the charge to income to increase
the reserve for possible credit losses to the level that management estimates
to be adequate considering delinquencies, loss experience and collateral
quality. Other factors considered relate to geographic trends and product
diversification, the size of the
F-9
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
portfolio and current economic conditions. When it is probable that the
Company will be unable to collect all amounts contractually due, the account
is considered impaired. Where an impairment is indicated, a valuation write-
down or write-off is measured based upon the excess of the recorded investment
amount over the net fair value of the collateral, as reduced for selling
costs. Any deficiency between the carrying amount of an asset and the net
sales price of repossessed collateral is charged to the reserve for credit
losses.
Cash and Cash Equivalents
The Company classifies highly liquid investments with original maturities of
three months or less from the date of purchase as cash equivalents. At
September 30, 1997, cash equivalents consisted primarily of an investment in a
money market fund that invests in Treasury bills.
Available-for-Sale Securities
Available-for-sale securities are reported on the consolidated balance sheet
at fair market value with any corresponding change in value reported as an
unrealized gain or loss (if assessed to be temporary), as a component of
shareholders' equity, after giving effect to taxes.
Commercial Mortgage-Backed Securities
The Company has the intent and ability to hold its subordinated investment
in CMBS until maturity. See Note 6. Consequently, this investment is
classified as held to maturity and is carried at amortized cost at September
30, 1997.
Income from CMBS is recognized based on the effective interest method using
the anticipated yield over the expected life of the investments. Changes in
yield resulting from prepayments are recognized over the remaining life of the
investment. The Company recognizes impairment on its CMBS whenever it
determines that the impact of expected future credit losses, as currently
projected, exceeds the impact of the expected future credit losses as
originally projected. Impairment losses are determined by comparing the
current fair value of a CMBS to its existing carrying amount, the difference
being recognized as a loss in the current period in the consolidated statement
of income. Reduced estimates of credit losses are recognized as an adjustment
to yield over the remaining life of the portfolio.
Derivative Financial Instruments
The Company uses interest rate swaps to effectively convert fixed rate
assets to variable rate assets for proper matching with variable rate
liabilities. The differential to be paid or received on these agreements is
recognized as an adjustment to the interest income related to the earning
asset.
Each derivative used as a hedge is matched with an asset or liability with
which it has a high correlation. The swap agreements are generally held to
maturity and the Company does not use derivative financial instruments for
trading purposes. Upon early termination of the designated matched asset or
liability, the related derivative is matched to another appropriate item or
marked to fair value.
Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements, net, are stated at original cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method based on the estimated lives of the depreciable assets.
Amortization is computed over the remaining terms of the related leases.
F-10
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for maintenance and repairs are charged directly to expense at
the time incurred. Expenditures determined to represent additions and
betterments are capitalized. Cost of assets sold or retired and the related
amounts of accumulated depreciation are eliminated from the accounts in the
year of sale or retirement. Any resulting profit or loss is reflected in the
consolidated statement of operations.
Sales of Real Estate
The Company complies with the provisions of Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate."
Deferred Debt Issuance Costs
The Company capitalizes costs incurred related to the issuance of long-term
debt. These costs are deferred and amortized on a straight-line basis over the
life of the related debt and recognized as a component of interest expense.
Income Taxes
Prior to commencement of full implementation of the new business plan on
July 15, 1997, the Company had elected to be taxed as a REIT and, as such, was
not taxed on that portion of its taxable income which was distributed to
shareholders, provided that at least 95% of its real estate trust taxable
income was distributed and that the Company met certain other REIT
requirements. At July 15, 1997, the Company did not meet the requirements to
continue to be taxed as a REIT and will therefore not be considered a REIT
retroactive to January 1, 1997.
The Company has adopted Financial Accounting Standards Board Statement No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109, utilizes
the liability method for computing tax expenses. Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying statutory tax rates to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Deferred tax assets are recognized for temporary
differences that will result in deductible amounts in future years and for
carryforwards. A valuation allowance is recognized if it is more likely than
not that some portion of the deferred asset will not be recognized. When
evaluating whether a valuation allowance is appropriate, SFAS No. 109 requires
a company to consider such factors as previous operating results, future
earning potential, tax planning strategies and future reversals of existing
temporary differences. The valuation allowance is increased or decreased in
future years based on changes in these criteria.
Amortization of the Excess of Purchase Price Over Net Tangible Assets
Acquired
The Company recognized the excess of purchase price over net tangible assets
acquired in a business combination accounted for as a purchase transaction and
is amortizing it on a straight-line basis over a period of 15 years. The
carrying value of the excess of purchase price over net tangible assets
acquired is analyzed quarterly by the Company based upon the expected revenue
and profitability levels of the acquired enterprise to determine whether the
value and future benefit may indicate a decline in value. If the Company
determines that there has been a decline in the value of the acquired
enterprise, the Company writes down the value of the excess of purchase price
over net tangible assets acquired to the revised fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-11
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings Per Class A Common Share
Primary earnings per Class A Common Share is computed by dividing net income
(loss), after deduction of preferred share dividends declared or required, by
the weighted average number of Class A Common Shares outstanding during the
period. Fully diluted earnings per Class A Common Share is computed by
dividing net income (loss) by the weighted average number of Class A Common
Shares outstanding and dilutive potential Class A Common Shares (convertible
preferred share and share options) that were outstanding during the period. At
September 30, 1997, the preferred shares and share options were not considered
Class A Common Share equivalents for purposes of calculating fully diluted
earnings per share as they were antidilutive. Accordingly, at September 30,
1997, there was no difference between primary and fully diluted loss per share
or weighted average Class A Common Shares outstanding.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128") effective for periods ending after December 15, 1997. SFAS
No. 128 simplifies the standard for computing earnings per share and makes
them comparable with international earnings per share standards. The statement
replaces primary earnings per share with Basic Earnings per Share ("Basic
EPS") and fully diluted earnings per share with Diluted Earnings per Share
("Diluted EPS"). Basic EPS is computed based on the income applicable to Class
A Common Shares (which is net loss reduced by the dividends on preferred
shares) divided by the weighted-average number of Class A Common Shares
outstanding during the period. Diluted EPS is based on the net earnings
applicable to Class A Common Shares plus dividends on convertible preferred
shares, divided by the weighted average number of Class A Common Shares and
dilutive potential Class A Common Shares that were outstanding during the
period. Dilutive potential Class A Common Shares include the convertible
preferred shares and dilutive share options. The Company will adopt this
accounting standard effective December 31, 1997, as required. The adoption of
this accounting standard would have no effect on the reported September 30,
1997 earnings per share amounts.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") effective for fiscal years beginning after December
15, 1997, although earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all components of comprehensive income shall be reported in the financial
statements in the period in which they are recognized. Furthermore, a total
amount for comprehensive income shall be displayed in the financial statement
where the components of other comprehensive income are reported. The Company
was not previously required to present comprehensive income or the components
therewith under generally accepted accounting principles. The Company intends
to adopt the requirements of this pronouncement in its financial statements
for the year ended December 31, 1998.
In June 1997, the FASB issued Statement No. 131, "Disclosure about segments
of an Enterprise and Related Information" ("SFAS No. 131") effective for
financial statements issued for periods beginning after December 15, 1997.
SFAS No. 131 requires disclosures about segments of an enterprise and related
information regarding the different types of business activities in which an
enterprise engages and the different economic environments in which it
operates. The Company intends to adopt the requirements of this pronouncement
in its financial statements for the year ended December 31, 1998. The adoption
of SFAS No. 131 is not expected to have a material impact on the Company's
financial statement disclosures.
F-12
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INTEREST RATE RISK MANAGEMENT
Effective September 12, 1997, the Company entered into an interest rate swap
agreement for a notional amount of $15 million with a financial institution
counterparty whereby the Company swapped a fixed rate instrument for a
floating rate instrument based on the London Interbank Offered Rate ("LIBOR").
Amounts arising from the differential are recognized as an adjustment to
interest income related to the earning asset. See Note 6. The agreement
terminates on April 12, 2006.
The Company is exposed to credit loss in the event of non-performance by the
counterparty to the agreement, although it does not anticipate such non-
performance.
5. AVAILABLE-FOR-SALE SECURITIES
At September 30, 1997, the Company's available-for-sale securities consisted
of the following (in thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED
----------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- -------- -------- ----------
<S> <C> <C> <C> <C>
Federal National Mortgage Association,
adjustable rate interest currently at
7.923%, due April 1, 2024............... $ 2,359 $ -- $ (2) $ 2,357
Federal Home Loan Mortgage Association,
adjustable rate interest currently at
7.944%, due June 1, 2024................ 812 1 -- 813
Federal National Mortgage Association,
adjustable rate interest currently at
7.360%, due May 1, 2025................. 532 -- (2) 530
Federal National Mortgage Association,
adjustable rate interest currently at
7.094%, due May 1, 2026................. 2,205 -- (19) 2,186
Federal National Mortgage Association,
adjustable rate interest currently at
7.146%, due June 1, 2026................ 4,865 64 -- 4,929
SL Green Realty Corp. Common Stock,
85,600 shares........................... 1,798 417 -- 2,215
------- -------- -------- -------
$12,571 $482 $ (23) $13,030
======= ======== ======== =======
</TABLE>
The maturity dates of debt securities are not necessarily indicative of
expected maturities as principal is often prepaid on such instruments.
The 85,600 shares of SL Green Realty Corp. Common Stock were received as
partial payment for advisory services rendered by Victor Capital to SL Green
Realty Corp. These shares are restricted from sale by the Company for a period
of one year from the date of issuance, August 20, 1997.
The cost of securities sold is determined using the specific identification
method.
6. INVESTMENT AND LENDING TRANSACTIONS
At September 30, 1997, the Company's investment and lending transactions
consisted of the following (in thousands):
<TABLE>
<S> <C>
(1) CMBS subordinated interest................................... $49,491
(2) Participation in mezzanine loan.............................. 15,617
(3) Second mortgage transition financing......................... 11,532
(4) Mortgage note acquisition bridge financing................... 9,800
(5) Other mortgage loans receivable.............................. 2,073
-------
88,513
Less: Reserve for possible credit losses......................... (155)
-------
Total investment and lending transactions........................ $88,358
=======
</TABLE>
F-13
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1997, $86.4 million of the aforementioned investment and
lending transactions bear interest at floating rates ranging from LIBOR plus
410 basis points to LIBOR plus 600 basis points. The remaining $2.1 million of
investment and lending transactions were financed at fixed rates ranging from
8% to 9.5% at September 30, 1997. The average earning rate in effect at
September 30, 1997 was 10.8%.
(1) On June 30, 1997 the Company completed an investment in a junior,
subordinated class of CMBS. The CMBS investment consists of securities with a
face value of $49.6 million purchased at a discount for $49.2 million plus
accrued fees. The investment is collateralized by twenty short-term commercial
notes receivable with original maturities ranging from two to three years. 75%
of the purchase price was financed (approximately $36.9 million) pursuant to a
reverse repurchase agreement and is collateralized by the Company's investment
in the CMBS.
In addition, the Company was named "special servicer" for the entire loan
portfolio of $413 million in which capacity the Company will earn fee income
for management of the collection process should any of the loans become non-
performing. At September 30, 1997, no fees relating to the special servicing
arrangement were earned.
(2) On September 19, 1997 the Company completed a fixed rate investment in
the form of a $15.0 million portion of a ten year $80.0 million mezzanine loan
secured by a pledge of the ownership interest in the entities that own an
office building in New York City. Additionally, the investment is secured by a
full payment guarantee by the principal owner of the property owning entities,
in the event of certain circumstances, including bankruptcy. The investment
was purchased at a premium for approximately $15.6 million. In the event that
excess cash flow available, as defined, is insufficient to pay the loan's
interest currently, up to 2% can be accrued and added to principal. Scheduled
maturity of the note is April 2007, with prepayment prohibited for the first
five years but permitted during the following four years with yield
maintenance. The loan is fully prepayable with no premium or penalty in the
tenth year. The purchase price was financed 75% (approximately $11.7 million)
pursuant to a reverse repurchase agreement. Effective September 12, 1997, in
order to hedge its interest rate risk under the transaction, the Company
entered into an interest rate swap agreement. See Note 4. Effective September
30, 1997, the reverse repurchase agreement was terminated and refinanced with
an $11.7 million borrowing under the Company's Credit Facility (as hereinafter
defined). See Note 9.
(3) On August 4, 1997, the Company originated, and funded in part, a $35.0
million commitment for a subordinated mortgage loan for improvements to a
mixed-use property in Chicago, Illinois. The loan is subordinate to senior
indebtedness and is secured by the mixed-use property and two mortgage notes
aggregating $9.6 million on nearby development sites. The loan has a two-year
initial term with a one-year extension option available to the borrower,
subject to certain conditions, and is payable upon the sale of the property
unless the Company approves the assumption of the debt by an institutional
investor. On August 4, 1997, the Company funded $19.0 million against the
aforementioned commitment and, subsequently, on August 19, 1997, the Company
entered into a participation agreement with a third party (the "Participant")
pursuant to which the Company assigned a 42.9% interest in the loan. In
connection with the participation agreement, the Participant paid to the
Company approximately $8.2 million or 42.9% of the $19.0 million previously
funded by the Company. During September 1997, the Company and the Participant
funded additional amounts aggregating $1.2 million, of which $506,000 was
funded by the Participant. Through September 30, 1997, the Company's portion
of the funding provided under the mortgage loan aggregated $11.5 million.
As of September 30, 1997, the Company's remaining share of the commitment
amounts to $8.5 million.
(4) On August 13, 1997, the Company originated and funded a LIBOR-based $9.8
million short-term loan. The proceeds of the loan were used primarily for the
acquisition of a first mortgage note that is secured by an office/warehouse
facility located in Philadelphia, Pennsylvania (the "Philadelphia Property"),
and for general
F-14
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
corporate purposes. The loan is secured by a pledge of the first mortgage
note, a pledge of a $4.4 million mortgage note secured by an
industrial/warehouse facility in Queens, New York (the "Maspeth Property")
(together with the Philadelphia Property, the "Operating Properties") and a
$2.3 million pool of secured home loans to owners of cooperative apartments
located in Brooklyn, New York. The loan is further secured by a pledge of
various other loans owned by the borrower.
The loan has a term of one year which may be extended by the borrower for an
additional year.
Condensed financial information for the Operating Properties is as follows
(in thousands):
<TABLE>
<CAPTION>
PHILADELPHIA
PROPERTY MASPETH PROPERTY
-------------------- --------------------
NINE NINE
YEAR MONTHS YEAR MONTHS
ENDED ENDED ENDED ENDED
12/31/96 9/30/97 12/31/96 9/30/97
-------- ----------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Rental revenue..................... $1,929 $1,403 $697 $559
Parking revenue.................... 312 235 -- --
Escalations and reimbursement reve-
nue............................... 545 418 -- --
------ ------ ---- ----
Total revenues................... 2,786 2,056 697 559
------ ------ ---- ----
CERTAIN EXPENSES:
Property taxes..................... 206 183 157 114
Utilities.......................... 458 356 1 --
Management fees.................... 57 46 -- 16
General and administrative......... 144 111 6 2
Repairs and maintenance............ 241 161 -- --
Insurance.......................... 54 24 19 14
------ ------ ---- ----
Total certain expenses............. 1,160 881 183 146
------ ------ ---- ----
Revenues in excess of certain ex-
penses.......................... $1,626 $1,175 $514 $413
====== ====== ==== ====
</TABLE>
With respect to the Philadelphia Property, approximately 87% of the
property's revenues for the nine months ended September 30, 1997 were derived
from two tenants. Operating leases to tenants expire through the year 2000
with future minimum rents under non-cancelable leases approximating (in
thousands): $476 (three months ending December 31, 1997); $1,760 (1998);
$1,448 (1999) and $618 (2000).
With respect to the Maspeth Property, approximately 82% of the property's
revenues for the nine months ended September 30, 1997 were derived from three
tenants. Operating leases to the tenants expire through the year 2005 with
future minimum rents under non-cancelable leases approximating (in thousands):
$209 (three months ending December 31, 1997); $657 (1998); $689 (1999); $715
(2000); $543 (2001) and $1,591 thereafter.
(5) The mortgage loans receivable are collateralized by real estate
properties in California and Arizona. These mortgage loans receivable mature
at varying dates between February 11, 1999 and March 31, 2012.
At September 30, 1997, the Company has letters of intent outstanding for
various other lending transactions, the terms of which have not been
finalized.
F-15
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At September 30, 1997, equipment and leasehold improvements, net, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD OF
DEPRECIATION OR
AMORTIZATION
---------------
<S> <C> <C>
Office equipment.................................... 3 to 7 years $250
Leasehold improvements.............................. Term of leases 134
----
384
Less: accumulated depreciation...................... (51)
----
$333
====
</TABLE>
Depreciation and amortization expense on equipment and leasehold
improvements totaled $48,000 for the nine months ended September 30, 1997.
Equipment and leasehold improvements are included in prepaid and other assets
in the consolidated balance sheet.
8. NOTES PAYABLE
At September 30, 1997, the Company has notes payable aggregating $4.9
million.
In connection with the acquisition of Victor Capital and related entities,
$5 million of non-interest bearing notes ("Acquisition Notes") were issued to
the sellers, payable in ten semi-annual payments of $500,000. The Acquisition
Notes have been discounted to $3.9 million based on an imputed interest rate
of 9.5%. At September 30, 1997, the net present value of the Acquisition Notes
amounted to approximately $4.0 million.
The Company is also indebted under a note payable due to a life insurance
company. The note bears interest at 9.50% per annum with principal and
interest payable monthly until August 7, 2017 when the entire unpaid principal
balance and any unpaid interest is due. The life insurance company has the
right to call the entire note due and payable upon ninety days prior written
notice. At September 30, 1997, the balance of the note payable amounted to
approximately $866,000.
9. LONG-TERM DEBT
Credit Facility
Effective September 30, 1997, the Company entered into a credit agreement
with a commercial lender that provides for a three-year $150 million line of
credit (the "Credit Facility"). The Credit Facility provides for advances to
fund lender-approved loans and investments made by the Company ("Funded
Portfolio Assets"). Prior to the execution of the Credit Facility, the
commercial lender provided financing to the Company of approximately $11.7
million pursuant to a reverse repurchase agreement. The agreement bore
interest at LIBOR plus 2.25% and upon execution of the Credit Facility, the
agreement was terminated and the $11.7 million was refinanced with an advance
under the Credit Facility.
The obligations of the Company under the Credit Facility are to be secured
by pledges of the Funded Portfolio Assets acquired with advances under the
Credit Facility. Borrowings under the Credit Facility will bear interest at
specified rates over LIBOR, (averaging approximately 7.9% for the borrowing
outstanding at September 30, 1997), which rate may fluctuate based upon the
credit quality of the Funded Portfolio Assets. Upon the signing of the credit
agreement, a commitment fee was due and when the total borrowing under the
agreement exceeds $75 million an additional fee will be due. In addition, each
advance requires payment of a drawdown fee. Future repayments and redrawdowns
of amounts previously subject to the drawdown fee will not require the Company
to pay any additional fees. The Credit Facility provides for margin calls on
asset-specific
F-16
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
borrowings in the event of asset quality and/or market value deterioration as
determined under the credit agreement. The Credit Facility contains customary
representations and warranties, covenants and conditions and events of
default. The Credit Facility also contains a covenant obligating the Company
to avoid undergoing an ownership change that results in Craig M. Hatkoff, John
R. Klopp or Samuel Zell no longer retaining their senior offices and
trusteeships with the Company and practical control of the Company's business
and operations.
On September 30, 1997, the unused Credit Facility amounted to $138.3
million.
Repurchase Obligation
The Company entered into a reverse repurchase agreement with the counter
party of the CMBS transaction described in Note 6. At September 30, 1997, the
balance of $36.9 million bears interest at a specified rate over LIBOR (6.75%
at September 30, 1997), and has a one year term with quarterly extensions
available every 90 days.
10. SHAREHOLDERS' EQUITY
Authorized Capital
Pursuant to the Company's Amended and Restated Declaration of Trust, all of
the Company's previously issued common shares of beneficial interest, par
value $1.00, were reclassified as Class A Common Shares on July 15, 1997. The
total number of authorized capital shares of the Company is unlimited and
currently consists of (i) Class A Preferred Shares, (ii) class B 9.5%
cumulative convertible non-voting preferred shares of beneficial interest,
$1.00 par value, in the Company ("Class B Preferred Shares"), (iii) Class A
Common Shares, and (iv) class B common shares of beneficial interest, $1.00
par value, in the Company ("Class B Common Shares"). As of September 30, 1997,
there were 12,267,658 Class A Preferred Shares issued and outstanding, no
Class B Preferred Shares issued and outstanding, 9,138,325 Class A Common
Shares issued and outstanding and no Class B Common Shares issued and
outstanding. The Board of Trustees is authorized, with certain exceptions, to
provide for the issuance of additional preferred shares of beneficial interest
in one or more classes or series.
Common Shares
Except as described herein or as required by law, all Class A Common Shares
and Class B Common Shares are identical and entitled to the same dividend,
liquidation and other rights. The Class A Common Shares are voting shares
entitled to vote on all matters presented to a vote of shareholders, except as
provided by law or subject to the voting rights of any outstanding preferred
shares. The Class B Common Shares do not have voting rights and are not
counted in determining the presence of a quorum for the transaction of
business at any meeting of the shareholders. Holders of record of Class A
Common Shares and Class B Common Shares on the record date fixed by the
Company's Board of Trustees are entitled to receive such dividends as may be
declared by the Board of Trustees subject to the rights of the holders of any
series of preferred shares.
Each Class A Common Share is convertible at the option of the holder thereof
into one Class B Common Share and, subject to certain conditions, each Class B
Common Share is convertible at the option of the holder thereof into Class A
Common Share.
The Company is restricted from declaring or paying any dividends on its
Class A Common Shares or Class B Common Shares unless all accrued and unpaid
dividends with respect to the Preferred Shares have been paid in full.
Preferred Shares
In connection with the adoption of the Amended and Restated Designation of
Trust, the Company created two classes of preferred shares, the Class A
Preferred Shares and the Class B Preferred Shares (collectively, the
"Preferred Shares"). Each class of Preferred Shares consists of 12,639,405
authorized shares, as specified in the certificate of designation, preferences
and rights thereof adopted on July 15, 1997 (the "Certificate of
Designation"). On July 15, 1997, Veqtor purchased from the Company 12,267,658
Class A Preferred Shares for an aggregate purchase price of approximately $33
million.
F-17
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Except as described herein or as required by law, both classes of Preferred
Shares are identical and entitled to the same dividend, liquidation and other
rights as provided in the Certificate of Designation and the Restated
Declaration. The Class A Preferred Shares are entitled to vote together with
the holders of the Class A Common Shares as a single class on all matters
submitted to a vote of shareholders. Each Class A Preferred Share entitles the
holder thereof to a number of votes per share equal to the number of Class A
Common Shares into which such Class A Preferred Share is then convertible.
Except as described herein, the Class B Preferred Shares do not have voting
rights and are not counted in determining the presence of a quorum for the
transaction of business at a shareholders' meeting. The affirmative vote of
the shareholders of a majority of the outstanding Preferred Shares, voting
together as a separate single class, except in certain circumstances, have the
right to approve any merger, consolidation or transfer of all or substantially
all of the assets of the Company. Holders of the Preferred Shares are entitled
to receive, when and as declared by the Board of Trustees, cash dividends per
share at the rate of 9.5% per annum on a per share price of $2.69. Such
dividends shall accrue (whether or not declared) and, to the extent not paid
for any dividend period, will be cumulative. Dividends on the Preferred Shares
are payable, when and as declared, semi-annually, in arrears, on December 26
and June 25 of each year commencing December 26, 1997.
Each Class A Preferred Share is convertible at the option of the holder
thereof into an equal number of Class B Preferred Shares, or into a number of
Class A Common Shares equal to the ratio of (x) $2.69 plus an amount equal to
all dividends per share accrued and unpaid thereon as of the date of such
conversion to (y) the Conversion Price in effect as of the date of such
conversion. Each Class B Preferred Share is convertible at the option of the
holder thereof, subject to certain conditions, into an equal number of Class A
Preferred Shares or into a number of Class B Common Shares equal to the ratio
of (x) $2.69 plus an amount equal to all dividends per share accrued and
unpaid thereon as of the date of such conversion to (y) the Conversion Price
in effect as of the date of such conversion. The Conversion Price as of
September 30, 1997 is $2.69.
11. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine months ended September 30,
1997 consist of (in thousands):
<TABLE>
<S> <C>
Salaries and benefits............................................. $ 1,785
Professional services............................................. 1,493
Other............................................................. 1,192
-------
Total............................................................. $ 4,470
=======
</TABLE>
F-18
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES
The Company and its subsidiaries will elect to file a consolidated federal
income tax return for the year ending December 31, 1997. The provision for
income taxes for the nine months ended September 30, 1997 is comprised of the
following:
<TABLE>
<S> <C>
Current
Federal......................................................... $ --
State........................................................... --
Deferred
Federal......................................................... --
State........................................................... --
------
Provision for income taxes........................................ $ --
======
</TABLE>
The Company has federal net operating loss carryforwards ("NOLs") as of
September 30, 1997 of approximately $16.4 million. Such NOLs expire through
2011. The Company also had a federal capital loss carryover of approximately
$1.6 million that can be used to offset future capital gains. Due to CRIL's
purchase of 6,959,593 Class A Common Shares from the Company's Former Parent
in January 1997 and another prior ownership change, NOLs are limited for
federal income tax purposes to approximately $1.5 million annually. Any unused
portion of such annual limitation can be carried forward to future periods.
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to the effective income tax rate for the nine month period ended
September 30, 1997 is as follows (in thousands):
<TABLE>
<S> <C> <C>
Federal in-
come tax
at statu-
tory rate
(34%)..... $ (836) (34)%
State and
local tax-
es, net of
federal
tax bene-
fit....... (271) (11)%
Tax benefit
of net op-
erating
loss not
currently
recognized. 1,107 45%
------ ---
$ -- --
====== ===
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax reporting purposes.
The components of the net deferred tax assets recorded under SFAS No. 109 as
of September 30, 1997 is as follows (in thousands):
<TABLE>
<S> <C>
Net operating loss carryforward................................. $ 7,380
Reserves on other assets........................................ 3,165
Reserve for possible credit losses.............................. 155
Deferred revenue................................................ 326
Reserve for uncollectible accounts.............................. 70
--------
Deferred tax assets............................................. $ 11,096
Valuation allowance............................................. (11,096)
--------
$ --
========
</TABLE>
The Company recorded a valuation allowance to fully reserve its net deferred
assets. Under SFAS No. 109, this valuation allowance will be adjusted in
future years, as appropriate. However, the timing and extent of such future
adjustments can not presently be determined.
F-19
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. EMPLOYEE BENEFIT PLANS
1997 Long-Term Incentive Share Plan
On May 23, 1997, the Board of Trustees adopted the 1997 Long-Term Incentive
Plan (the "Incentive Share Plan"), which became effective upon shareholder
approval on July 15, 1997 at the 1997 annual meeting of shareholders (the
"1997 Annual Meeting"). The Incentive Share Plan permits the grant of
nonqualified share option ("NQSO"), incentive share option ("ISO"), restricted
share, share appreciation right ("SAR"), performance unit, performance share
and share unit awards. The Company has reserved an aggregate of 2,000,000
Class A Common Shares for issuance pursuant to awards under the Incentive
Share Plan and the Trustee Share Plan (as defined below). The maximum number
of shares that may be subject of awards to any employee during the term of the
plan may not exceed 500,000 shares and the maximum amount payable in cash to
any employee with respect to any performance period pursuant to any
performance unit or performance share award is $1.0 million. Through September
30, 1997, the Company had outstanding ISOs and NQSOs (the "Grants") pursuant
to the Incentive Share Plan to purchase an aggregate of 607,000 Class A Common
Shares with an exercise price of $6.00 per share (the closing Class A Common
Share price on the date of the grant). None of the options are exercisable at
September 30, 1997 and they have a remaining contractual life of 9 3/4 years.
The ISOs shall be exercisable no more than ten years after their date of
grant and five years after the grant in the case of a 10% shareholder and vest
over a period of three years with one-third vesting at each anniversary date.
Payment of an option may be made with cash, with previously owned Class A
Common Shares, by foregoing compensation in accordance with performance
compensation committee or compensation committee rules or by a combination of
these.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued by the
FASB in October 1995. SFAS No. 123 encourages the adoption of a new fair-value
based accounting method for employee stock-based compensation plans. SFAS No.
123 also permits companies to continue accounting for stock-based compensation
plans as prescribed by APB Opinion No. 25. However, companies electing to
continue accounting for stock-based compensation plans under the APB Opinion
No. 25, must make pro forma disclosures as if the company adopted the cost
recognition requirements under SFAS No. 123. The Company has continued to
account for stock-based compensation under the APB Opinion No. 25.
Accordingly, no compensation cost has been recognized for the Incentive Share
Plan or the Trustee Share Plan in the accompanying consolidated statement of
operations as the exercise price of the Grant equaled the market price of the
underlying stock on the date of the Grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, respectively: (1) dividend yield of zero;
(2) expected volatility of 40%; (3) risk-free interest rate of 6.15% and (4)
an expected life of five years. The weighted average fair value of each share
option granted during the nine months ended September 30, 1997 was $2.67.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee share options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee share
options.
F-20
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. For the nine
months ended September 30, 1997, pro forma net loss, after giving effect to
the Class A Preferred Share dividend requirement, and primary and fully
diluted loss per share, after giving effect to the fair value of the grants
would be $3.3 million and $0.36, respectively.
The pro forma information presented above is not representative of the
effect share options will have on pro forma net income or earnings per share
for future years.
1997 Non-Employee Trustee Share Plan
On May 23, 1997, the Board of Trustees adopted the 1997 Non-Employee Trustee
Share Plan (the "Trustee Share Plan"), which became effective upon shareholder
approval on July 15, 1997 at the 1997 Annual Meeting. The Trustee Share Plan
permits the grant of NQSO, restricted shares, SAR, performance unit, share and
share unit awards. The Company has reserved an aggregate of 2,000,000 Class A
Common Shares for issuance pursuant to awards under the Trustee Share Plan and
the Incentive Share Plan. Through September 30, 1997, the Company issued to
each of two trustees pursuant to the Trustee Share Plan NQSOs to purchase
25,000 Class A Common Shares with an exercise price of $6.00 per share (the
closing Class A Common Share price on the date of grant).
The purchase price per Class A Common Share covered by a NQSO granted under
the Trustee Share Plan shall be determined by the Board of Trustees. Payment
of a NQSO may be made with cash, with previously owned Class A Common Shares,
by foregoing compensation in accordance with Board rules or by a combination
of these. SARs may be granted under the plan in lieu of NQSOS, in addition to
NQSOS, independent of NQSOs or as a combination of the foregoing. A holder of
a SAR is entitled upon exercise to receive Class A Common Shares, or cash or a
combination of both, as the Board of Trustees may determine, equal in value on
the date of exercise to the amount by which the fair market value of one Class
A Common Share on the date of exercise exceeds the exercise price fixed by the
Board on the date of grant (which price shall not be less than 100% of the
market price of a Class A Common Share on the date of grant) multiplied by the
number of shares in respect of which the SARs are exercised.
Restricted shares may be granted under the Trustee Share Plan with
performance goals and periods of restriction as the Board of Trustees may
designate. The performance goals may be based on the attainment of certain
objective and/or subjective measures. The Trustee Share Plan also authorizes
the grant of share units at any time and from time to time on such terms as
shall be determined by the Board of Trustees. Share units shall be payable in
Class A Common Shares upon the occurrence of certain trigger events. The terms
and conditions of the trigger events may vary by share unit award, by the
participant, or both.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based upon estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
does not represent the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class financial instruments for which it is practicable to estimate
that value:
F-21
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and cash equivalents: The carrying amount of cash on hand and money
market funds is considered to be a reasonable estimate of fair value.
Available-for-sale securities: The fair value was determined based upon the
market value of the securities.
Investing and lending transactions, net: The fair values were estimated by
using current institutional purchaser yield requirements. The fair value of
the investing and lending transactions totaled $88.7 million at September 30,
1997.
Interest rate swap agreement: The fair value was estimated based upon the
amount at which similar financial instruments would be valued. At September
30, 1997, the fair value of the interest rate swap approximated ($348,000).
Credit Facility: The Credit Facility was entered into effective September
30, 1997, and therefore, the carrying value is a reasonable estimate of fair
value.
Repurchase obligation: The repurchase obligation bears interest which is at
a floating rate and is a reasonable estimate of fair value.
The notes included above reflect fair values where appropriate for the
financial instruments of the Company, utilizing the assumptions and
methodologies as defined.
15. SUPPLEMENTAL SCHEDULE OF NON-CASH AND FINANCING ACTIVITIES
The following is a summary of the significant non-cash investing and
financing activities during the nine months ended September 30, 1997:
<TABLE>
<S> <C>
Stock received as partial compensation for advisory services...... $1,798
</TABLE>
In connection with the sale of properties and notes receivable, the Company
entered into various non-cash transactions as follows during the nine months
ended September 30, 1997:
<TABLE>
<S> <C>
Sales price less selling costs................................... $ 8,396
Amount due from buyer............................................ (1,090)
-------
Net cash received................................................ $ 7,306
=======
</TABLE>
16. TRANSACTIONS WITH RELATED PARTIES
The Company entered into a consulting agreement, dated as of July 15, 1997,
with a Trustee of the Company. The consulting agreement has a term of one year
and provides for a consulting fee of $150,000. Pursuant to the agreement, the
Trustee provides consulting services for the Company including strategic
planning, identifying and negotiating mergers, acquisitions, joint ventures
and strategic alliances, and advising as to capital structure matters. During
the nine months ended September 30, 1997 the Company has incurred an expense
of $37,000 in connection with this agreement.
The Company pays EGI, an affiliate under common control of the Chairman of
the Board of Trustees, for certain corporate services. These services include
consulting on legal matters, tax matters, risk management, investor relations
and investment banking. During the nine months ended September 30, 1997, the
Company has incurred $22,000 of expenses in connection with these services.
F-22
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to January 7, 1997, the Company had an oral agreement with the
Company's former parent whereby certain general administrative costs were
allocated to the Company based upon a formula agreed to by the parties. At
September 30, 1997, the Company had no amounts due to the Company's former
parent pursuant to the cost allocation arrangement.
During the nine months ended September 30, 1997, the Company, through two of
its acquired subsidiaries, earned asset management fees pursuant to agreements
with entities in which two of the executive officers and trustees of the
Company have an equity interest and serve as officers, members or as a general
partner thereof. During the nine months ended September 30, 1997, the Company
earned $233,000 from such agreements, which has been included in the
consolidated statement of operations.
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at September 30, 1997
are as follows (in thousands):
<TABLE>
<S> <C>
Three months ending December 31, 1997............................. $ 101
Years ending December 31,
1998.............................................................. 484
1999.............................................................. 491
2000.............................................................. 173
------
$1,249
======
</TABLE>
Rent expense for office space and equipment amounted to $183,000 for the
nine months ended September 30, 1997.
Litigation
In the normal course of business, the Company is subject to various legal
proceeding and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the consolidated financial position or
the results of operations of the company.
Employment Agreements
The Company has employment agreements with three of its executives.
The employment agreements with two of the executives provide for five-year
terms of employment commencing as of July 15, 1997. Such agreements contain
extension options which extend such agreements automatically unless terminated
by notice, as defined, by either party. The employment agreements provide for
base annual salaries of $500,000, which will be increased each calendar year
to reflect increases in the cost of living and will otherwise be subject to
increase in the discretion of the Board of Trustees. Such executives are also
entitled to annual incentive cash bonuses to be determined by the Board of
Trustees based on individual performance and the profitability of the Company
and are participants in the Incentive Share Plan and other employee benefit
plans of the Company.
The employment agreement with another executive provides for a two year
employment term. Such agreement contains extension options which extend the
agreement automatically unless terminated by notice by either party. The
employment agreement provides for base annual salary of $300,000, annual
bonuses, as specified, at the end of 1997 and 1998, and participation in the
Incentive Share Plan and other employee benefit plans of the Company. Such
executive is also entitled to an annual incentive cash bonus to be determined
by the Board of Trustees based on individual performance and the profitability
of the Company.
F-23
<PAGE>
CAPITAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. SUBSEQUENT EVENTS
On October 31, 1997 the Company entered into an agreement to provide a
secured second mortgage loan of $10 million, which is secured by a 64%
tenancy-in-common interest in an office building located in New York City; the
loan is further secured by a pledge by the members of the borrower of 100% of
membership interests in the borrower. The loan is for five years and bears
interest at a fixed rate. The Company earns certain financing fees in
connection therewith and such fees will be recognized over the life of the
loan as an adjustment to yield. The Company financed the aforementioned
investment in part by entering into a repurchase agreement which is
collateralized by certain of the Company's debt securities.
On October 6, 1997, the Company filed a Registration Statement on Form S-1
with the Securities and Exchange Commission pursuant to which the Company
intends to register 9.2 million Class A Common Shares, including 1.2 million
shares that may be sold under an over-allotment option available to the
underwriters, exercisable for 30 days after the shares are registered.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of California
Real Estate Investment Trust:
We have audited the accompanying consolidated balance sheets of California
Real Estate Investment Trust and Subsidiary (the "Trust") as of December 31,
1996 and 1995, and the related consolidated statements of operations, cash
flows, and changes in shareholders' equity for each of the three years in the
period ended December 31, 1996. In connection with our audits of the
consolidated financial statements, we have also audited the financial
statement schedules as listed in the accompanying index. These financial
statements and financial statement schedules are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of California
Real Estate Investment Trust and Subsidiary as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statements schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
San Francisco, California
February 14, 1997
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
Swiss limited liability association.
F-25
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
------
Investments, Generally Held for Sale:
Rental properties, less accumulated depreciation
of $0 and $2,777,000 in 1996 and 1995,
respectively, and valuation allowances of $0 and
$6,898,000 in 1996 and 1995, respectively....... $ 8,585,000 $ 17,215,000
Notes receivable, net of valuation allowances and
deferred gains of $6,127,000 and $9,151,000 in
1996 and 1995, respectively..................... 1,576,000 10,502,000
Marketable securities available-for-sale......... 14,115,000 --
------------ ------------
24,276,000 27,717,000
Cash............................................... 4,698,000 4,778,000
Receivables, net of allowance of $1,001,000 and
$700,000 in 1996 and 1995, respectively........... 707,000 680,000
Other assets, net of valuation allowance of $0 and
$310,000 in 1996 and 1995 respectively............ 355,000 357,000
------------ ------------
Total Assets................................... $ 30,036,000 $ 33,532,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Long-term notes payable, collateralized by deeds
of trust on rental properties................... $ 5,169,000 $ 8,335,000
Accounts payable and accrued expenses............ 326,000 209,000
Other liabilities................................ 70,000 81,000
------------ ------------
Total Liabilities.............................. 5,565,000 8,625,000
Commitments (Note 10)
Shareholders' Equity:
Shares of beneficial interest, par value $1.00 a
share; unlimited authorization, 9,137,000 and
9,137,000 shares outstanding in 1996 and 1995,
respectively.................................... 9,137,000 9,137,000
Additional paid-in capital....................... 55,118,000 55,118,000
Unrealized holding loss on marketable securities... (22,000) --
Accumulated deficit................................ (39,762,000) (39,348,000)
------------ ------------
Total Shareholders' Equity..................... 24,471,000 24,907,000
------------ ------------
Total Liabilities and Shareholders' Equity... $ 30,036,000 $ 33,532,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Rent.................................... $2,019,000 $ 2,093,000 $2,593,000
Interest................................ 1,136,000 1,396,000 1,675,000
Hotel................................... -- 46,000 519,000
---------- ----------- ----------
3,155,000 3,535,000 4,787,000
---------- ----------- ----------
Expenses:
Operating expenses...................... 685,000 584,000 1,011,000
Hotel operating expenses................ -- 8,000 771,000
Property management..................... 96,000 96,000 252,000
Depreciation and amortization........... 64,000 662,000 595,000
Interest................................ 547,000 815,000 1,044,000
General and administrative.............. 1,503,000 933,000 813,000
---------- ----------- ----------
2,895,000 3,098,000 4,486,000
---------- ----------- ----------
Income before gain (loss) on foreclosure
or sale of investments and valuation
losses................................... 260,000 437,000 301,000
Net gain (loss) on foreclosure or sale of
investments.............................. 1,069,000 66,000 (218,000)
---------- ----------- ----------
Income before valuation losses.......... 1,329,000 503,000 83,000
Valuation losses.......................... 1,743,000 3,281,000 119,000
---------- ----------- ----------
Net Loss................................ (414,000) (2,778,000) (36,000)
========== =========== ==========
Net loss per share of beneficial interest. $ (0.05) $ (0.30) $ (0.00)
========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
SHARES OF UNREALIZED
BENEFICIAL INTEREST ADDITIONAL HOLDING LOSS TOTAL
-------------------- PAID-IN ACCUMULATED ON MARKETABLE SHAREHOLDERS
NUMBER AMOUNT CAPITAL DEFICIT SECURITIES EQUITY
--------- ---------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... 9,125,000 $9,125,000 $55,106,000 $(35,620,000) $ -- $28,611,000
Net loss................ -- -- -- (36,000) -- (36,000)
Proceeds from shares
issued................. 12,000 12,000 12,000 -- -- 24,000
Distributions........... -- -- -- (914,000) -- (914,000)
--------- ---------- ----------- ------------ -------- -----------
Balance at December 31,
1994................... 9,137,000 9,137,000 55,118,000 (36,570,000) -- 27,685,000
--------- ---------- ----------- ------------ -------- -----------
Net loss................ -- -- -- (2,778,000) -- (2,778,000)
--------- ---------- ----------- ------------ -------- -----------
Balance at December 31,
1995................... 9,137,000 9,137,000 55,118,000 (39,348,000) -- 24,907,000
--------- ---------- ----------- ------------ -------- -----------
Unrealized holding loss
on marketable
securities............. -- -- -- -- (22,000) (22,000)
Net loss................ -- -- -- (414,000) -- (414,000)
--------- ---------- ----------- ------------ -------- -----------
Balance at December 31,
1996................... 9,137,000 $9,137,000 $55,118,000 $(39,762,000) $(22,000) $24,471,000
========= ========== =========== ============ ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss)............................ $ (414,000) $(2,778,000) $ (36,000)
------------ ----------- ----------
Adjustments to reconcile net (loss) to
net cash provided by operating
activities:
Depreciation and amortization....... 64,000 662,000 595,000
(Gain) loss on foreclosure or sale
of investments..................... (1,069,000) (66,000) 218,000
Valuation losses.................... 1,743,000 3,281,000 119,000
Changes in assets and liabilities:
(Increase) decrease in receivables.... (38,000) 294,000 107,000
(Increase) decrease in other assets... (61,000) (282,000) 82,000
Increase (decrease) in accounts
payable and accrued expenses......... 226,000 166,000 (45,000)
Increase (decrease) in other
liabilities.......................... (2,000) 11,000 (106,000)
------------ ----------- ----------
Total adjustments to net (loss)... 863,000 4,066,000 970,000
------------ ----------- ----------
Net cash provided by operating
activities......................... 449,000 1,288,000 934,000
------------ ----------- ----------
Cash flows from investing activities:
Payments related to sales of rental
properties........................... -- -- (100,000)
Proceeds from sale of assets.......... 13,796,000 -- --
Improvements to rental properties..... (146,000) (321,000) (106,000)
Collections on notes receivable....... 35,000 850,000 346,000
Purchase of marketable securities..... (15,849,000) -- --
Principal collection of marketable
securities........................... 1,712,000 -- --
Increase in notes receivable.......... -- -- (175,000)
------------ ----------- ----------
Net cash (used in) provided by
investing activities............... (452,000) 529,000 (35,000)
------------ ----------- ----------
Cash flows from financing activities:
Principal payments on long-term notes
payable.............................. (77,000) (405,000) (94,000)
Distributions paid.................... -- -- (890,000)
------------ ----------- ----------
Net cash used in financing
activities......................... (77,000) (405,000) (984,000)
------------ ----------- ----------
Net (decrease) increase in cash..... (80,000) 1,412,000 (85,000)
Cash, beginning of year................. 4,778,000 3,366,000 3,451,000
------------ ----------- ----------
Cash, end of year....................... $ 4,698,000 $ 4,778,000 $3,366,000
============ =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Capital Trust (f/k/a California Real Estate Investment Trust (the "Company"
or "CalREIT") was organized under the laws of the State of California pursuant
to a Declaration of Trust dated September 15, 1966.
The Trust became a partner of Totem Square, L. P. ("Totem"), a Washington
Limited Partnership in which the Company owns a 59% interest, on November 30,
1990. The Trust also formed CalREIT Totem Square, Inc. ("Cal-CORP") to act as
general partner of Totem. Cal-CORP has a 1% interest in Totem, and Totem
Square Associates, an unrelated party, has the remaining 40%.
In 1994, the Company operated as a subsidiary of The Peregrine Real Estate
Trust ("Peregrine"), which then held 76% of the Company's outstanding Shares
of Beneficial Interest. In April 1994, Peregrine replaced the CalREIT Board of
Trustees with a slate of its own Trustees. In 1995, the Board was expanded
from three to five Trustees, two of whom were independent. In 1996, the Board
of Trustees was comprised of two independent Trustees, one Trustee who
concurrently served on the Board of Trustees of Peregrine, a former officer of
the Company, and the then Chief Executive Officer of the Company.
On January 3, 1997, Peregrine sold its entire 76%-ownership interest in the
Company to CalREIT Investors Limited Partnership, an entity controlled by
Samuel Zell. Simultaneous with the closing of this Transaction, the Board of
Trustees was expanded to seven members; one Trustee, who also served on the
Peregrine Board of Trustees, resigned; and three additional Trustees,
nominated by CRIL, were appointed to the Board.
At the end of 1996, the Company owned two commercial properties, Fulton
Square Shopping Center and Totem Square located in Sacramento, California and
Kirkland, Washington, respectively. The Trust also owned a mortgage note
portfolio of three notes encompassing approximately $7.7 million in loans,
with an aggregate book value of approximately $1.6 million. These loans bear
interest at an overall effective rate of approximately 8%. They are
collateralized by mortgages on real property. Most of the investments in the
three loans were originated by the Company in connection with the disposition
of Trust properties prior to 1996. Additionally, at December 31, 1996, the
Company had approximately $14 million invested in liquid mortgage-backed
securities.
Principles of Consolidation
For 1996, 1995 and 1994, the consolidated financial statements include the
accounts of the Company, Cal-CORP and Totem.
Rental Properties
At December 31, 1996 and 1995, rental properties are carried at cost, net of
accumulated depreciation and less a valuation allowance for possible
investment losses. The Trust's valuation allowance for possible investment
losses represents the excess of the carrying value of individual properties
over their appraised or estimated fair value less estimated selling costs. At
December 31, 1996 all rental properties are classified as held for sale and
valued at net estimated sales price.
The additions to the valuation allowance for possible investment losses are
recorded after consideration of various external factors, particularly
overbuilding in real estate markets which has a negative impact on achievable
rental rates. A gain or loss will be recorded to the extent that the amounts
ultimately realized from property sales differ from those currently estimated.
In the event economic conditions for real estate continue to decline,
additional valuation losses may be recognized in the near term.
F-30
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
When applicable, the allowance for depreciation and amortization has been
calculated under the straight-line method, based upon the estimated useful
lives of the properties which lives range from 30 to 40 years. Expenditures
for maintenance, repairs and improvements which do not materially prolong the
normal useful life of an asset are charged to operations as incurred.
Real estate acquired by cancellation of indebtedness or foreclosure is
recorded at fair market value at the date of acquisition but not in excess of
the unpaid balance of the related loan plus costs of securing title to and
possession of the property.
Other Assets
The Trust amortizes leasing commissions on a straight-line basis over the
lives of the leases to which they relate. Financing costs are amortized over
the lives of the loans or other financial instruments to which they relate.
Income Taxes
The Trust has elected to be taxed as a real estate investment trust and as
such, is not taxed on that portion of its taxable income which is distributed
to shareholders, provided that at least 95% of its real estate trust taxable
income is distributed and that the Company meets certain other REIT
requirements. Due to federal and California tax net operating loss
carryforwards ("NOLs"), the Company does not have taxable income for the year
ended December 31, 1996. The Trust has federal and California NOLs as of
December 31, 1996 of approximately $17,631,000 and $5,194,000, respectively.
Such NOLs expire through 2011 for federal and 2001 for California. The Trust
also has a federal and California capital loss carryover of approximately
$1,567,000 that can be used to offset future capital gain.
Due to the transaction and the prior year ownership change related to the
Peregrine bankruptcy, NOLs are limited for both federal and California to
approximately $1,500,000 annually. Any unused portion of such annual
limitation can be carried forward to future periods.
Cash
The Trust invests its cash in demand deposits with banks with strong credit
ratings. Bank balances in excess of federally insured amounts totaled
$4,301,000 and $4,577,000 as of December 31, 1996 and 1995, respectively. The
Trust has not experienced any losses on these deposits.
Sales of Real Estate
The Trust complies with the provisions of Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate." Accordingly, the
recognition of gains on certain transactions are deferred until such
transactions have complied with the criteria for full profit recognition under
the Statement. The Trust had deferred gains of $239,000 and $1,103,000 at
December 31, 1996 and 1995, respectively.
Interest Income Recognition
The Trust recognizes interest income on notes receivable when it is
estimated that the fair value of the collateral related to the note is
adequate.
F-31
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment of Loan
Effective January 1, 1995 CalREIT adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors of Impairment of a Loan," as
amended ("SFAS 114"). In accordance with SFAS 114, CalREIT considers loans
where it is probable they will be unable to collect all amounts contractually
due, as being impaired. Where an impairment is indicated, a valuation
writedown is measured based upon the excess of the loan amount over the fair
value of the collateral of the loan less costs to sell. Interest income from
impaired loans is recognized to the extent cash is received.
Impairment of Long-Lived Assets
In 1995, Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" was issued. This statement requires that companies review
long-lived assets and certain identifiable intangibles for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If the carrying amount of the asset exceeds its
estimated undiscounted net cash flow before interest, the company must
recognize an impairment loss equal to the difference between its carrying
amount and its current value. After an impairment is recognized, the reduced
carrying amount of the asset shall be accounted for as its new cost. For a
depreciable asset, the new cost shall be depreciated over the asset's
remaining useful life. Long-lived assets to be disposed of shall be reported
at the lower of carrying amount or fair value less cost to sell. In 1996, the
Company adopted the provisions of SFAS 121. Generally, fair values are
estimated using undiscounted cash flow, direct capitalization and market
comparison analyses.
Net Loss Per Share
Net loss per share of beneficial interest is based upon the weighted-average
number of shares of beneficial interest outstanding. Shares of beneficial
interest equivalents were anti-dilutive for the three years ended December 31,
1996. The weighted average number of shares of beneficial interest and
earnings per share of beneficial interest are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares of beneficial
interest................................. 9,137,335 9,137,335 9,130,961
========= ========= =========
Loss per share of beneficial interest..... $ (0.05) $ (0.30) $ (0.00)
</TABLE>
Reclassifications
Certain reclassifications have been made in the presentation of the 1995 and
1994 financial statements to conform to the 1996 presentation.
F-32
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. RELATED-PARTY TRANSACTIONS:
Until April 14, 1994, administrative services were provided to the Company
by B & B Property Investment, Development and Management Company, Inc. ("B &
B"). B & B's compensation consisted of an advisory fee based on the real
estate investments and real estate commissions in connection with purchases,
sales and leasing of Trust properties as well as a reimbursement of certain
expenses incurred in performing services for the Company. Until April 14,
1994, property management responsibilities of the Company were assigned to
B & B Property Investment, Inc. ("B & B Property"). The compensation for
property management services was computed at 5% of the gross receipts of each
property managed and each note receivable serviced. Compensation to B & B and
B & B Property was $156,000 during 1994. Certain disputes between the Company,
B & B and B & B Property arising from the Company's termination of B & B's and
B & B Property's advisory and management agreements were settled in May 1994
for $60,000. Prior to 1994, the Company entered into a management agreement
with North Main Street Company ("North Main"), a company owned by the
President and Chairman of the Board of the Company's former advisor, B & B, to
manage the Company's hotel. Pursuant to that agreement, the Company incurred
management fees of $16,000 in 1994. The Trust also terminated that agreement
with North Main in 1994 and leased the hotel property to an unrelated third
party, a professional hotel management company which operated lodging
facilities nationwide. No payments were made to B & B or B & B Property in
1995 or 1996.
The Trust is self-administered. However, during 1996 and 1995 it shared
certain personnel and other costs with Peregrine, its majority interest
shareholder. The Trust reimbursed Peregrine pursuant to a cost allocation
agreement based on each Trust's respective asset values (real property and
notes receivable) that was subject to annual negotiation. During 1996 and
1995, reimbursable costs charged to the Company by Peregrine approximated
$258,000 and $435,000, respectively. The 1995 amount was partially offset
against $202,000 (net of valuation allowances of $141,000) which was recorded
as due from Peregrine at December 31, 1994.
At December 31, 1996 and 1995, the Company had $31,000 and $45,000,
respectively, due to Peregrine pursuant to the cost allocation agreement. The
cost allocation agreement between the Company and Peregrine was terminated on
January 7, 1997.
3. RENTAL PROPERTIES:
At December 31, 1996 and 1995, the Company's rental property portfolio at
cost included a retail and mixed-use retail property carried at $8,585,000 and
$13,018,000 respectively; industrial buildings, carried at $0 and $7,395,000
respectively; and a hotel property carried at $0 and $6,477,000, respectively.
The Trust's hotel property, with a carrying value of $3,182,000 at December
31, 1995, was returned to the lender through foreclosure proceedings in
February 1996. No gain or loss was recorded on the foreclosure of the Casa
Grande Motor Inn.
4. INVESTMENT IN MARKETABLE SECURITIES:
At December 31, 1996 and 1995, the Company had $14,115,000 and $0,
respectively, invested in mortgage-backed securities classified as "available-
for-sale."
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," ("SFAS 115") issued in May 1993
requires that at the date of acquisition and at each reporting date, debt and
equity securities be classified as "held-to-maturity," "trading" or "available
for sale." Investments in debt securities in which the Company has the
positive intent and ability to hold to maturity are
F-33
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
required to be classified as "held-to-maturity." "Held-to-maturity" securities
are required to be stated at cost and adjusted for amortization of premiums
and discounts to maturity in the statement of financial position. Investments
in debt and equity securities that are not classified as "held-to-maturity"
and equity securities that have readily determinable fair values are to be
classified as "trading" or "available-for-sale" and are measured at fair value
in the statement of financial position. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
"trading." Unrealized holding gains and losses for "trading" securities are
included in earnings.
Investments that are not classified as "held-to-maturity" or "trading"
securities are classified as "available-for-sale." Unrealized holding gains
and losses for "available-for-sale" securities are excluded from earnings and
reported as a separate component of shareholders' equity until realized.
In accordance with SFAS 115, the Company determines the appropriate
classification at the time of purchase and Representative-evaluates such
designation at each balance sheet date.
At December 31, 1996, the Company's "available-for-sale" securities
consisted of the following:
<TABLE>
<CAPTION>
UNREALIZED
------------ ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ----- ------ ----------
<S> <C> <C> <C> <C>
Federal National Mortgage Association,
adjustable rate interest currently at
7.783%, due April 1, 2024............... $ 2,879 $(34) $ 2,845
Federal Home Loan Mortgage Association,
adjustable rate interest currently at
7.625%, due June 1, 2024................ $ 967 $(10) $ 957
Federal National Mortgage Association,
adjustable rate interest currently at
7.292%, due April 1, 2025............... $ 732 $ (4) $ 728
Federal National Mortgage Association,
adjustable rate interest currently at
6.144%, due May 1, 2026................. $ 3,260 $ (5) $ 3,255
Federal National Mortgage Association,
adjustable rate interest currently at
6.116%, due June 1, 2026................ $ 6,299 $31 -- $ 6,330
------- --- ---- -------
$14,137 $31 $(53) $14,115
======= === ==== =======
</TABLE>
The maturity dates above are not necessarily indicative of expected
maturities as principal is often prepaid on such instruments.
5. NOTES RECEIVABLE:
In order to facilitate sales of real estate, the Company has accepted
partial payment in the form of notes receivable collateralized by deeds of
trust. As of December 31, 1996 and 1995, the Company had long-term notes
receivable, collateralized by deeds of trust (before valuation allowances and
deferred gains) of $7,703,000 and $19,653,000, respectively. The notes are
collateralized by real estate properties in California and Arizona.
The notes bear interest at rates ranging from 7.63% to 9.5% as of December
31, 1996. For the year ended December 31, 1996, the overall effective rate was
approximately 8%.
6. VALUATION ALLOWANCES:
Based on a review of its investments, the Company has provided for valuation
allowances as set forth below. Adverse economic factors, particularly
overbuilt real estate markets which caused a decline in lease renewal
F-34
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
rates, were the primary causes of these valuation losses. If such adverse
economic factors continue, additional valuation loss provisions may be
required in the near term.
As of December 31, 1996, the Company was in the process of monetizing its
assets and accordingly, wrote down such assets to current market value, less
estimated selling costs, the accounting treatment required when investments
are held for sale.
Analysis of changes in the allowance for possible losses on real estate
investments, notes receivable, and rents and interest receivable for 1996,
1995 and 1994 follow:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
RENTAL PROPERTIES
Allowance for valuation losses on rental
property investments:
Beginning balance..................... $ 6,898,000 $5,863,000 $ 8,674,000
Provision for valuation losses........ 1,743,000 1,035,000 69,000
Amounts charged against allowance for
valuation losses..................... (8,641,000) -- (2,880,000)
----------- ---------- -----------
Ending balance...................... $ -- $6,898,000 $ 5,863,000
=========== ========== ===========
NOTES RECEIVABLE
Allowance for valuation losses and
deferred gains on notes receivable:
Beginning balance..................... $ 9,151,000 $7,182,000 $ 7,442,000
Provision for valuation losses........ -- 2,246,000 --
Deferred gains on notes and other,
net.................................. -- (66,000) (12,000)
Amounts charged against allowance for
valuation losses..................... (3,024,000) (211,000) (248,000)
----------- ---------- -----------
Ending balance...................... $ 6,127,000 $9,151,000 $ 7,182,000
=========== ========== ===========
RENTS AND INTEREST RECEIVABLE
Allowance for bad debt losses on rents
and interest receivable:
Beginning balance..................... $ 700,000 $ 323,000 $ 233,000
Provision for losses.................. 501,000 873,000 183,000
Amounts charged against allowance for
losses............................... (200,000) (496,000) (93,000)
----------- ---------- -----------
Ending balance...................... $ 1,001,000 $ 700,000 $ 323,000
=========== ========== ===========
</TABLE>
In addition, the Company had established an allowance for valuation losses
on other assets in the amount of $0.00 and $310,000 at December 31, 1996 and
1995, respectively.
7. LONG-TERM NOTES PAYABLE:
As of December 31, 1996 and 1995, the Company had long-term notes payable
(Notes) of $5,169,000 and $8,335,000 respectively, most of which were
collateralized by deeds of trust on rental properties with an aggregate net
book value of $8,585,000 and $11,181,000 at December 31, 1996 and 1995,
respectively. These Notes are due in installments extending to the year 2014
with interest rates ranging from 8% to 10.75%. At December 31, 1996 none of
the Notes were delinquent. At December 31, 1995, $3,089,000 of such Notes,
bearing interest at a default rate of 18% and secured by the Casa Grande Motor
Inn (which was foreclosed upon in February 1996) were delinquent. As of
December 31, 1996, contractually scheduled principal payments during each of
the next five years were $4,291,000, $39,000, $43,000, $38,000 and $41,000,
respectively, and $718,000 thereafter. The Note on the Totem Square Shopping
Center of $4,256,000 is due May 1, 1997.
F-35
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DISTRIBUTIONS:
There were no distributions paid in 1996 or 1995. Cash distributions were
made per share of beneficial interest in 1994 and were classified for Federal
income tax purposes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Ordinary income....................................... -- % -- % -- %
Capital gains income.................................. -- % -- % -- %
Return of capital..................................... -- % -- % 100%
----- ----- -----
-- % -- % 100%
===== ===== =====
Total distributions per share......................... $0.00 $0.00 $0.10
===== ===== =====
</TABLE>
9. SHARE OPTION PLANS:
In November of 1995, the Board of Trustees approved two share option plans
(the "Plans"). The Plans provided that if they were not approved by the
holders of a majority of the outstanding shares of the Company within one year
after their adoption, they would automatically terminate. The Plans were not
approved by the holders of a majority of the outstanding shares of the Company
within one year after their adoption and automatically terminated in November
1996. At December 31, 1996 there were no share options outstanding.
10. STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION:
In connection with the sale of property, the Company entered into various
non-cash transactions as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----- -----------
<S> <C> <C> <C>
Sales price.................................... $13,853,000 $ -- $ 4,423,000
Notes receivable............................... -- -- --
Notes payable assumed by buyer and other
liabilities applied to sales price............ (57,000) -- (4,523,000)
----------- ----- -----------
Cash received (paid)........................... $13,796,000 -- $ (100,000)
=========== ===== ===========
Cost of property sold.......................... $19,321,000 $ -- $ 8,084,000
=========== ===== ===========
</TABLE>
In 1996, with respect to its hotel property, the Company allowed foreclosure
on a note payable secured by a deed of trust. The amount of $3,089,000
represents the value of the note payable relieved in connection with this
foreclosure and is aggregated in the 1996 sales price category above.
Distributions were made as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- --------
<S> <C> <C> <C>
Total distributions.................................. $ -- $ -- $914,000
Distributions reinvested............................. -- -- (24,000)
----- ----- --------
Distributions paid in cash........................... $ -- $ -- $890,000
===== ===== ========
</TABLE>
Interest paid on the Company's outstanding debt for 1996, 1995, and 1994 was
$550,000, $730,000 and $1,121,000, respectively.
F-36
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS:
During 1995, the Company entered into a three year, non-cancelable operating
lease for office facilities in San Francisco, California. Rent expense under
the operating lease was $40,000 in 1996. At December 31, 1996 future minimum
lease payments under the lease are $50,000, with $40,000 due in 1997 and
$10,000 in 1998.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 ("SFAS 107") requires
disclosure of fair value information about financial instruments, whether or
not recognized in the balance sheet, for which it is practicable to estimate
that value. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The estimated fair value of the Company's marketable securities is set forth
in Note 4. The estimated fair value of the Company's financial instruments,
other than marketable securities, including cash, notes receivable, rents and
other receivables and long-term notes payable, at December 31, 1996 and 1995,
is approximately the same as their carrying amounts.
13. MINORITY INTEREST:
The Trust has a 60% ownership interest in Totem, its subsidiary. Totem's net
losses have exhausted the minority shareholder's equity interest. On the
consolidated statement of operations, no minority interest in the subsidiary's
net loss is recorded for 1996, 1995 or 1994. In the event that future income
is generated from the subsidiary, the Company will have first rights to the
income to the extent of the minority shareholder's accumulated deficit in the
subsidiary.
Furthermore, the Company has a note receivable from Totem, which note is
eliminated in consolidation, in the amount of $3,336,000. Pursuant to the
terms of that note, it is likely that CalREIT will be entitled to all future
income from Totem.
F-37
<PAGE>
CAPITAL TRUST (F/K/A CALIFORNIA REAL ESTATE INVESTMENT TRUST)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
1996
Revenues...................... $ 871,000 $ 780,000 $ 771,000 $ 733,000
Gain on foreclosure or sale of
investments, net............. 299,000 297,000 517,000 (44,000)
Net income (loss)............. 440,000 (213,000) (514,000) (127,000)
Net income (loss) per share... 0.05 (0.02) (0.06) (0.02)
1995
Revenues...................... $ 879,000 $ 836,000 $ 942,000 $ 878,000
Gain on foreclosure or sale of
investments, net............. 66,000 -- -- --
Net income (loss)............. 242,000 44,000 100,000 (3,164,000)
Net income (loss) per share... 0.03 0.00 0.01 (0.34)
1994
Revenues...................... $1,131,000 $ 780,000 $1,353,000 $ 1,523,000
Gain (loss) on foreclosure or
sale of investments, net..... -- 114,000 (344,000) 12,000
Net income (loss)............. (1,000) (328,000) 341,000 (48,000)
Net income (loss) per share... (0.00) (0.04) 0.04 (0.00)
</TABLE>
F-38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners and Members of
Victor Capital Group, L.P.
(A Delaware Limited Partnership)
and Affiliates
We have audited the accompanying combined balance sheets of Victor Capital
Group, L.P. (A Delaware Limited Partnership) and Affiliates as of December 31,
1996 and 1995, and the related combined statements of income, changes in
partners' and members' capital (deficiency) and stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Victor Capital
Group, L.P. (A Delaware Limited Partnership) and Affiliates as of December 31,
1996 and 1995, and the combined results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
David Berdon & Co. LLP
Certified Public Accountants
New York, New York
March 10, 1997
F-39
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Partners and Members of
Victor Capital Group, L.P.
(A Delaware Limited Partnership)
and Affiliates
We have reviewed the accompanying combined balance sheet of Victor Capital
Group, L.P. (A Delaware Limited Partnership) and Affiliates as of June 30,
1997 and the related combined statements of income, changes in partners' and
members' capital (deficiency), and stockholder's equity, and cash flows for
the six months then ended, and the combined statements of income and cash
flows for the six months ended June 30, 1996. These combined financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying combined financial statements for them to
be in conformity with generally accepted accounting principles.
David Berdon & Co. LLP
Certified Public Accountants
New York, New York
July 16, 1997
F-40
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1996 1995 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2(c))..... $1,056,048 $1,258,429 $ 955,785
Investment in available for sale
securities (Note 2(d))................... 8,400 8,400 17,719
Investment in unregistered securities
(Note 2(e)).............................. -- 124,250 --
Accounts receivable (Note 2(i))........... 563,602 900,000 115,884
Prepaid local business taxes.............. -- -- 18,361
Expense reimbursement receivable.......... 30,294 85,727 52,580
Deposits.................................. -- -- 100,000
Due from partner (Note 4)................. 24,000 159,000 --
Sundry.................................... 16,701 5,405 35,575
---------- ---------- ----------
TOTAL CURRENT ASSETS.................... 1,699,045 2,541,211 1,295,904
DEFERRED COSTS (Note 2(j)) 106,110 -- --
PROPERTY AND EQUIPMENT--NET (Notes 2(g) and
3)......................................... 90,071 107,840 93,529
SECURITY DEPOSITS........................... 3,220 3,110 640
---------- ---------- ----------
TOTAL ASSETS............................ $1,898,446 $2,652,161 $1,390,073
========== ========== ==========
LIABILITIES AND PARTNERS' AND MEMBERS'
CAPITAL (DEFICIENCY), AND STOCKHOLDER'S
EQUITY (NOTE 11)
</TABLE>
<TABLE>
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities
(Note 8).................................. $ 173,511 $ 78,979 $ 350,393
Bonuses payable--discretionary (Note 5).... 1,441,500 1,206,000 --
Accrued local business taxes............... 27,845 48,869 14,912
Unearned revenue (Note 2(b))............... 19,739 -- 5,942
Due to partners (Note 6)................... -- -- 400,000
---------- ---------- ----------
TOTAL CURRENT LIABILITIES................ 1,662,595 1,333,848 771,247
COMMITMENTS AND CONTINGENCIES (Note 9)
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY),
AND STOCKHOLDER'S EQUITY ................... 235,851 1,318,313 618,826
---------- ---------- ----------
TOTAL LIABILITIES AND PARTNERS' AND MEMBERS'
CAPITAL (DEFICIENCY), AND STOCKHOLDER'S
EQUITY...................................... $1,898,446 $2,652,161 $1,390,073
========== ========== ==========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-41
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- ---------------------
1996 1995 1994 1997 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME:
Fees earned (Notes
2(b), (c), (e) and
8)................... $6,940,036 $5,981,219 $5,159,157 $2,722,217 $2,649,621
Investment income..... 70,126 23,627 31,174 15,253 22,491
Gain on sale of
securities........... -- 518 3,263 21,532 --
Sublease income (Note
9)................... -- 24,030 41,167 -- --
Gain on surrender of
unregistered
securities (Note
2(e))................ 262,585 -- -- -- --
Gain (loss) on
disposal of property
and equipment........ -- 2,521 (2,884) -- --
---------- ---------- ---------- ---------- ----------
TOTAL INCOME........ 7,272,747 6,031,915 5,231,877 2,759,002 2,672,112
EXPENSES:
Employee salaries..... $1,164,897 $1,294,416 $1,265,384 $ 761,820 $ 577,057
Discretionary employee
bonuses (Note 5)..... 1,441,500 1,206,000 1,247,000 -- --
Payroll taxes......... 103,504 101,013 100,122 70,098 57,715
Employee benefits..... 123,146 112,420 96,004 77,253 60,169
Management fees (Note
8)................... 860,573 836,560 821,000 438,943 430,286
Rent expense (Note 9). 292,309 261,917 125,143 131,871 132,891
Telephone............. 61,439 62,139 39,259 32,857 31,708
Insurance............. 15,828 30,927 36,594 12,723 18,275
Stationery, printing
and supplies......... 31,483 46,960 26,663 27,438 14,269
Local travel and
transportation....... 7,531 8,532 12,711 3,296 3,637
Postage............... 7,702 7,775 3,317 5,571 4,632
Travel and
entertainment........ 49,147 76,364 51,535 28,907 31,639
Messenger/courier..... 2,909 2,987 2,764 2,784 1,899
Payments to
subcontractors....... 40,450 168,553 325,434 28,296 16,153
Public relations...... 24,010 25,236 25,122 12,013 12,000
Dues and
subscriptions........ 10,623 11,814 12,257 4,556 6,498
Education............. -- -- -- 13,185 --
Miscellaneous......... 33,614 34,785 29,343 41,748 22,478
Contributions......... 29,315 8,545 6,575 16,100 1,525
Professional fees..... 67,804 79,647 119,259 181,104 23,907
Local business taxes.. 143,642 97,620 21,462 47,531 63,280
Recruiting............ -- -- -- 34,000 --
Advertising........... 52,076 33,151 9,117 -- 3,218
Bad debt expense...... -- -- 8,581 -- --
Information system
expense.............. 22,299 31,832 16,189 3,205 9,154
Depreciation.......... 44,004 49,638 43,529 19,047 27,000
Interest expense (Note
7)................... -- 30,852 64,459 -- --
---------- ---------- ---------- ---------- ----------
TOTAL EXPENSES...... 4,629,805 4,619,683 4,508,823 1,994,346 1,549,390
---------- ---------- ---------- ---------- ----------
NET INCOME BEFORE
EXTRAORDINARY ITEM .... 2,642,942 1,412,232 723,054 764,656 1,122,722
EXTRAORDINARY ITEM--Gain
on extinguishment of
debt (Note 7).......... -- 181,319 -- -- --
---------- ---------- ---------- ---------- ----------
NET INCOME.............. $2,642,942 $1,593,551 $ 723,054 $ 764,656 $1,122,722
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-42
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY),
AND STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY), AND STOCKHOLDER'S
EQUITY--JANUARY 1, 1994.......................................... $ 888,172
Net income for the year ended December 31, 1994................... 723,054
Distributions to partners and members during 1994................. (1,833,309)
-----------
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY), AND STOCKHOLDER'S
EQUITY--DECEMBER 31, 1994........................................ (222,083)
Capital contributions during 1995................................. 282,883
Net income for the year ended December 31, 1995................... 1,593,551
Distributions to partners and members during 1995 (Note 1)........ (336,038)
-----------
PARTNERS' AND MEMBERS' CAPITAL, AND STOCKHOLDER'S EQUITY--
DECEMBER 31, 1995................................................ 1,318,313
Net income for the year ended December 31, 1996................... 2,642,942
Distributions to partners and members during 1996 (Notes 1 and
2(e))............................................................ (3,725,404)
-----------
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY), AND STOCKHOLDER'S
EQUITY--DECEMBER 31, 1996........................................ 235,851
Net income for the six months ended June 30, 1997 (Unaudited)..... 764,656
Distributions to partners and members during the six months ended
June 30, 1997 (Unaudited)........................................ (391,000)
Unrealized gain on available for sale securities (Unaudited)...... 9,319
-----------
PARTNERS' AND MEMBERS' CAPITAL (DEFICIENCY), AND STOCKHOLDER'S $ 618,826
EQUITY--JUNE 30, 1997 (UNAUDITED)................................ ===========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-43
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30
--------------------------------- ----------------------
1996 1995 1994 1997 1996
---------- ---------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $2,642,942 $1,593,551 $ 723,054 $ 764,656 $1,122,722
---------- ---------- --------- ---------- ----------
Adjustments to
reconcile net income
to net cash provided
by (used in)
operating activities:
(Gain) on sale of
securities......... -- (518) (3,263) -- --
Extraordinary (gain)
on extinguishment
of debt............ -- (181,319) -- -- --
(Gain) on
disposition of
security........... (262,585) -- -- -- --
(Gain) loss on
disposal of
property and
equipment.......... -- (2,521) 2,884 -- --
Deferred rent....... -- -- (114,381) -- --
Bad debt expense.... -- -- 8,581 -- --
Depreciation........ 44,004 49,638 43,529 19,047 27,000
Unregistered
securities received
for services
rendered........... (750,000) (124,250) -- -- --
Proceeds from the
sale of trading
securities......... -- 60,920 11,463 -- --
Changes in assets and
liabilities:
(Increase) decrease
in:
Accounts receivable. 336,398 (333,000) (199,625) 447,718 755,000
Expense
reimbursement
receivable......... 55,433 21,884 (50,538) (22,286) 48,831
Deposits............ -- -- -- (100,000) --
Prepaid local
business taxes..... -- 12,691 (12,691) (18,361) --
Sundry.............. (11,296) (5,405) 11,036 (18,874) 953
Security deposits... (110) 11,590 (12,313) 2,580 (110)
(Decrease) increase
in:
Accounts payable and
accrued
liabilities........ 94,532 8,372 (1,681) 176,882 178,186
Bonuses payable--
discretionary...... 235,500 284,000 922,000 (1,441,500) (1,206,000)
Accrued local
business taxes..... (21,024) 48,869 -- (12,933) (37,186)
Unearned revenue.... 19,739 -- -- (13,797) --
Accrued interest due
to affiliate....... -- 30,852 4,402 -- --
---------- ---------- --------- ---------- ----------
Total adjustments. (259,409) (118,197) 609,403 (981,524) (233,326)
---------- ---------- --------- ---------- ----------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES............. 2,383,533 1,475,354 1,332,457 (216,868) 889,396
---------- ---------- --------- ---------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Employee loans
receivable........... -- 30,000 (30,000) -- --
Due from partner...... 135,000 (159,000) -- 24,000 156,500
Deferred costs........ (106,110) -- -- 106,110 --
Purchase of property
and equipment........ (26,235) (42,365) (77,524) (22,505) (13,681)
Proceeds from the sale
of securities........ 386,835 -- -- -- --
Proceeds from disposal
of property and
equipment............ -- 4,256 -- -- --
---------- ---------- --------- ---------- ----------
NET CASH PROVIDED BY
(USED IN) INVESTING
ACTIVITIES............. 389,490 (167,109) (107,524) 107,605 142,819
---------- ---------- --------- ---------- ----------
Subtotal (carried
forward)............... 2,773,023 1,308,245 1,224,933 (109,263) 1,032,215
</TABLE>
(Table continued on following page)
The accompanying notes to combined financial statements are an integral part of
these statements.
F-44
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------ -----------------------
1996 1995 1994 1997 1996
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Subtotal (brought
forward)............... $ 2,773,023 $1,308,245 $ 1,224,933 $ (109,263) $ 1,032,215
----------- ---------- ----------- ---------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Contributions from
partners............. -- 282,883 -- -- --
Distributions to
partners and members. (2,975,404) (336,038) (1,833,309) (391,000) (1,459,126)
Payment of note
payable due
affiliate............ -- (500,000) -- -- --
Increase in note
payable due
affiliate............ -- -- 60,057 -- --
Due to partners....... -- -- -- 400,000 --
----------- ---------- ----------- ---------- -----------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES............. (2,975,404) (553,155) (1,773,252) 9,000 (1,459,126)
----------- ---------- ----------- ---------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (202,381) 755,090 (548,319) (100,263) (426,911)
CASH AND CASH
EQUIVALENTS--BEGINNING
OF PERIOD.............. 1,258,429 503,339 1,051,658 1,056,048 1,258,429
----------- ---------- ----------- ---------- -----------
CASH AND CASH
EQUIVALENTS--END OF
PERIOD................. $ 1,056,048 $1,258,429 $ 503,339 $ 955,785 $ 831,518
=========== ========== =========== ========== ===========
NONCASH FINANCING
ACTIVITIES:
Unregistered
securities
distributed to
partners............. $ 750,000 $ -- $ -- $ -- $ --
=========== ========== =========== ========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
period for interest.. $ -- $ 2,214 $ -- $ -- $ --
=========== ========== =========== ========== ===========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-45
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 1--ORGANIZATION
Victor Capital Group, L.P. (the "Partnership") was organized as a Delaware
Limited Partnership on February 17, 1989. The purposes of the Partnership are,
among other things, to earn fee income from services rendered in connection
with equity and debt investments in real property and interests therein, to
invest in real estate partnerships, and to acquire, hold and otherwise deal
with equity and debt investments in real property of all kinds. The sole
general partner of the Partnership is Valentine Wildove & Company, Inc.
("Valentine Wildove"), which currently has a 15% ownership interest. The
limited partners are John R. Klopp and Craig M. Hatkoff, who presently have
ownership interests of 42.5% each.
In June 1995, the Partnership entered into an agreement with a former
limited partner, Windsor Investors Corporation ("Windsor Investors"), whereby
Valentine Wildove was assigned Windsor Investors' 4.9% limited partnership
interest and all related rights thereto, in exchange for the Partnership's
payment in respect of a $500,000 promissory note (the "Note") due to Windsor
Investors (see Note 7).
The allocations among the partners of profits and losses are governed by the
Partnership Agreement. The Partnership Agreement provides, among other things,
that any losses of the Partnership are allocated to the partners in accordance
with the partners' percentage interests, provided the allocation would not
cause a negative balance in the partners' capital account. In this case,
losses are allocated to those partners with positive capital account balances
in proportion to such balances. If no partner has a positive capital account
balance, all losses are allocated to the general partner. Net profits of the
Partnership are to be allocated: first, pro rata among the partners in
proportion to the amount of cumulative net losses allocated to each partner
since the amendment and restatement of the Partnership Agreement, until such
losses have been reduced to zero; second, pro rata among the partners in
proportion to the amount that cumulative cash distributions (as defined)
exceed cumulative net profits; and third, to the extent cumulative net profits
exceed cumulative cash distributions, to the partners in the same manner as
distributable cash (as defined).
Commencing June 14, 1995, Partnership profits were allocated on a pro rata
basis in accordance with the current partner percentage interests described
above due to the termination of Windsor Investors limited partnership interest
as of June 13, 1995.
As of December 1, 1995, the partners entered into an agreement which
provides for the payment of additional distributions to the general partner,
Valentine Wildove & Company, Inc. For 1996 and 1995, distributions made in
accordance with this agreement amounted to $1,011,014 and $53,155,
respectively. For the six months (unaudited) ended June 30, 1997, the
Partnership did not make any additional distributions to Valentine Wildove &
Company, Inc.
VCG Montreal Management, Inc. is owned entirely by the Partnership. Victor
Asset Management Partners, L.L.C., VP Metropolis Services, L.L.C. and 970
Management, LLC are related to Victor Capital Group, L.P. through common
ownership as members John R. Klopp and Craig M. Hatkoff each own a fifty-
percent interest in all three limited liability companies. All of these
entities and VCG Montreal Management, Inc. are collectively referred to herein
as the "Affiliates." Each affiliate was organized for the purpose of providing
asset management and advisory services relating to various mortgage pools
and/or real estate properties. VCG Montreal Management, Inc. was also
organized to hold a marginal interest in a Canadian real estate venture.
Victor Asset Management Partners, L.L.C. was organized under New York State
law in 1995. VP Metropolis Services, L.L.C. was organized in 1994 in the State
of New Jersey, 970 Management, LLC was organized in
F-46
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND 1996 IS UNAUDITED)
New York State during 1996 and VCG Montreal Management, Inc. was organized in
New York State during 1997.
Profits, losses and distributions relating to each of the limited liability
companies are allocated to each of the owners on a pro rata basis in
accordance with their ownership percentage.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Combination
The accompanying combined financial statements include the accounts of
Victor Capital Group, L.P. (A Delaware Limited Partnership), its wholly-owned
subsidiary VCG Montreal Management, Inc., Victor Asset Management Partners,
L.L.C., VP Metropolis Services, L.L.C. and 970 Management, LLC, all of which
are related through common ownership. All significant intercompany accounts
and transactions have been eliminated.
(b) Revenue Recognition
Fees from professional advisory services are recorded as services are
rendered and exclude expenses incurred on behalf of and charged to clients.
Fees from mortgage placement services and asset management and advisory
services are recognized when earned.
(c) Credit Risk and Concentrations
The Partnership and Affiliates have a significant amount of cash on deposit
in two financial institutions.
In 1996, the Partnership and Affiliates conducted 30 engagements on behalf
of 23 clients. Revenue earned during 1996 included approximately $2,823,000
from a multi-phase assignment on behalf of two related clients which comprised
approximately 41% of the total annual revenue. In 1995, the Partnership and
Affiliates conducted approximately 40 engagements on behalf of 19 clients.
Revenue earned during 1995 included approximately $1,174,000 from one client,
which comprised approximately 20% of revenues earned during the year ended
December 31, 1995. In 1994, the Partnership and Affiliates conducted
approximately 26 engagements on behalf of 16 clients. Revenue earned during
the year ended December 31, 1994 included approximately $3,115,000 from two
clients and accounted for approximately 60% of annual revenues earned.
Revenue earned during the six months (unaudited) ended June 30, 1997
included approximately $1,535,000 from four clients and accounted for
approximately 56% of total revenue for the period. Revenue earned during the
six months (unaudited) ended June 30, 1996 included approximately $702,000
from two clients and accounted for approximately 26% of total revenue for the
period.
(d) Investment in Available for Sale Securities
As of December 31, 1996 and 1995, respectively, investment in available for
sale securities are stated at their market values. As of June 30, 1997
(unaudited), the securities continue to be carried at their market values.
F-47
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND 1996 IS UNAUDITED)
(e) Investment in Unregistered Securities
During 1995, the Partnership received cash and unregistered securities in
connection with an engagement to provide financial advisory services. At the
time the services were rendered the fair market value of the securities was
determined to be $124,250. The combined financial statements for 1995 reflect
this amount as investment in unregistered securities and fees earned. During
1996, pursuant to a plan of merger between the issuer of the unregistered
securities and other parties, the securities were surrendered in exchange for
cash of $386,835 resulting in a gain of $262,585.
In 1996, the Partnership also received unregistered securities and cash in
exchange for services rendered. These securities were unrelated to those
received in 1995. All of the shares received by the Partnership were
distributed simultaneously to the partners. The fair market value of these
securities was determined to be $750,000 and accordingly, the combined
financial statements for 1996 reflect this amount as distributions to partners
and fee income.
(f) Income Taxes
The Partnership and those affiliates which are limited liability companies
are not subject to federal or state income taxes. No provision has been made
in the accompanying combined financial statements for such taxes, which may be
payable by the individual partners. The Partnership and certain limited
liability company affiliates are subject to New York City Unincorporated
Business taxes which taxes are reflected in local business taxes on the
combined statements of income.
VCG Montreal Management, Inc. is subject to federal and state corporate
taxes. For the six months (unaudited) ended June 30, 1997, the corporation did
not incur any tax liabilities and, therefore, no provision for such taxes have
been made in the accompanying combined statements of income.
(g) Property and Equipment
Property and equipment are stated at cost and are being depreciated under
the straight-line method over the estimated useful lives of the assets, which
range from 5 to 7 years.
(h) Cash Equivalents
All liquid assets with a maturity of three months or less are considered
cash equivalents.
(i) Accounts Receivable
The entities have written off all accounts deemed to be uncollectible at
December 31, 1996 and 1995 and do not anticipate any additional losses.
Accounts receivable deemed uncollectible at June 30, 1997 (unaudited) were
also written off.
(j) Deferred Costs
As of December 31, 1996, the Partnership was involved in negotiations
relating to a new business venture. During 1996, the Partnership capitalized
$106,110 of various professional and consulting expenses relating to the
venture. As of December 31, 1996, these costs remain unamortized. In April
1997, pursuant to an agreement
F-48
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND 1996 IS UNAUDITED)
among the parties, $53,647 has been determined to be an expense of the
Partnership and, accordingly, is reflected as professional fees in the
combined statement of income for the six months (unaudited) ended June 30,
1997. The remaining balance of $52,463, which was accrued as of December 31,
1996, is to be paid by various parties of the venture, and accordingly, has
been transferred to the respective parties at June 30, 1997.
(k) Use of Estimates in Financial Statement Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1996 and 1995,
and June 30, 1997 and the reported amounts of income and expenses during the
three years ended December 31, 1996 and the six months ended June 30, 1997 and
1996. Actual results could differ from those estimates.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment--at cost, consists of the following at December 31,
1996 and 1995 and June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- JUNE 30,
1996 1995 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures..................... $ 80,328 $ 79,630 $ 80,328
Office, telephone and computer equipment... 236,961 211,424 259,466
--------- --------- ---------
Total................................... 317,289 291,054 339,794
Less, accumulated depreciation............. (227,218) (183,214) (246,265)
--------- --------- ---------
$ 90,071 $ 107,840 $ 93,529
========= ========= =========
</TABLE>
NOTE 4--DUE FROM PARTNER
Due from partner represents amounts due from Valentine Wildove & Company,
Inc. relating to short term noninterest-bearing advances made by the
Partnership.
NOTE 5--BONUSES PAYABLE--DISCRETIONARY
Bonuses payable as of December 31, 1996 and 1995 represent additional year
end compensation for Partnership employees. These amounts were determined by
the management of the Partnership and were authorized at management's
discretion.
NOTE 6--DUE TO PARTNERS
As of June 30, 1997 (unaudited), $400,000 was due to partners. The entire
amount represents short-term noninterest-bearing loans made to the
Partnership. In July 1997, this balance was repaid.
F-49
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 7--NOTE PAYABLE
Pursuant to the terms of the Partnership Agreement, a $500,000 promissory
note was issued on May 1, 1991 to Windsor Investors in settlement of a
reduction in its ownership interest in the Partnership (see Note 1).
The note, which was due and payable on May 1, 2001, was considered fully
repaid in June 1995, pursuant to a Stipulation of Settlement Agreement
executed in the State of New York, which required the Partnership to make a
$500,000 payment. Interest accrued at a rate of 11% per annum, and was due
annually on May 1 for the preceding calendar year. Interest payments and
principal prepayments were payable only to the extent of 12.5% of net cash
flow, as defined, and 100% of net cash from capital events, as defined. For
1995 and 1994, interest expense attributable to the note amounted to $30,852
and $64,459, respectively. Unpaid accrued interest had been added to the
principal balance of the note in accordance with the note agreement and
amounted to $181,319 as of the settlement date. At the time of extinguishment
of this debt the Partnership recognized an extraordinary gain of $181,319
which is reflected in the accompanying combined financial statements.
NOTE 8--RELATED PARTY TRANSACTIONS
The Partnership is managed by its general partner, Valentine Wildove, a
corporation owned entirely by John R. Klopp and Craig M. Hatkoff. In
accordance with the Partnership Agreement, management fees charged by
Valentine Wildove for 1996, 1995 and 1994 amounted to $860,573, $836,560 and
$821,000, respectively. Management fees charged for the six months (unaudited)
ended June 30, 1997 and 1996 amounted to $438,943 and $430,286, respectively,
of which $214,943 remains unpaid at June 30, 1997 and is included in accounts
payable and accrued liabilities on the combined balance sheet.
Fees earned in 1996, 1995 and 1994, respectively, include $737,350, $373,523
and $28,272 from affiliates of certain partners. Fees earned for the six
months (unaudited) ended June 30, 1997 and 1996, respectively, include
$660,930 and $329,365 from these affiliates for asset management services
rendered to businesses in which certain partners of Victor Capital Group, L.P.
have minimal ownership interests.
NOTE 9--COMMITMENTS AND CONTINGENCIES
The Partnership is committed under an operating lease for office space with
an affiliate of Windsor Investors expiring on December 31, 1997. The lease
requires annual fixed minimum lease payments, plus additional amounts for real
estate taxes, operating expenses and electricity. Charges for rent for 1996,
1995 and 1994 amounted to approximately $216,000, $209,000 and $216,000,
respectively. Charges for rent for the six months (unaudited) ended June 30,
1997 and 1996 amounted to approximately $108,000 for each period.
Effective January 1994, the Partnership exercised its option to terminate an
amended office lease with the affiliate of Windsor Investors. The amended
lease provided for a rent abatement and for the forgiveness of deferred rent
incurred by the Partnership under a prior lease agreement. As of the date the
amended lease was terminated, the deferred rent and rent abatements were being
amortized on a straight-line basis through the life of the amended lease. As
of the termination date of this lease, the remaining unamortized balances
relating to deferred rent and rent abatements amounted to $43,229 and $71,152,
respectively, which were recognized as a reduction of rent expense in 1994.
The Partnership entered into an agreement to sublease a portion of its
office space to a nonaffiliated company. The sublease commenced in April 1994
and terminated on April 30, 1995. The agreement provided
F-50
<PAGE>
VICTOR CAPITAL GROUP, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND 1996 IS UNAUDITED)
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 as income, $11,450 in 1996,
$311,000 in 1995, $37,000 in 1994 and $4,950 for the six months (unaudited)
ended June 30, 1996. For the six months (unaudited) ended June 30, 1997, VP
Metropolis Services, L.L.C. was not entitled to any resolution fees.
In connection with the sale of the members' interest in VP Metropolis
Services, L.L.C. (See Note 11), the rights to the contingent resolution fees
noted above were assigned to an affiliated entity owned by John R. Klopp and
Craig M. Hatkoff.
Management is committed to a key employee, which will allow the individual
to share in a percentage of certain future contingent revenues that the
Partnership may earn upon the successful outcome of certain specified
projects.
As of December 31, 1996, the Partnership has guaranteed to an employee a
minimum bonus amounting to $100,000 relating to the 1997 calendar year. As of
June 30, 1997 (unaudited), $50,000 has been paid.
NOTE 10--EMPLOYEE PENSION PLAN
The Partnership maintains a Salary Reduction Simplified Employee Pension
Plan (SARSEP) which is considered a qualified defined contribution plan under
Section 408 of the Internal Revenue Code. The plan was adopted during 1995 and
is available to all employees of the Partnership who meet certain defined
eligibility requirements. Contributions to the plan are made entirely by the
employees through annual salary reductions. Employee contributions for each
participating employee in the plan are limited to a percentage of annual
compensation paid by the Partnership not to exceed $9,500 for tax year 1996
and 1997. For the years ended December 31, 1996 and 1995 and for the six
months (unaudited) ended June 30, 1997 and 1996, the Partnership did not incur
any administrative costs directly associated with the plan.
NOTE 11--SALE OF INTEREST
On July 15, 1997, John R. Klopp, Craig M. Hatkoff and Valentine Wildove &
Company, Inc. sold their entire ownership interests in the Partnership and its
Affiliates to Capital Trust (f/k/a California Real Estate Investment Trust)
for a total purchase price of $5,000,000, evidenced by notes payable.
F-51
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Phoenix Four, Inc.
Nassau, Bahamas
We have audited the accompanying consolidated statement of assets,
liabilities and stockholders' equity of Phoenix Four, Inc. and subsidiaries as
of December 31, 1996, and the related consolidated statements of income and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Phoenix
Four, Inc. and subsidiaries at December 31, 1996, and the results of their
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles in the United States of America.
BDO Binder
Nassau, Bahamas
March 4, 1997
F-52
<PAGE>
PHOENIX FOUR, INC.
CONSOLIDATED STATEMENT OF ASSETS, LIABILITIES
AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER
31, 1996
-----------
<S> <C>
ASSETS
------
Investments (Note 1):
Hudson Street.................................................... $ 7,436,268
Clermont Cove.................................................... 7,148,118
Highland Lake.................................................... 4,444,564
Maspeth.......................................................... 4,192,180
Seacrest Towers.................................................. 3,378,620
Luther Village................................................... 2,783,821
Ridge Plaza...................................................... 2,325,819
Stiles Lane...................................................... 2,144,275
380 Broadway..................................................... 1,858,338
Ravenna Warehouse................................................ 443,795
Rockland Warehouse............................................... 350,000
Cash and cash equivalents.......................................... 1,079,271
Security deposits, prepaid expenses, organization costs and other
assets............................................................ 401,532
-----------
Total assets................................................... $37,986,601
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Bridge loans payable (Note 6).................................... $ 4,113,264
Loan payable--bank (Note 3)...................................... 2,877,002
Subordinated note payable (Note 4)............................... 1,031,507
Notes payable--related parties (Note 5).......................... 717,624
Accrued performance fees (Note 2)................................ 1,008,381
Accrued expenses, commissions, security deposits and other
liabilities..................................................... 538,386
-----------
Total liabilities.............................................. 10,286,164
-----------
Stockholders' equity (Note 8)...................................... $27,700,437
===========
Common stock--shares issued and outstanding (1,000,000 shares
authorized) (Note 8).............................................. 34,497.62
===========
Net Asset Value per Share (Note 8)............................. $ 802.97
===========
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-53
<PAGE>
PHOENIX FOUR, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Investment income, including increase in net unrealized gain of
$6,212,959 (Note 1).............................................. $8,426,693
----------
Expenses:
Management fee (Note 2)......................................... 1,134,653
Performance fee (Note 2)........................................ 1,127,127
Interest expense (Note 3, 4, 5 and 6)........................... 704,658
Legal (Note 7).................................................. 169,638
Accounting...................................................... 96,820
Investment banking and directors fees (Note 7).................. 146,000
Office and reimbursed salaries.................................. 156,761
Business travel--prospective and existing investments, board
meetings....................................................... 184,621
Marketing, printing, brochures, news reprints, Net Asset Value
publication, stockholder relations............................. 90,063
Office, postage, filing fees, bank charges and other
administrative................................................. 86,906
Site management (Note 7)........................................ 72,500
Amortization--organization costs................................ 57,789
Stockholders' meeting........................................... 30,529
Annual report................................................... 22,497
Insurance....................................................... 24,000
----------
Total expenses................................................ 4,104,562
----------
Net income........................................................ $4,322,131
==========
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-54
<PAGE>
PHOENIX FOUR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 4,322,131
------------
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization................................................. 57,789
Net changes in assets and liabilities:
Decrease (increase) in:
Hudson Street Investment................................. (7,436,269)
Maspeth Avenue Investment................................ (4,192,180)
Stiles Lane Investment................................... (2,144,275)
380 Broadway Investment.................................. (1,858,338)
Ridge Plaza Investment................................... (2,325,819)
Ravenna Warehouse Investment............................. (443,795)
Clermont Cove Investment................................. 475,374
Highland Lake Investment................................. 593,122
Luther Village Investment................................ 2,101,882
Seacrest Towers Investment............................... 347,222
27 East 65th Street Investment........................... 1,035,325
Rockland Warehouse Investment............................ 100,000
Other assets............................................. (374,072)
Increase (decrease) in:
Participations payable................................... (949,484)
Accrued performance fee.................................. 277,128
Accrued management fees.................................. (83,517)
Accrued interest......................................... 196,010
Other liabilities........................................ 263,109
Total adjustments...................................... (14,360,788)
------------
Net cash used in operating activities.................. (10,038,657)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of $244,412 in commissions....... 7,299,094
Redemption of common stock..................................... (441,034)
Issuance of loan payable--bank................................. 3,500,000
Issuance of bridge loans....................................... 4,050,000
Issuance of subordinated note payable.......................... 1,000,000
Repayment of loan payable--bank................................ (622,998)
Repayment of notes payable..................................... (1,830,000)
Repayment of bridge loans payable.............................. (2,200,000)
------------
Net cash provided by financing activities........................ 10,755,062
------------
Net increase in cash and cash equivalents........................ 716,405
------------
Cash and cash equivalents, beginning of year..................... 362,866
------------
Cash and cash equivalents, end of year........................... $ 1,079,271
============
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-55
<PAGE>
PHOENIX FOUR, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
Phoenix Four, Inc. was incorporated on November 5, 1993, in the Commonwealth
of the Bahamas as an open-ended investment company. The principal office is in
Nassau, the Bahamas. The operations (funding) of the Company began on March
31, 1994. The overall objective of Phoenix Four, Inc. and its subsidiaries
(the "Company") is to seek a high level of return by investing in various debt
and equity securities and investments related to broad market opportunities
within the U.S. credit, mortgage and finance industries.
PRINCIPLES OF FINANCIAL REPORTING AND INVESTMENT VALUATION
The Company reports investments on the value method of accounting. The value
method does not reflect the recognition of income or loss by use of the equity
method of accounting. Investments are carried on the statement of assets,
liabilities and stockholders' equity at market value with the related
unrealized gains and losses reflected in income.
MARKET VALUE OF INVESTMENTS HELD BY THE COMPANY
The value of assets for which there is no formal market will be calculated
based on the net present value of the anticipated cash flows to be received
over the projected lives of the assets, discounted at a rate appropriate for
the level of risk, as determined by the Company's Board of Directors. The
values as determined are not in excess of market values as supported by third
party offers and commitments.
If the Board of Directors determines that information is not available to
value an asset in the manner described above, or if it determines that the
value of an asset as so determined does not reasonably reflect its fair market
value, the value of the asset may be determined by methods which the Board
determines reasonably reflect its fair market value. Any assets or liabilities
expressed in terms of currencies other than the United States dollar are
translated into United States dollars at the prevailing market rate as
obtained from one or more banks or dealers.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Phoenix Four, Inc. and its wholly-owned, special purpose subsidiaries, Shore
and Voorhies Acquisition Corporation, Rockland Warehouse Corporation and
Highland Lake Capital Corp. (all New York corporations); Beach & Hudson Corp.,
Hud-Moore, Inc., Tribeca Capital Corp. and North Haven Capital Corp. (all
Delaware Corporations); and ROC, Inc. (a Bahamas Corporation). The financial
statements also include the 49% minority interest in CC Capital Corp., a
Delaware company, recorded on the equity method. All intercompany investments
and advances have been eliminated in consolidation.
TAXES
At the present time, no ordinary income, profit, capital gains, estate or
inheritance taxes are levied in the Commonwealth of the Bahamas, and,
accordingly, no provision for such taxes has been recorded by the Company.
However, certain of the Company's investments contain United States real
property interests. These interests are held in wholly-owned and partially-
owned United States subsidiaries which are subject to Federal income taxes
and, in some instances, New York State and City income taxes. In addition, the
Company was subject to a 30% U.S. Federal withholding tax which has been
collected on the interest income received by the Company on certain of its
notes receivable.
F-56
<PAGE>
BASIS OF PRESENTATION
The financial statements are presented in United States dollars in
accordance with generally accepted accounting principles in the United States
of America.
INVESTMENT AND GEOGRAPHIC CONCENTRATION OF RISK
Substantially all of the Company's investments are debt securities which are
secured by real estate (primarily condominium and cooperative multi-family and
single family housing, industrial warehousing facilities and a retail shopping
center), approximately 85% of which is located in the New York metropolitan
area.
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
DEFERRED CHARGES
Organization costs are being amortized over sixty months.
F-57
<PAGE>
PHOENIX FOUR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVESTMENT TRANSACTIONS
At December 31, 1996, the Company's investments consisted of the following:
(a) Hudson Street Investment
The Company determines the value of the investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Hudson Street Investment includes the net asset value of (1) a loan
collateralized by mortgages encumbering the premises located at 121-133 Hudson
Street, New York, NY (the Property) which are subject to a foreclosure action;
(ii) certain mechanics liens encumbering the Property, which are owned by
Beach & Hudson Corp., a wholly-owned U.S. subsidiary of the Company; and (iii)
a certain mechanics lien filed by Target Builders, Inc., encumbering the
Property, which is owned by Hud-Moore, Inc., a wholly-owned U.S. subsidiary of
the Company.
In addition, Tribeca Capital Corp., a wholly-owned U.S. subsidiary of the
Company, was formed for the purpose of acquiring the fee interest in the
Property in the event that an acceptable offer is not received at the
foreclosure sale.
(b) Clermont Cove Investment
The Company determines the value of this investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Clermont Cove Investment includes the net asset value of a subordinate
mortgage (Phoenix mortgage) collateralized by the unsold condominium units at
the Clermont Cove Condominium located in Jersey City, New Jersey, and the
Company's 49% investment in CC Capital Corp., a Delaware corporation that is
the fee owner of the unsold condominium units. Of the original 59 unsold
condominium units owned by CC Capital Corp., 18 units were sold as of December
31, 1996. As of February 28, 1997, an additional nine units have been sold.
(c) Highland Lake Investment
The Company determines the value of this investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Highland Lake Investment includes the net asset value of Highland Lake Capital
Corp. (HLOC), a wholly-owned U.S. subsidiary of the Company, a land loan with
a face value of $266,086 and a promissory note receivable with a face value of
$32,000. HLCC was formed to provide infrastructure and construction financing
for a residential housing development located in Orange County, New York. The
net asset value of HLCC includes two mortgage notes with face values of
$1,990,671 and $245,603, respectively.
(d) Maspeth Avenue Investment
The Company determines the value of the investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Maspeth Avenue Investment includes the net asset value of a note and mortgage
encumbering an industrial warehouse building located at Maspeth Avenue,
Maspeth, New York. The note has a face value of $4,800,000 and provides for
monthly payments of principal and interest in the amounts of $23,300 and
$16,700 each, respectively, from the cash flow of the property. The note
matures on July 1, 1998. Additional collateral for the note includes a
mortgage lien on a commercial property owned by the mortgagor located on
Onderdonk Avenue, Brooklyn, New York and personal guarantees of the principals
of the borrower.
F-58
<PAGE>
PHOENIX FOUR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(e) Seacrest Towers Investment
The Company determines the value of the investment by applying the
discounted cash flow method to the assets acquired. The amount carried as
Seacrest Towers Investment includes the net asset value of the unsold shares
promissory note, the advances promissory note, and a tax promissory note. In
addition, Shore and Voorhies Acquisition Corp. ("SVAC"), a wholly-owned U.S.
subsidiary of the Company, was formed to purchase units in the Seacrest Towers
building from the cooperative association, Voorhies Avenue and Shore Parkway
Owners, Inc. ("VSOC"). At December 31, 1996, SVAC owned fifty-six (56) units.
SVAC also owns 92 end loans relating to the sale of cooperative apartments at
Seacrest Towers.
(f) Luther Village Investment
The Company determines the value of the investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Luther Village Investment includes the net asset value of the Company's 34.29%
participating interest in a first mortgage. The mortgage is collateralized by
a 392 unit cooperatively owned, senior retirement community and a lien on
development land located in Arlington Heights, Illinois. On January 31, 1997
the remaining balance of the first mortgage was repaid by the borrower and the
Company received its pro rata share of the proceeds in the amount of
$2,633,826.
(g) Stiles Lane Investment
The Company determines the value of the investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Stiles Lane Investment includes the net asset value of a note and mortgage
encumbering a vacant industrial warehouse located at Stiles Lane, North Haven,
Connecticut. The note has a face value of $2,500,000, bears interest at a rate
of 5% per annum and is due on January 1, 1999. In addition, North Haven
Capital Corp., a wholly-owned U.S. subsidiary of the Company, was formed to
provide up to $500,000 of additional mortgage financing (the North Haven
Mortgage) to fund certain improvements to the property, as well as taxes,
insurance and certain operating expenses during the first year. The North
Haven Mortgage is scheduled to close in March 1997, and provides for draw-
downs of up to $250,000 at closing, and the balance of the loan as and when
the property is at least 50% leased. Increase will accrue at 10% per annum,
and will be payable concurrent with payments on the first Phoenix mortgage.
(h) Ridge Plaza Investment
The Company determines the value of the investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Ridge Plaza investment includes the net asset value of a note and mortgage
encumbering a strip shopping center located at 5734 Berkshire Valley Road, Oak
Ridge, New Jersey. The note has a face amount of $1,635,000 and an outstanding
principal balance of $1,513,034. In addition, Oak Ridge Acquisition Corp., a
wholly-owned U.S. subsidiary of the Company, was formed to acquire an option
to acquire the interest of a purchaser, in a contract of sale to purchase the
fee interest in the Ridge Plaza Property.
(i) 380 Broadway Investment
The Company determines the value of the investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
380 Broadway investment includes the net asset value of a note and mortgage
encumbering a commercial and loft building located at 380 Broadway, New York,
NY which is subject to a foreclosure action. The note has a face amount of
$1,900,000 and an outstanding principal balance of $1,861,208.
F-59
<PAGE>
PHOENIX FOUR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(j) Ravenna, Ohio Investment
The Company determines the value of this Investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Ravenna, Ohio investment includes the net asset value of a first mortgage and
note encumbering a commercial warehouse facility located in Ravenna, Ohio. The
first mortgage and note were acquired by ROC, Inc., a wholly-owned Bahamas
subsidiary of the Company. On January 21, 1997, ROC, Inc. received $450,000 in
full satisfaction of the first mortgage debt. In addition, on February 24,
1997, ROC, Inc. received an additional $35,000 from its title insurance
company in settlement of a claim.
(k) Rockland Warehouse Corporation Investment
The Company determines the value of this Investment based upon the net
proceeds of $344,000 received from a sale in escrow which occurred on August
28, 1996. In January 1997, Rockland Warehouse Corporation received the
proceeds of sale. Rockland Warehouse Corporation is a wholly-owned subsidiary
of the Company, and was formed to purchase the land and buildings located at
Elias Street and Roosevelt Avenue in Spring Valley, New York.
2. INVESTMENT ADVISORY FEES
Pursuant to an agreement dated November 5, 1993, Strategic Resources
Corporation (SRC), a related party, serves as the Company's primary investment
advisor. The agreement provides for a base management fee to be paid monthly
at the annual rate of 5% of the average monthly gross assets under management
with a minimum of $20,000 per month. In addition, SRC is to receive a
performance fee representing 50% of the monthly increase in net asset value
after providing for a 10% annual return to the investors.
3. LOAN PAYABLE--BANK
On January 19, 1996, CC Capital Corp. refinanced a portion of the Phoenix
mortgage with First Bank of America (FBA) in the principal amount of
$3,500,000. A portion of the proceeds of this FBA loan was used to reduce the
Phoenix mortgage to $7,138,581, and the Company agreed to subordinate its
first mortgage to the lien of the FBA mortgage (see note 1(b)--Clemont Cove
Investment). The FBA loan bears interest at an annual rate of FBA's prime rate
plus 2% with monthly payments based upon a 15-year amortization schedule
(through December 1996). The loan matures on February 1, 2001, and is
collateralized by a first mortgage on the 59 Clermont Cove units, as well as a
first priority security interest in the 92 end loans held by a subsidiary of
the Company on cooperative apartments located at Seacrest Towers. On December
26, 1996, CC Capital Corp. closed on a modification of the mortgage with FBA.
The modification provided for monthly payments of interest only and a
modification of the required unit release prices that are paid to FBA from the
sale of Clermont Cove units. The unit release prices were reduced from $70,000
to $30,000 for the first twenty units sold, no release payments for the 21st
through 30th closings, and 90% of the sales prices on all closings thereafter.
At December 31, 1996, the loan payable to FBA totaled $2,877,002.
4. SUBORDINATED NOTE PAYABLE
On October 1, 1996, the Company issued a subordinated promissory note in the
principal amount of $1,000,000 to C.M.R. s.a., an unrelated Luxembourg
corporation. The note matures on October 1, 1999, and provides for annual
payments of interest only as follows: (a) 12.5% per annum payable on the first
anniversary of the loan date, (b) 13.25% per annum computed from the first
anniversary loan date due and payable on the second anniversary loan date and
(c) 14.5% per annum computed from the second anniversary loan date due and
payable on the third anniversary loan date. At December 31, 1996, accrued
interest amounted to $31,507.
F-60
<PAGE>
PHOENIX FOUR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE--RELATED PARTIES
During September and October 1995, the Company issued promissory notes to
various stockholders and related parties totaling $6,005,000 and bearing
interest at a rate of 15% per annum. The majority of the notes had maturity
dates of twelve months from the date of issuance. Two such notes totaling
$1,000,000 were due on demand and were fully repaid in February 1996. In June
1996 the Company offered all note holders the option to convert their
respective notes into stock of the Company at the May 1996 published Net Asset
Value per share plus an incentive equal to one-half of the interest which
would have accrued on the portion of the note converted into stock. Notes
totaling $2,861,264, including accrued interest and incentives, were converted
into stock during June 1996. During September and October 1996, notes totaling
$1,391,905, including accrued interest, were repaid at maturity and in October
and November 1996, notes totaling $759,977, including accrued interest, were
converted into stock at the then current Net Asset Value per share. Two
remaining notes totaling $700,000 were extended for a term of one year at an
interest rate of 10% per annum. At December 31, 1996, notes payable to related
parties totaled $717,624, which includes accrued interest of $17,624.
6. BRIDGE LOANS PAYABLE
On September 4, 1996, the Company received a bridge loan in the amount of
$1,000,000, the proceeds of which were utilized to fund a portion of the
Hudson Street and Ravenna, Ohio investments. The loan was made by a
stockholder of the Company and bears interest at a rate of 9% per annum plus a
1.5% origination fee. This loan matures on April 4, 1997.
On December 18, 1995, the Company received the following three bridge loans
totaling $3,050,000, the proceeds of which were utilized to fund a portion of
the Stiles Lane, 380 Broadway and Ridge Plaza investments:
1. $500,000 promissory note due January 21, 1997
2. $550,000 promissory note due March 15, 1997
3. $2,000,000 promissory note due March 22, 1997
The loans were made by two stockholders of the Company at an interest rate
of 15% per annum plus a 1.5% origination fee. The above described bridge loan
(1) in the amount of $500,000 was fully repaid on January 21, 1997.
7. RELATED PARTY TRANSACTIONS
Certain directors of the Company are also principals of the Company's
primary investment advisor.
The Company incurred legal fees of approximately $350,000 to Fischbein,
Badillo. Wagner, Harding (FBWH), counsel to the Company. Certain partners of
FBWH own all of the stock of a corporation which owns a majority interest in
CC Capital Corp. (see Note 1).
A director of the Company, Mr. Paul Knowles, is also a partner of McKinney,
Bancroft & Hughes, counsel and trustee to the Company. The Company incurred
fees of approximately $100,000 to McKinney, Bancroft & Hughes during 1996.
A director of the Company, Mr. Christian Van Pelt, is also a partner of
Christian M. Van Pelt, P.C., counsel to the Company. Mr. Van Pelt is also a
stockholder in SRC.
Site manager fees of $72,500 and reimbursed office salaries of $144,955 were
paid to SRC.
F-61
<PAGE>
PHOENIX FOUR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment banking fees of $55,000 and financing commissions of $120,000
were paid to R.H. Arnold & Co. pursuant to consulting agreements. Mr. Robert
H. Arnold, a principal of the firm, is a director of the Company.
Commissions of $54,391, attributable to the issuance of stock, were paid or
are payable to stockholders/directors of the Company.
8. COMMON STOCK AND COMMON STOCK TRANSACTIONS
Proceeds and payments on common stock, as shown in the consolidated
statement of cash flows, are in respect of the following number of shares:
<TABLE>
<S> <C>
Balance, January 1, 1996.......................................... 18,745.14
---------
Issuance of common stock.......................................... 16,391.65
---------
Redemption of common stock........................................ (639.17)
---------
Balance, December 31, 1996........................................ 34,497.62
=========
</TABLE>
At December 31, 1996, there were 34,497.62 shares of no par value common
stock issued and outstanding and 1,000,000 shares authorized.
The net asset value of a share of common stock at December 31, 1996 is
computed as follows:
<TABLE>
<S> <C>
Stockholders' equity............................................ $27,700,437
===========
Shares issued and outstanding................................... 34,497.62
===========
Net asset value per share....................................... $ 802.97
===========
</TABLE>
9. CASH FLOWS FROM OPERATIONS
Payments for interest amounted to $389,331 for the year ended December 31,
1996.
10. NON-CASH TRANSACTIONS
Promissory notes totaling $3,621,241, including accrued interest of
$296,241, were converted into stock of the Company during 1996 (see Note 5).
F-62
<PAGE>
PHOENIX FOUR, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF ASSETS, LIABILITIES
AND STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER
30, 1997
-----------
<S> <C>
ASSETS
------
Investments (Note 1):
Hudson Street.................................................... $10,336,785
642 N. Broad Street.............................................. 10,282,178
Maspeth Avenue................................................... 4,189,002
Highland Lake.................................................... 3,881,582
Seacrest Towers.................................................. 3,405,889
Ridge Plaza...................................................... 2,831,672
Clermont Cove.................................................... 228,183
380 Broadway..................................................... 2,693,696
Stiles Lane...................................................... 2,462,195
Astor Place...................................................... 406,350
Cash and cash equivalents.......................................... 3,097,333
Security deposits, prepaid expenses, organization costs and other
assets............................................................ 2,189,140
-----------
Total assets................................................... $46,004,005
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Loan payable-Capital Trust (Note 3).............................. $ 9,547,908
Subordinated note payable (Note 5)............................... 1,000,000
Accrued expenses, commissions, security deposits and other
liabilities..................................................... 392,929
-----------
Total liabilities.............................................. 10,940,837
-----------
Stockholders' equity (Note 8)...................................... $35,063,168
===========
Common stock--shares issued and outstanding (1,000,000 shares
authorized) (Note 8).............................................. 42,557.57
===========
Net Asset Value per Share (Note 8)............................. $ 823.90
===========
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-63
<PAGE>
PHOENIX FOUR, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997
-----------------
<S> <C>
Investment income, including increase in net unrealized gain
of $2,181,759 (Note 1)...................................... $4,604,826
----------
Expenses:
Management fee (Note 2).................................... $1,294,469
Interest expense (Notes 3, 4, 5 and 6)..................... 605,488
Legal (Note 6)............................................. 451,900
Accounting................................................. 151,835
Investment banking, consulting and due diligence fees (Note
6)........................................................ 245,842
Directors fees............................................. 32,750
Office and reimbursed salaries............................. 132,920
Business travel--prospective and existing investments,
board meetings............................................ 131,665
Marketing, printing, brochures, news reprints, Net Asset
Value publication, stockholder relations.................. 89,963
Office, postage, filing fees, bank charges and other
administrative............................................ 71,893
Telephone.................................................. 39,887
Site management (Note 6)................................... 58,752
Amortization............................................... 51,789
Stockholders' meeting...................................... 25,823
Annual report.............................................. 77,401
Insurance.................................................. 24,000
----------
Total expenses........................................... 3,486,377
----------
Net income............................................... $1,118,448
==========
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-64
<PAGE>
PHOENIX FOUR, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997
-----------------
<S> <C>
Cash flows from operating activities:
Net income................................................. $1,118,449
----------
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization............................................. 51,789
Net changes in assets and liabilities:
Decrease (increase) in:
Clermont Cove Investment............................. 6,919,935
Luther Village....................................... 2,783,821
Hudson Street Investment............................. (2,900,517)
Maspeth Avenue Investment............................ 3,178
Stiles Lane Investment............................... (317,920)
380 Broadway Investment.............................. (835,358)
Ridge Plaza.......................................... (505,853)
Ravenna Warehouse.................................... 443,795
Highland Lake Investment............................. 562,982
Seacrest Towers Investment........................... (27,269)
Astor Place Investment............................... (406,350)
Rockland Warehouse Investment........................ 350,000
Other assets......................................... (1,787,608)
Increase (decrease) in:
Accrued performance fees............................. (1,008,381)
Accrued interest..................................... (112,395)
Other liabilities.................................... (33,062)
Total adjustments.................................. (7,101,391)
----------
Net cash used in operating activities.............. (5,982,942)
----------
Cash flows from financing activities:
Issuance of common stock, net of $261,027 in commissions... 7,715,914
Redemption of common stock................................. (1,887,908)
Issuance of loan payable--Capital Trust.................... 9,800,000
Prepayment of notes payable--related parties............... (700,000)
Repayment of loan payable--bank............................ (2,877,002)
Repayment of bridge loans payable.......................... (4,050,000)
----------
Net cash provided by financing activities.......... 8,001,004
----------
Net increase in cash and cash equivalents.................... 2,018,062
----------
Cash and cash equivalents, January 1, 1997................... 1,079,271
----------
Cash and cash equivalents, September 30, 1997................ $3,097,333
==========
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-65
<PAGE>
PHOENIX FOUR, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
Phoenix Four, Inc. was incorporated on November 5, 1993 in the Commonwealth
of the Bahamas as an open-ended investment company. The principal office is in
Nassau, the Bahamas. The operations (funding) of the Company began on March
31, 1994. The overall objective of Phoenix Four, Inc. and its subsidiaries
(the "Company") is to seek a high level of return by investing in various debt
and equity securities and investments related to broad market opportunities
within the U.S. credit, mortgage and finance industries. On February 17, 1997,
the Commonwealth of the Bahamas granted the Company a Mutual Fund License to
carry on business as a regulated mutual fund subject to the Mutual Fund Act,
1995 of the Commonwealth of the Bahamas. In addition, on July 11, 1997,
Phoenix Four, Inc. was approved for listing and on September 29, 1997 was
listed on the Luxembourg Stock Exchange.
PRINCIPLES OF FINANCIAL REPORTING AND INVESTMENT VALUATION
The Company reports investments on the value method of accounting. The value
method does not reflect the recognition of income or loss by use of the equity
method of accounting. Investments are carried on the statement of assets,
liabilities and stockholders' equity at market value with the related
unrealized gains and losses reflected in income.
MARKET VALUE OF INVESTMENTS HELD BY THE COMPANY
The value of assets for which there is no formal market will be calculated
based on the net present value of the anticipated cash flows to be received
over the projected lives of the assets, discounted at a rate appropriate for
the level of risk, as determined by the Company's Board of Directors. The
values as determined are not in excess of market values as supported by third
party offers and commitments.
If the Board of Directors determines that information is not available to
value an asset in the manner described above, or if it determines that the
value of an asset as so determined does not reasonably reflect its fair market
value, the value of the asset may be determined by methods which the Board
determines reasonably reflect its fair market value. Any assets or liabilities
expressed in terms of currencies other than the United States dollar are
translated into United States dollars at the prevailing market rate as
obtained from one or more banks or dealers.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Phoenix Four, Inc. and its wholly-owned, special purpose subsidiaries, Shore
and Voorhies Acquisition Corporation, Rockland Warehouse Corporation and
Highland Lake Capital Corp. (all New York corporations); and Beach & Hudson
Corp., Hud-Moore, Inc., Tribeca Capital Corp., and North Haven Capital Corp.
(all Delaware corporations); and ROC., Inc. (a Bahamas corporation). The
financial statements also include the 49% minority interest in CC Capital
Corp., a Delaware company, recorded on the equity method. All intercompany
investments and advances have been eliminated in consolidation.
TAXES
At the present time, no ordinary income, profit, capital gains, estate or
inheritance taxes are levied in the Commonwealth of the Bahamas and,
accordingly, no provision for such taxes has been recorded by the Company.
However, certain of the Company's investments contain United States real
property interests. These interests are held in wholly-owned and partially-
owned United States subsidiaries which are subject to Federal income taxes
and, in some instances, New York State and City income taxes. In addition, the
Company was subject to a 30% U.S. Federal withholding tax which has been
collected on the interest income received by the Company on certain of its
notes receivable.
F-66
<PAGE>
BASIS OF PRESENTATION
The financial statements are presented in United States dollars in
accordance with generally accepted accounting principles in the United States
of America.
INVESTMENT AND GEOGRAPHIC CONCENTRATION OF RISK
Substantially all of the Company's investments are debt securities which are
secured by real estate (primarily condominium and cooperative multi-family and
single family housing, industrial warehousing facilities, an office building
and a retail shopping center), the majority of which is located in the New
York metropolitan area.
DEFERRED CHARGES
Organization costs are being amortized over sixty months.
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
F-67
<PAGE>
PHOENIX FOUR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVESTMENT TRANSACTIONS
At September 30, 1997, the Company's investments consisted of the following:
(a) Hudson Street Investment
The Company determines the value of this investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Hudson Street Investment includes the net asset value of (i) a loan
collateralized by mortgages encumbering the premises located at 121-133 Hudson
Street, New York, NY (the "Property") which are subject to a foreclosure
action; (ii) certain mechanics' liens encumbering the Property, which are
owned by Beach & Hudson Corp., a wholly-owned U.S. subsidiary of the Company
and (iii) a certain mechanics lien filed by Target Builders, Inc., encumbering
the Property, which is owned by Hud-Moore, Inc., a wholly-owned U.S.
subsidiary of the Company.
In addition, Tribeca Capital Corp., a wholly-owned U.S. subsidiary of the
Company, was formed for the purpose of acquiring the fee interest in the
Property in the event that an acceptable offer is not received at the
foreclosure sale.
(b) 642 N. Broad Street Investment
The Company determines the value of this investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
642 North Broad Street Investment includes the net asset value two notes and
mortgages, a first term mortgage and a second construction mortgage,
encumbering adjacent office and warehouse buildings located on North Broad
Street in Philadelphia, Pennsylvania. The two notes and mortgages were
acquired on August 12, 1997 at which time their aggregate outstanding
principal balance was $11,801,829. The first term mortgage is due by its terms
in December 1999, and the second mortgage is scheduled to self-liquidate in
September 1998.
(c) Maspeth Avenue Investment
The Company determines the value of this investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Maspeth Avenue Investment includes the net asset value of a note and mortgage
encumbering an industrial warehouse building located at Maspeth Avenue,
Maspeth, New York. The note has a face value of $4,800,000 and provides for
monthly payments of principal and interest in the amounts of $23,300 and
$16,700 each, respectively, from the cash flow of the property. The note
matures on July 1, 1998. Additional collateral for the note includes a
mortgage lien on a commercial property owned by the mortgagor located on
Onderdonk Avenue, Brooklyn, New York and personal guarantees of the principals
of the borrower.
(d) Highland Lake Investment
The Company determines the value of this investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Highland Lake Investment includes the net asset value of Highland Lake Capital
Corp. ("HLCC"), a wholly-owned U.S. subsidiary of the Company, a first
mortgage land loan and a closing cost promissory note receivable. HLCC was
formed to provide infrastructure and construction financing for a residential
housing development located in Orange County, New York. The net asset value of
HLCC includes an infrastructure loan and a home construction mortgage loan.
On February 13, 1997, legal actions were commenced by the Company and
Highland Lake Capital Corp. in federal and state court, respectively, to
enforce provisions of the notes, mortgages and related agreements with the
borrower. On July 11, 1997, the borrower filed for protection under Chapter 11
of the U.S. bankruptcy laws. The Company and HLCC will be filing claims in the
bankruptcy proceeding. While the borrower will dispute such claims, and the
full effect of the filing cannot be determined at this time, management
believes that the value of the underlying collateral continues to support the
value at which the investment is being carried.
F-68
<PAGE>
PHOENIX FOUR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(e) Seacrest Towers Investment
The Company determines the value of this investment by applying the
discounted cash flow method to the assets acquired. The amount carried as
Seacrest Towers Investment includes the net asset value of the unsold shares
promissory note, the advances promissory note, and a tax promissory note. In
addition, Shore and Voorhies Acquisition Corp. ("SVAC"), a wholly-owned U.S.
subsidiary of the Company, was formed to purchase units in the Seacrest Towers
building from the cooperative association, Voorhies Avenue and Shore Parkway
Owners, Inc. ("VSOC"). At September 30, 1997, SVAC owned fifty-six (56) units.
SVAC also owns 91 end loans relating to the sale of cooperative apartments at
Seacrest Towers.
(f) Ridge Plaza Investment
The Company determines the value of the investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Ridge Plaza investment includes the net asset value of a note and mortgage
encumbering a strip shopping center located at 5734 Berkshire Valley Road, Oak
Ridge, New Jersey. The note has a face amount of $1,635,000 and an outstanding
principal balance of $1,513,034. In addition, Oak Ridge Acquisition Corp., a
wholly-owned U.S. subsidiary of the Company, was formed to acquire an option
to acquire the interest of a purchaser in a contract of sale to purchase the
fee interest in the Ridge Plaza property.
(g) Clermont Cove Investment
The Company determines the value of this investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Clermont Cove Investment includes the net asset value of a subordinate
mortgage ("Phoenix mortgage") collateralized by the unsold condominium units
at the Clermont Cove Condominium located in Jersey City, New Jersey, and the
Company's 49% investment in CC Capital Corp., a Delaware corporation that is
the fee owner of the unsold condominium units. Of the original 59 unsold
condominium units owned by CC Capital Corp., 58 units were sold as of
September 30, 1997. On October 8, 1997, the last remaining unit was sold.
(h) 380 Broadway Investment
The Company determines the value of this investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
380 Broadway investment includes the net asset value of a note and mortgage
encumbering a commercial and loft building located at 380 Broadway, New York,
NY which is subject to a foreclosure action. The note has a face amount of
$1,900,000 and an outstanding principal balance of $1,861,208.
(i) Stiles Lane Investment
The Company determines the value of this investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
Stiles Lane Investment includes the net asset value of a note and mortgage
encumbering a vacant industrial warehouse located at Stiles Lane, North Haven,
Connecticut. The note has a face value of $2,500,000, bears interest at a rate
of 5% per annum and is due on January 1, 1999. In addition, North Haven
Capital Corp., a wholly-owned U.S. subsidiary of the Company, was formed to
provide up to $500,000 of additional mortgage financing (the "North Haven
Mortgage") to fund certain improvements to the property, as well as taxes,
insurance and certain operating expenses during the first year. The North
Haven Mortgage closed in March 1997, and provided for draw-downs of up to
$250,000 at closing, and the balance of the loan as and when the property is
at least 50% leased. As of September 30, 1997, $106,364 has been funded
against the North Haven Mortgage. Interest accrues at 10% per annum, and will
be payable concurrent with payments on the first Phoenix mortgage.
(j) 21 Astor Place Investment
The Company determines the value of this investment by applying the
discounted cash flow method to the assets acquired. The amount carried as the
21 Astor Place investment includes the net asset value of a contract to
acquire, through a designee of the Company, the premises located at 21 Astor
Place, New York, N.Y. During
F-69
<PAGE>
PHOENIX FOUR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the first quarter of 1997 another investment company, Stonehenge Partners
("Stonehenge") asserted its rights to purchase 21 Astor Place. On July 18,
1997, a settlement closed which provides for the payment of $500,000 to the
Company in conjunction with Stonehenge's acquisition of 21 Astor Place. In the
event Stonehenge does not purchase the property by December 31, 1997, the
Company has retained its rights to preserve its interest in the property.
2. INVESTMENT ADVISORY FEES
Pursuant to an agreement dated November 5, 1993, Strategic Resources
Corporation ("SRC"), a related party, serves as the Company's primary
investment advisor. The agreement provides for a base management fee to be
paid monthly at the annual rate of 5% of the average monthly gross assets
under management with a minimum of $20,000 per month. In addition, SRC is to
receive a performance fee representing 50% of the monthly increase in net
asset value after providing for a 10% annual return to the investors.
3. LOAN PAYABLE--CAPITAL TRUST
On August 12, 1997 the Company received a loan in the principal amount of
$9,800,000 from Capital Trust, to finance the 642 North Broad Street
Investment. The term of the loan is one year, with an option to extend for an
additional year. Interest on the loan is payable monthly at a rate equal to 6%
above the 30-day LIBOR rate for the initial term, and 8% above the 30-day
LIBOR rate for the extension term. Amortization of principal is also paid
monthly in an amount equal to the amount by which the cash flow from the
underlying collateral exceeds the interest payment due for that period.
As security for the loan, the Company issued collateral assignments of its
interest in the loans relating to the following investments: (I) 642 North
Broad Street, (II) Maspeth Avenue, (III) Stiles Lane, (IV) Hudson Street, (V)
380 Broadway, (VI) Ridge Plaza, and (VII) SVAC's interest in the 92 end loans
on cooperative apartments at Seacrest Towers.
On November 26, 1997 the loan payable to Capital Trust was fully repaid by
the Company.
4. LOAN PAYABLE--BANK
On January 19, 1996, CC Capital Corp. refinanced a portion of the Phoenix
mortgage with First Bank of Americas ("FBA") in the principal amount of
$3,500,000. A portion of the proceeds of the FBA loan was used to reduce the
Phoenix mortgage to $7,138,581, and the Company agreed to subordinate its
first mortgage to the lien of the FBA mortgage (see note 1(g)--Clermont Cove
Investment). The FBA loan bears interest at an annual rate of FBA's prime rate
plus 2% with monthly payments based upon a 15-year amortization schedule
(through December 1996). The loan matures on February 1, 2001 and is
collateralized by a first mortgage on the 59 Clermont Cove units, as well as a
first priority security interest in the 92 end loans held by a subsidiary of
the Company on cooperative apartments located at Seacrest Towers. On December
26, 1996, CC Capital Corp. closed on a modification of the mortgage with FBA.
The modification provided for monthly payments of interest only and a
modification of the required unit release prices that are paid to FBA from the
sale of Clermont Cove units. The unit release prices were reduced from $70,000
to $30,000 for the first twenty units sold, no release payments for the 21st
through 30th closings, and 90% of the sales prices on all closings thereafter.
As of September 30, 1997, the loan was fully repaid.
F-70
<PAGE>
PHOENIX FOUR, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SUBORDINATED NOTE PAYABLE
On October 1, 1996, the Company issued a subordinated promissory note in the
principal amount of $1,000,000 to C.M.R. sa., an unrelated Luxembourg
corporation. The note matures on October 1, 1999 and provides for annual
payments of interest only as follows: (a) 12.50% per annum payable on the
first anniversary of the loan date, (b) 13.25% per annum computed from the
first anniversary loan date due and payable on the second anniversary loan
date and (c) 14.50% per annum computed from the second anniversary loan date
due and payable on the third anniversary loan date.
6. NOTES PAYABLE--RELATED PARTIES
During September and October 1995, the Company issued the following
promissory notes to two entities related to certain stockholders of the
Company:
1. $400,000 promissory note due September 30, 1997
2. $300,000 promissory note due October 1, 1997
The above notes were originally issued for a term of one year at an interest
rate of 15% per annum. They were extended at maturity for an additional one
year period, at an interest rate of 10% per annum. At June 30, 1997, accrued
interest amounted to $52,145. The notes were repaid by the Company during
September, 1997.
7. RELATED PARTY TRANSACTIONS
Certain directors of the Company are also principals of the Company's
primary investment advisor.
The Company incurred legal fees of approximately $318,000 to Fischbein,
Badillo, Wagner, Harding ("FBWH"), counsel to the Company. Certain partners of
FBWH own all of the stock of a corporation which owns a majority interest in
CC Capital Corp. (see Note 1).
A director of the Company, Mr. Paul Knowles, is also a partner of McKinney,
Bancroft & Hughes, counsel and trustee to the Company.
A director of the Company, Mr. Christian Van Pelt, is also a partner of
Christian M. Van Pelt, P.C., counsel to the Company. Mr. Van Pelt is also a
stockholder in SRC.
Site manager fees of $58,752 and reimbursed office salaries of $115,836 were
paid to SRC.
Investment banking fees of $45,000 were paid or are payable to R.H. Arnold &
Co. pursuant to consulting agreements. Mr. Robert H. Arnold, a principal of
the firm, is a director of the Company.
Commissions of $243,673, attributable to the issuance of stock, were paid or
are payable to stockholders/directors of the Company.
8. COMMON STOCK AND COMMON STOCK TRANSACTIONS
Proceeds and payments on common stock as shown in the consolidated statement
of cash flows are in respect of the following number of shares:
<TABLE>
<S> <C>
Balance, January 1, 1997......................................... 34,497.62
Issuance of common stock......................................... 10,385.25
Redemption of common stock....................................... (2,325.30)
----------
Balance, September 30, 1997...................................... $42,557.57
==========
</TABLE>
F-71
<PAGE>
At September 30, 1997, there were 42,557.57 shares of no par value common
stock issued and outstanding and 1,000,000 shares authorized.
The net asset value of a share of common stock at September 30, 1997 is
computed as follows:
<TABLE>
<S> <C>
Stockholders' equity............................................ $35,063,168
===========
Shares issued and outstanding................................... 42,557.57
===========
Net asset value per share....................................... $ 823.90
===========
</TABLE>
F-72
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Apparel Center Owners, Ltd.:
We have audited the accompanying statement of revenue and certain operating
expenses (described in Note 2) of APPAREL CENTER OWNERS, LTD. for the year
ended December 31, 1996. This financial statement is the responsibility of the
Partnership's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with Rule 3-14 of Regulation S-X of the Securities
and Exchange Commission for inclusion in the Form S-1 of Capital Trust and is
not intended to be a complete presentation of the Partnership's revenue and
certain expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenue and certain operating expenses of
Apparel Center Owners, Ltd. for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
April 25, 1997
F-73
<PAGE>
APPAREL CENTER OWNERS, LTD.
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
SEPTEMBER 30, 1997
YEAR ENDED (UNAUDITED SEE
DECEMBER 31, 1996 NOTE 9)
----------------- ------------------
<S> <C> <C>
Revenues:
Rentals, net............................ $14,637,559 $13,610,644
Parking revenues........................ 1,505,861 --
Interest income......................... 54,785 66,940
----------- -----------
Total operating revenues.............. $16,198,205 $13,677,584
----------- -----------
Certain Operating Expenses:
Operating............................... $ 3,482,995 $ 2,207,101
Real estate taxes (Note 6).............. 2,609,105 1,533,891
Utilities............................... 1,792,334 1,322,523
Marketing............................... 1,619,524 1,118,461
Administrative.......................... 1,610,496 909,420
Management fees (Note 5)................ 276,015 192,936
----------- -----------
Total certain expenses................ $11,390,469 $ 7,284,332
----------- -----------
Revenue in Excess of Certain Operating
Expenses................................. $ 4,807,736 $ 6,393,252
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-74
<PAGE>
APPAREL CENTER OWNERS, LTD.
(AN ILLINOIS LIMITED PARTNERSHIP)
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
1. ORGANIZATION
Apparel Center Owners, Ltd. ("ACOL"), an Illinois limited partnership, holds
title to the building known as The Apparel Center, which contains showrooms,
the ExpoCenter, offices and retail space, and an adjacent parking facility.
Mart Holdings Group ("MHG"), an Illinois general partnership, is the managing
general partner of ACOL. Joseph P. Kennedy Enterprises, Inc. (III.) ("JPK-
(III.)") serves as the managing general partner of MHG.
A breakdown of the occupied space as of December 31, 1996, and September 30,
1997 is as follows:
<TABLE>
<CAPTION>
PERCENT SQUARE FOOTAGE
--------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Apparel......................................... 50% 41%
Office/Retail................................... 50 59
--- ---
100% 100%
</TABLE>
2. BASIS OF PRESENTATION
The statement of revenue and certain operating expenses for the year ended
December 31, 1996 and the nine month period ended September 30, 1997
(unaudited) relates to the operations of the Apparel Center Owners, Ltd. The
accompanying financial statement excludes certain expenses, such as interest,
depreciation and amortization, professional fees and other costs not directly
related to the operations of the Partnership, in accordance with Rule 3-14 of
Regulation S-X of the Securities and Exchange Commission. Management is not
aware of any material factors relating to the Partnership which would cause
the reported financial information not to be necessarily indicative of future
operating results.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Reporting--The financial statement is presented on the accrual
basis of accounting.
b. Rental Revenue--Rentals from tenants with scheduled rent increases and
rent abatements are recognized as revenue on a straight-line basis over the
respective lease term.
c. Use of Estimates--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 revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
4. HOTEL LEASE
ACOL entered into a lease with a hotel operator whereby the operator, at its
own expense, constructed a hotel atop The Apparel Center. The lease, which has
a term of 65 years commencing January, 1977, provides for an annual base
rental of $159,600, additional rent payable based on hotel revenue, as
defined, and an allocation of certain real estate taxes, rehabilitation and
maintenance costs.
5. TRANSACTIONS WITH AFFILIATES
Certain owners of ACOL are owners of Merchandise Mart Owners, Ltd. ("MMOL").
In addition, Joseph P. Kennedy Enterprises, Inc. (Delaware) ("JPK-(Del.)"),
which is affiliated with the owners of ACOL, owns
F-75
<PAGE>
APPAREL CENTER OWNERS, LTD.
(AN ILLINOIS LIMITED PARTNERSHIP)
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
Merchandise Mart Properties, Inc. ("MMPI"). As a convenience, certain amounts
are disbursed or collected by one entity on behalf of another.
a. ACOL reimburses MMPI for certain payroll-related expenses incurred on
behalf of ACOL.
b. ACOL paid MMPI management fees of $276,015 and $192,936 during 1996 and
the nine months ended September 30, 1997, respectively. Fees are calculated
using various percentages of gross revenues as adjusted for uncollectible
accounts and as summarized below:
<TABLE>
<CAPTION>
APPLICABLE
TYPE OF REVENUE PERCENTAGE
--------------- ----------
<S> <C>
Apparel......................................................... 3.0%
Office, retail, exposition and hotel............................ 1.5%
</TABLE>
6. REAL ESTATE TAXES
During 1996, ACOL paid its 1995 real estate tax bill amounting to
$2,759,400. The actual tax bill was less than the December 31, 1995, accrual
by $138,064.
7. FUTURE MINIMUM RENTALS UNDER TENANT LEASES
ACOL leases showroom, office and retail space under noncancellable operating
leases with terms ranging from 1 to 15 years. Future minimum rentals to be
received as of December 31, 1996, are summarized as follows:
<TABLE>
<S> <C>
Year ending December 31
1997........................................................ $10,033,000
1998........................................................ 9,016,000
1999........................................................ 7,622,000
2000........................................................ 6,206,000
2001........................................................ 5,645,000
-----------
Future years................................................ 25,418,000
-----------
Total future minimum rentals.................................. $63,940,000
===========
</TABLE>
Two tenants in the building have future minimum lease payments in excess of
71% of the total future minimum rentals. Management does not believe this
represents a credit risk.
8. PROPERTY DAMAGE INSURANCE
Property damage insurance for ACOL and MMOL is written on a combined, agreed
amount basis. The combined, agreed amount exceeds the replacement value of the
Apparel Center. However, based on management's evaluation, the combined
replacement value of the ACOL and MMOL structures and other personal property
exceeds the insured coverage.
F-76
<PAGE>
APPAREL CENTER OWNERS, LTD.
(AN ILLINOIS LIMITED PARTNERSHIP)
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
9. SUBSEQUENT EVENT
As of January 1, 1997, all of the assets and liabilities of Apparel Center
Owners, Ltd. were distributed to two new limited liability companies, World
Trade Center Chicago, L.L.C. and Wolf Point, L.L.C. The former received the
Apparel Center, its related assets, liabilities and capital accounts, while
the latter received the development property, known as Wolf Point, and its
related assets (including the adjacent parking facility), liabilities and
capital accounts. The ownership of these two entities is the same as ACOL.
Accordingly, the accompanying unaudited statement of revenues and certain
operating expenses for the nine month period ended September 30, 1997
represents the results of operations of the World Trade Center Chicago, L.L.C.
F-77
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of 555 West 57th Associates:
We have audited the accompanying statement of revenues and certain operating
expenses, as described in Note A, of 555 West 57th Associates for the year
ended December 31, 1996. This financial statement is the responsibility of the
Partnership's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying statement of revenues and certain expenses was prepared for
the purpose of complying with Rule 3-14 of Regulation S-X of the Securities
and Exchange Commission for inclusion in the Form 8-K of Capital Trust and is
not intended to be a complete presentation of the Partnership's revenues and
expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenues and certain operating expenses of 555
West 57th Associates, as described in Note A, for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
Tackman, Pilla, Arnone and Company,
P.C.
Stamford, Connecticut
February 4, 1997
F-78
<PAGE>
555 WEST 57TH ASSOCIATES
(A GENERAL PARTNERSHIP)
STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, 1997
DECEMBER 31, 1996 (UNAUDITED)
----------------- ------------------
<S> <C> <C>
Revenues
Base rent............................... $14,399,863 $10,241,041
Expense recoveries...................... 2,480,074 2,325,455
----------- -----------
Total Revenues........................ 16,879,937 12,566,496
----------- -----------
Certain Operating Expenses
Real estate taxes....................... 3,153,939 2,304,106
Operating expenses...................... 6,103,168 4,752,697
Management fees......................... 456,160 358,104
General and administrative expenses..... 234,420 239,342
----------- -----------
Total Certain Operating Expenses...... 9,947,687 7,654,249
----------- -----------
Revenues in excess of certain operating
expenses................................. $ 6,932,250 $ 4,912,247
=========== ===========
</TABLE>
See accompanying notes to the financial statement.
F-79
<PAGE>
555 WEST 57TH ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization
555 W. 57th Associates, a New York general partnership (The Partnership),
holds title to a building located at 555 W. 57th Street in New York City which
contains a showroom, automobile sales and maintenance floors, office space,
and parking facilities (the Property).
A breakdown of the occupied space as of December 31, 1996 and September 30,
1997 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DECEMBER 31, 1996 (UNAUDITED)
----------------- ------------------
PERCENT SQUARE PERCENT SQUARE
FOOTAGE FOOTAGE
----------------- ------------------
<S> <C> <C>
Office................................. 64% 64%
Showroom, Automobile Sales and
Maintenance floors.................... 31 17
Parking................................ 5 9
--- ---
100% 90%
=== ===
</TABLE>
In the nine months ended September 30, 1997 the fifth and sixth floors of
the building are being renovated as office space. Management projects the cost
of renovation to bring these floors to rentable office space to be
approximately $4,000,000. Management considers the unoccupied floors a
material factor affecting future rent revenues.
2. Basis of Presentation
The statement of revenues and certain operating expenses for the year ended
December 31, 1996 and the nine months ended September 30, 1997 (unaudited)
relates to the operation of the Partnership's Property. The accompanying
financial statement excludes interest income from treasury bills for the year
ended December 31, 1996 and for the nine months ended September 30, 1997. In
addition, interest income on a note received as part of a termination
agreement has been excluded as has the related termination fee income of
$3,500,000. Certain operating expenses exclude interest expense, depreciation
and amortization of leasing commissions and certain other costs for the year
ended December 31, 1996 and the nine months ended September 30, 1997. It also
excludes a lease penalty paid to a current tenant during the nine months ended
September 30, 1997. Such revenue and expenses are being excluded from the
financial statement in accordance with Rule 3-14 of Regulation S-X which
requires exclusion of certain revenues and expenses and other costs not
comparable to proposed future operations of the Partnership's Property.
3. Recognition of Rental Revenue
The Partnership records revenues from base rent billed to tenants under
long-term leases. Base rent includes amortization of the present value of
lease inducements and level rent calculations for new leases.
4. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Accordingly, actual results could differ from those
estimates.
F-80
<PAGE>
555 WEST 57TH ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. Concentration of Credit Risks
The building and tenants in the building are located in New York City where
the real estate market is recovering from depressed conditions.
NOTE B--RELATED PARTY TRANSACTIONS
Certain payments to the managing agent, a related party, have been reflected
in the financial statement. The managing agent received management fees
totaling $456,160 for the year ended December 31, 1996 and $358,104 for nine
months ended September 30, 1997 based on 3% of rent collected.
NOTE C--LEASES
Revenues from base rent are recorded from long-term tenant leases in the
office building located at 555 W. 57th Street, New York City. At December 31,
1996, the minimum base rent receivable under noncancelable leases is as
follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1997........................................................... $12,744,354
1998........................................................... 12,281,453
1999........................................................... 13,182,578
2000........................................................... 13,121,819
2001........................................................... 13,018,508
Thereafter to 2011............................................. 75,127,511
</TABLE>
One tenant comprises 31% of the base rent revenues for the year ended
December 31, 1996 and two tenants comprise 27% for the nine months ended
September 30, 1997, exclusive of rent income of 25% from its former primary
tenant.
NOTE D--COMMITMENTS AND CONTINGENCIES
During the nine months ended September 30, 1997, the Partnership found that
it may be subject to certain environmental liabilities arising out of the
operation of the Property. The Partnership will accrue such costs when it is
probable that a liability has been incurred and that the amount can be
reasonably estimated.
NOTE E--SUBSEQUENT EVENT
Subsequent to September 30, 1997, the Partnership entered into an agreement
to sell certain of the present partnership interests. If the sale becomes
final, the Property and other assets would be held as tenants-in-common by the
new owners and certain of the former owners.
NOTE F--INTERIM UNAUDITED FINANCIAL INFORMATION
The statement of revenues and certain operating expenses for the nine months
ended September 30, 1997 is unaudited, however, in the opinion of management,
all adjustments consisting of normal recurring adjustments necessary for a
fair presentation of this financial statement for the interim period have been
included. The results of interim periods are not necessarily indicative of
results to be obtained for the full fiscal year.
F-81
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Partners
1325 Limited Partnership
New York, New York
We have audited the accompanying statement of revenue and certain operating
expenses (described in Note 2) of 1325 Limited Partnership (a Delaware Limited
Partnership) for the year ended December 31, 1996. This financial statement is
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying statement of revenue and certain operating expenses was
prepared for the purpose of complying with Rule 3-14 of Regulation S-X of the
Securities and Exchange Commission for inclusion in the Form S-1 of Capital
Trust and is not intended to be a complete presentation of the Partnership's
revenue and expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenue and certain operating expenses of 1325
Limited Partnership for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
Margolin, Winer & Evens LLP
Garden City, New York
March 21, 1997
F-82
<PAGE>
1325 LIMITED PARTNERSHIP
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER SEPTEMBER
31, 1996 30, 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
REVENUE (NOTES 2 AND 3):
Minimum rentals, net................................. $24,254,098 $18,285,881
Expense reimbursements and escalations............... 5,427,262 4,253,213
----------- -----------
Total Revenue...................................... 29,681,360 22,539,094
----------- -----------
CERTAIN OPERATING EXPENSES:
Operating............................................ 3,249,720 2,518,252
Real estate taxes (Note 4)........................... 4,842,105 3,719,088
Utilities............................................ 601,352 453,335
Administrative....................................... 882,287 669,688
Management fees (Note 3)............................. 285,072 245,736
----------- -----------
Total Certain Operating Expenses................... 9,860,536 7,606,099
----------- -----------
REVENUE IN EXCESS OF CERTAIN OPERATING EXPENSES........ $19,820,824 $14,932,995
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE>
1325 LIMITED PARTNERSHIP
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 (UNAUDITED)
1. FORMATION AND BUSINESS ACTIVITY
1325 Limited Partnership (the Partnership) is a limited partnership formed
under the laws of the State of Delaware on November 12, 1987 and is authorized
to conduct business in New York. The Partnership's purpose is to develop,
construct, finance, lease, own and operate a commercial office building,
consisting of approximately 750,000 square feet, known as 1325 Avenue of the
Americas (the Building) on land owned by the Partnership (the Property).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation--The statements of revenue and certain operating
expenses for the year ended December 31, 1996 and the nine months ended
September 30, 1997 (unaudited) include gross operating revenue, exclusive of
interest income, and direct operating expenses, exclusive of mortgage and
other interest expense, depreciation, amortization, non-recurring
administrative expenses, partnership expenses and federal, state and local
income taxes, if any. Amortization of lease incentive costs of $3,138,802 for
the year ended December 31, 1996 and $2,321,745 for the nine months ended
September 30, 1997 is reflected as a reduction of rental income.
Use of estimates--The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts
of revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Rental income--Minimum rentals are recognized on a straight-line basis over
the noncancelable term of the respective leases. Amounts recognized in excess
of amounts actually billed to tenants amounted to $4,624,000 for the year
ended December 31, 1996 and $549,544 for the nine months ended September 30,
1997. The leases generally provide for expense reimbursements and escalations
to be paid in monthly installments.
Income taxes--The Partnership is not subject to federal, state or local
income taxes and, accordingly, makes no provision for income taxes in its
financial statements. The Partnership's taxable income or loss is reportable
by the partners.
3. RELATED PARTY TRANSACTIONS
The Partnership is a party to an agreement with an affiliate whereby the
affiliate provides management services in the rental operations of the
Partnership for a fee based on a percentage of rent collected with a minimum
of $150,000 per year. Amounts charged to the Partnership related to this
agreement were $285,072 and $245,736 for the year ended December 31, 1996 and
the nine months ended September 30, 1997, respectively.
The Partnership is also party to various agreements with affiliated
companies to provide leasing and construction management services. These fees
are capitalized as incurred.
Rental revenue from a tenant that owns a 9.3% limited partner's interest in
the Partnership was $7,419,887 and $5,404,808 for the year ended December 31,
1996 and the nine months ended September 30, 1997, respectively, and rental
revenue from an affiliate of a general partner was $566,261 and $422,326,
respectively.
4. REAL ESTATE TAXES
The Partnership qualified to receive the benefits of the Industrial and
Commercial Incentive Program provided by the City of New York whereby certain
decreasing amounts of the annual real property taxes through June 30, 1997 are
deferred. Beginning in the tax year July 1, 1999, previously deferred amounts
are repayable
F-84
<PAGE>
1325 LIMITED PARTNERSHIP
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 (UNAUDITED)--(CONTINUED)
over a ten year period in equal semi-annual installments without interest. The
discounted amounts of the deferred real property taxes recorded for the year
ended December 31, 1996 and the nine months ended September 30, 1997 were
$330,482 and $73,488, respectively. At December 31, 1996 and September 30,
1997, cumulative deferred real property taxes, undiscounted, amount to
$17,570,071 and $17,689,694, respectively. The Partnership will recover a
portion of the deferred real property taxes through reimbursements from
certain tenants during the above noted ten year period.
5. RENTALS UNDER OPERATING LEASES
The following is a schedule of future minimum rental income as of December
31, 1996 from noncancelable operating leases during the next five years and
thereafter (presented on a straight-line basis).
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997........................................................ $ 27,190,501
1998........................................................ 27,449,941
1999........................................................ 26,688,476
2000........................................................ 25,622,019
2001........................................................ 24,962,602
Thereafter.................................................. 203,794,337
------------
Total future minimum rentals.................................. $335,707,876
============
</TABLE>
Future minimum rentals related to the affiliate leases are included in the
above amounts.
6. INTERIM UNAUDITED FINANCIAL INFORMATION
The statement of revenue and certain operating expenses for the nine months
ended September 30, 1997 is unaudited. However, in the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of this financial statement for the interim period have been
included. The results of interim periods are not necessarily indicative of the
results to be obtained for a full fiscal year.
F-85
<PAGE>
[LOGO OF CAPITAL TRUST]
<PAGE>
PROSPECTUS
9,000,000 Shares
[LOGO OF CAPITAL TRUST]
CLASS A COMMON SHARES OF BENEFICIAL INTEREST
----------------
OF THE 9,000,000 CLASS A COMMON SHARES OF BENEFICIAL INTEREST, $1.00 PAR
VALUE, IN CAPITAL TRUST BEING OFFERED HEREBY, 1,600,000 SHARES ARE
BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 7,400,000 SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE
U.S. UNDERWRITERS. ALL OF THE CLASS A COMMON SHARES
OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. THE
CLASS A COMMON SHARES ARE TRADED ON THE NEW YORK
STOCK EXCHANGE ("NYSE") UNDER THE SYMBOL
"CT." ON DECEMBER 10, 1997, THE REPORTED
LAST SALE PRICE OF THE CLASS A COMMON
SHARES ON THE NYSE WAS $11 1/2
PER SHARE.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
PRICE $11 A SHARE
----------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share............................. $11.00 $.66 $10.34
Total(3).............................. $99,000,000 $5,940,000 $93,060,000
</TABLE>
- --------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2)Before deduction of expenses payable by the Company estimated at
$1,200,000.
(3) The Company has granted the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
1,350,000 additional Shares at the price to public less underwriting
discounts and commissions for the purpose of covering over-allotments,
if any. If the U.S. Underwriters exercise such option in full, the total
price to public, underwriting discounts and commissions and proceeds to
Company will be $113,850,000, $6,831,000 and $107,019,000, respectively.
See "Underwriters."
----------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about December 16, 1997 at the
offices of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment
therefor in immediately available funds.
----------------
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH INTERNATIONAL
DEUTSCHE MORGAN GRENFELL
December 10, 1997
