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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 1-10150
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ISTAR FINANCIAL INC.
(Exact name of registrant as specified in its charter)
MARYLAND 95-6881527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1114 AVENUE OF THE AMERICAS, 27TH FLOOR 10036
NEW YORK, NY 10036 (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (212)930-9400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Exchange on which registered:
COMMON STOCK, $0.001 PAR VALUE NEW YORK STOCK EXCHANGE
9.375% SERIES B CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
9.200% SERIES C CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
8.000% SERIES D CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant; (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (ii) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of August 8, 2000, there were 85,716,354 shares of common stock of IStar
Financial Inc., $0.001 par value per share outstanding ("Common Stock").
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ISTAR FINANCIAL INC.
INDEX TO FORM 10-Q
PAGE
--------
PART I. Consolidated Financial Information.......................... 3
Item 1. Financial Statements:
Consolidated Balance Sheets at June 30, 2000 and December
31, 1999.................................................... 3
Consolidated Statements of Operations--For the three- and
six- month periods ended June 30, 2000 and 1999............. 4
Consolidated Statements of Changes in Shareholders'
Equity--For the six- month period ended June 30, 2000....... 5
Consolidated Statements of Cash Flows--For the three- and
six- month periods ended June 30, 2000 and 1999............. 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 32
PART II. Other Information........................................... 42
Item 1. Legal Proceedings........................................... 42
Item 2. Changes in Securities and Use of Proceeds................... 42
Item 3. Defaults Upon Senior Securities............................. 42
Item 4. Submission of Matters to a Vote of Security Holders......... 42
Item 5. Other Information........................................... 42
Item 6. Exhibits and Reports on Form 8-K............................ 42
Signatures.................................................. 43
2
PART I--CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISTAR FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF AS OF
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------------
(UNAUDITED)
ASSETS
Loans and other lending investments, net.................... $2,253,339 $2,003,506
Real estate subject to operating leases, net................ 1,653,512 1,714,284
Cash and cash equivalents................................... 32,718 34,408
Restricted cash............................................. 16,138 10,195
Marketable securities....................................... 95 4,344
Accrued interest and operating lease income receivable...... 18,392 16,211
Deferred operating lease income receivable.................. 5,637 1,147
Deferred expenses and other assets.......................... 61,264 29,074
Investment in IStar Operating............................... 174 383
---------- ----------
Total assets.............................................. $4,041,269 $3,813,552
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities.... $ 52,536 $ 54,773
Dividends payable........................................... 5,225 53,667
Debt obligations............................................ 2,138,060 1,901,204
---------- ----------
Total liabilities......................................... 2,195,821 2,009,644
---------- ----------
Commitments and contingencies............................... -- --
Minority interest in consolidated entities.................. 2,565 2,565
Shareholders' equity:
Series A Preferred Shares, $0.001 par value, liquidation
preference $220,000, 4,400,000 shares authorized and
outstanding at June 30, 2000 and December 31, 1999........ 4 4
Series B Preferred Shares, $0.001 par value, liquidation
preference $50,000, 2,000,000 shares issued and
outstanding at June 30, 2000 and December 31, 1999........ 2 2
Series C Preferred Shares, $0.001 par value, liquidation
preference $32,500, 1,300,000 shares issued and
outstanding at June 30, 2000 and December 31, 1999........ 1 1
Series D Preferred Shares, $0.001 par value, liquidation
preference $100,000, 4,000,000 shares issued and
outstanding at June 30, 2000 and December 31, 1999........ 4 4
Common Stock, $0.001 par value, 200,000,000 shares
authorized, 85,284,909 and 84,985,236 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively.............................................. 85 85
Warrants and options........................................ 17,922 17,935
Accumulated other comprehensive income (losses)............. -- (229)
Additional paid in capital.................................. 1,959,207 1,953,972
Retained earnings (deficit)................................. (93,797) (129,992)
Treasury stock (at cost).................................... (40,545) (40,439)
---------- ----------
Total shareholders' equity................................ 1,842,883 1,801,343
---------- ----------
Total liabilities and shareholders' equity................ $4,041,269 $3,813,552
========== ==========
The accompanying notes are an integral part of the financial statements.
3
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
REVENUE:
Interest income.................................... $ 66,864 $52,007 $126,947 $101,926
Operating lease income............................. 47,223 3,723 93,495 7,450
Other income....................................... 3,827 3,525 8,360 5,303
-------- ------- -------- --------
Total revenue.................................... 117,914 59,255 228,802 114,679
-------- ------- -------- --------
COSTS AND EXPENSES:
Interest expense................................... 42,770 20,556 80,559 40,249
Property operating costs........................... 2,959 -- 6,284 --
Depreciation and amortization...................... 8,862 1,365 17,871 2,730
General and administrative......................... 7,808 1,185 14,711 1,669
Provision for possible credit losses............... 1,500 1,250 3,000 2,250
Stock option compensation expense.................. 586 -- 1,134 --
Advisory fees...................................... -- 5,016 -- 9,681
-------- ------- -------- --------
Total costs and expenses......................... 64,485 29,372 123,559 56,579
-------- ------- -------- --------
Net income before minority interest, gain on sale of
net lease assets and extraordinary loss............ 53,429 29,883 105,243 58,100
Minority interest in consolidated entities........... (41) -- (82) --
Gain on sale of net lease assets..................... 441 -- 974 --
-------- ------- -------- --------
Net income before extraordinary loss................. 53,829 29,883 106,135 58,100
Extraordinary loss on early extinguishment of debt... -- -- (317) --
-------- ------- -------- --------
Net income........................................... $ 53,829 $29,883 $105,818 $ 58,100
-------- ------- -------- --------
Preferred dividend requirements...................... $ (9,227) $(5,308) $(18,454) $(10,615)
-------- ------- -------- --------
Net income allocable to common shareholders.......... $ 44,602 $24,575 $ 87,364 $ 47,485
======== ======= ======== ========
Basic earnings per common share(1)................... $ 0.52 $ 0.46 $ 1.03 $ 0.90
-------- ------- -------- --------
Diluted earnings per common share.................... $ 0.52 $ 0.43 $ 1.02 $ 0.84
======== ======= ======== ========
EXPLANATORY NOTE:
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(1) Net income per basic common share excludes 1% of net income allocable to
the Company's class B shares prior to November 4, 1999. These shares were
exchanged for Common Stock concurrently with the closing of the Company's
acquisition of TriNet and related transactions on November 4, 1999. As a
result, the Company now has a single class of Common Stock outstanding.
The accompanying notes are an integral part of the financial statements.
4
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
(UNAUDITED)
SERIES A SERIES B SERIES C SERIES D COMMON WARRANTS ACCUMULATED OTHER
PREFERRED PREFERRED PREFERRED PREFERRED STOCK AND COMPREHENSIVE TREASURY
STOCK STOCK STOCK STOCK AT PAR OPTIONS INCOME STOCK
--------- --------- --------- --------- -------- -------- ----------------- --------
Balance at December 31,
1999.................... $ 4 $ 2 $ 1 $ 4 $ 85 $17,935 $(229) $(40,439)
Exercise of options....... -- -- -- -- -- (13) -- --
Dividends declared--
preferred stock......... -- -- -- -- -- -- -- --
Dividends declared--
common stock............ -- -- -- -- -- -- -- --
Acquisition of ACRE
Partners................ -- -- -- -- -- -- -- --
Restricted stock units
issued to employees in
lieu of cash bonuses.... -- -- -- -- -- -- -- --
Restricted stock units
granted to employees.... -- -- -- -- -- -- -- --
Treasury stock............ -- -- -- -- -- -- -- (106)
Net income for the
period.................. -- -- -- -- -- -- -- --
Change in accumulated
other comprehensive
income.................. -- -- -- -- -- -- 229 --
---- ---- ---- ---- ---- ------- ----- --------
Balance at June 30,
2000.................... $ 4 $ 2 $ 1 $ 4 $ 85 $17,922 $ -- $(40,545)
==== ==== ==== ==== ==== ======= ===== ========
ADDITIONAL RETAINED
PAID-IN EARNING
CAPITAL (DEFICIT) TOTAL
---------- --------- ----------
Balance at December 31,
1999.................... $1,953,972 $(129,992) $1,801,343
Exercise of options....... 96 -- 83
Dividends declared--
preferred stock......... 165 (18,453) (18,288)
Dividends declared--
common stock............ -- (51,170) (51,170)
Acquisition of ACRE
Partners................ 3,637 -- 3,637
Restricted stock units
issued to employees in
lieu of cash bonuses.... 1,125 -- 1,125
Restricted stock units
granted to employees.... 212 -- 212
Treasury stock............ -- -- (106)
Net income for the
period.................. -- 105,818 105,818
Change in accumulated
other comprehensive
income.................. -- -- 229
---------- --------- ----------
Balance at June 30,
2000.................... $1,959,207 $ (93,797) $1,842,883
========== ========= ==========
The accompanying notes are an integral part of the financial statements.
5
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
Cash flows from operating activities:
Net income.................................................. $ 53,829 $ 29,883 $ 105,818 $ 58,100
Adjustments to reconcile net income to cash flows provided
by operating activities:
Minority interest......................................... 41 -- 82 --
Equity in (earnings) loss of unconsolidated joint ventures
and subsidiaries........................................ (2,087) 8 (2,411) 113
Depreciation and amortization............................. 11,846 2,745 22,980 5,650
Amortization of discounts/premiums, deferred interest and
costs on lending investments............................ (4,683) (5,428) (11,750) (12,730)
Distributions from operating joint ventures............... 1,426 -- 2,378 --
Straight-line operating lease income adjustments.......... (2,249) -- (4,531) --
Realized (gains) losses on sales of securities............ -- -- 229 --
Gain on sale of net lease assets.......................... (441) -- (974) --
Extraordinary loss on early extinguishment of debt........ -- -- 317 --
Provision for possible credit losses...................... 1,500 1,250 3,000 2,250
Changes in assets and liabilities:
(Increase) decrease in restricted cash.................. (4,882) 649 (5,943) 2,202
(Increase) decrease in accrued interest and operating
lease income receivable............................... (768) 633 (2,181) 789
Increase in deferred expenses and other assets.......... (5,940) (623) (8,833) (1,034)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities........................ 421 1,743 (4,336) (1,964)
--------- --------- --------- ---------
Cash flows provided by operating activities............. 48,013 30,860 93,845 53,376
--------- --------- --------- ---------
Cash flows from investing activities:
New investment originations/acquisitions................ (231,248) (182,932) (443,173) (337,250)
Principal fundings on existing loan commitments......... (21,267) (15,597) (37,809) (22,724)
Net proceeds from sale of net lease assets.............. 100,974 -- 146,265 --
Repayments of and principal collections from loans and
other lending investments............................. 41,429 207,737 163,232 264,310
Net investments in and advances to unconsolidated joint
ventures.............................................. (11,305) 765 (11,973) 860
Capital expenditures on real estate subject to operating
leases................................................ (1,224) -- (3,082) --
--------- --------- --------- ---------
Cash flows provided by (used in) investing activities... (122,641) 9,973 (186,540) (94,804)
--------- --------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
facilities............................................ (562,304) (41,689) (497,127) 45,459
Borrowings under term loans............................. 60,000 209,400 90,000 364,800
Repayments under term loans............................. (230,629) (172,919) (240,355) (298,602)
Borrowings under repurchase agreements.................. 27,981 -- 27,981 --
Repayments under repurchase agreements.................. (2,273) (6,038) (2,392) (6,491)
Borrowings under bond offerings......................... 857,015 -- 857,015 --
Common dividends paid................................... (51,170) (22,261) (99,611) (43,967)
Preferred dividends paid................................ (9,144) (5,225) (18,288) (6,152)
Minority interest....................................... (41) -- (82) --
Extraordinary loss on early extinguishment of debt...... -- -- (317) --
Payments for deferred financing costs................... (23,858) (345) (25,771) (5,158)
Increase in loan costs.................................. (25) -- (131) --
Purchase of treasury stock.............................. -- -- -- --
Proceeds from exercise of options....................... 83 225 83 947
--------- --------- --------- ---------
Cash flows provided by (used in) financing activities... 65,635 (38,852) 91,005 50,836
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents............ (8,993) 1,981 (1,690) 9,408
Cash and cash equivalents at beginning of period............ 41,711 17,537 34,408 10,110
--------- --------- --------- ---------
Cash and cash equivalents at end of period.................. $ 32,718 $ 19,518 $ 32,718 $ 19,518
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................ $ 34,595 $ 19,562 $ 71,445 $ 38,359
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements
6
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS
ORGANIZATION--IStar Financial Inc. (the "Company") began its business in
1993 through private investment funds formed to capitalize on inefficiencies in
the real estate finance market. In March 1998, these funds contributed their
approximately $1.1 billion of assets to the Company's predecessor, Starwood
Financial Trust, in exchange for a controlling interest in that company. Since
that time, the Company has grown by originating new lending and leasing
transactions, as well as through corporate acquisitions. Specifically, in
September 1998, the Company acquired the loan origination and servicing business
of a major insurance company, and in December 1998, the Company acquired the
mortgage and mezzanine loan portfolio of its largest private competitor.
Additionally, in November 1999, the Company acquired TriNet Corporate Realty
Trust, Inc. ("TriNet"), which was then the largest publicly traded company
specializing in the net leasing of corporate office and industrial facilities
(the "TriNet Acquisition"). The TriNet Acquisition was structured as a
stock-for-stock merger of TriNet with a subsidiary of the Company. Concurrent
with the TriNet Acquisition, the Company also acquired its external advisor (the
"Advisor Transaction") in exchange for shares of common stock of the Company
("Common Stock") and converted its organizational form to a Maryland corporation
(the "Incorporation Merger"). As part of the conversion to a Maryland
corporation, the Company replaced its dual class common share structure with a
single class of Common Stock. The Company's Common Stock began trading on the
New York Stock Exchange under the symbol "SFI" in November 1999.
BUSINESS--The Company believes it is the largest publicly traded finance
company in the United States focused exclusively on the commercial real estate
industry. The Company, which is taxed as a real estate investment trust
("REIT"), provides structured mortgage, mezzanine and lease financing through
its nationwide origination, acquisition and servicing platform. The Company's
investment strategy targets specific sectors of the real estate credit markets
in which it can deliver value-added, flexible financial solutions to its
customers, thereby differentiating its financial products from those offered by
other capital providers.
The Company has implemented its investment strategy by: (i) focusing on the
origination of large, highly structured mortgage, mezzanine and lease financings
where customers require flexible financial solutions, and avoiding commodity
businesses in which there is significant direct competition from other providers
of capital; (ii) developing direct relationships with borrowers and corporate
tenants as opposed to sourcing transactions through intermediaries;
(iii) adding value beyond simply providing capital by offering borrowers and
corporate tenants specific lending expertise, flexibility, speed, certainty and
continuing relationships beyond the closing of a particular financing
transaction; and (iv) taking advantage of market anomalies in the real estate
financing markets when the Company believes credit is mispriced by other
providers of capital such as the spread between lease yields and the yields on
corporate tenants' underlying credit obligations.
The Company intends to continue to emphasize a mix of portfolio financing
transactions to create built-in diversification and single-asset financings for
properties with strong, long-term positioning.
NOTE 2--BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been
prepared in conformity with the instructions to Form 10-Q and Article 10,
Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles ("GAAP") for complete financial statements. The
Consolidated Financial Statements include the accounts of the Company, its
qualified REIT subsidiaries, and its majority-owned
7
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BASIS OF PRESENTATION (CONTINUED)
and controlled partnership. Certain third-party mortgage servicing operations
are conducted through IStar Operating Inc. ("IStar Operating"), a taxable
corporation which is not consolidated with the Company for financial reporting
or income tax purposes. The Company owns all of the preferred stock and a 95%
economic interest in IStar Operating, which is accounted for under the equity
method for financial reporting purposes. In addition, the Company has an
investment in TriNet Management Operating Company, Inc. ("TMOC"), a taxable
noncontrolled subsidiary of the Company, which is also accounted for under the
equity method. Further, certain other investments in partnerships or joint
ventures which the Company does not control are also accounted for under the
equity method. All significant intercompany balances and transactions have been
eliminated in consolidation.
In the opinion of management, the accompanying Consolidated Financial
Statements contain all adjustments, consisting of normal and recurring accruals,
necessary for a fair presentation of the Company's financial condition at
June 30, 2000 and December 31, 1999 and the results of its operations, changes
in shareholders' equity and its cash flows for the three- and six-month periods
ended June 30, 2000 and 1999, respectively. Such operating results are not
necessarily indicative of the results that may be expected for any other interim
periods or the entire year.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LOANS AND OTHER LENDING INVESTMENTS, NET--As described in Note 5 "Loans and
Other Lending Investments," includes the following investments: senior
mortgages, subordinate mortgages, partnership loans/ unsecured notes, loan
participations and other lending investments. In general, management considers
its investments in this category as held-to-maturity and, accordingly, reflects
such items at amortized historical cost.
REAL ESTATE SUBJECT TO OPERATING LEASES AND DEPRECIATION--Real estate
subject to operating leases is generally recorded at cost. Certain improvements
and replacements are capitalized when they extend the useful life, increase
capacity or improve the efficiency of the asset. Repairs and maintenance items
are expensed as incurred. The Company capitalizes interest costs incurred during
the land development or construction period on qualified development projects
including investments in joint ventures accounted for under the equity method.
Depreciation is computed using the straight line method of cost recovery over
estimated useful lives of 40.0 years for buildings, seven years for furniture
and equipment, the shorter of the remaining lease term or expected life for
tenant improvements, and the remaining life of the building for building
improvements.
Real estate assets to be disposed of are reported at the lower of their
carrying amount or fair value less costs to sell. The Company also periodically
reviews long-lived assets to be held and used for an impairment in value
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. In management's opinion, real estate assets
to be held and used are not carried at amounts in excess of their estimated
recoverable amounts.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash held in
banks or invested in money market funds with original maturity terms of less
than 90 days.
MARKETABLE SECURITIES--From time to time, the Company invests excess working
capital in marketable securities such as those issued by the Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"),
and Federal Home Loan Mortgage Corporation ("FHLMC"). Although the Company
generally intends to hold such investments for investment purposes, it may, from
8
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
time to time, sell any of its investments in these securities as part of its
management of liquidity. Accordingly, the Company considers such investments as
"available-for-sale" and reflects such investments at fair market value with
changes in fair market value reflected as a component of shareholders' equity.
REPURCHASE AGREEMENTS--The Company may enter into sales of securities or
loans under agreements to repurchase the same security or loan. The amounts
borrowed under repurchase agreements are carried on the balance sheet as part of
debt obligations at the amount advanced plus accrued interest. Interest incurred
on the repurchase agreements is reported as interest expense.
REVENUE RECOGNITION--The Company's revenue recognition policies are as
follows:
LOANS AND OTHER LENDING INVESTMENTS: The Company generally intends to hold
all of its loans and other lending investments to maturity. Accordingly, it
reflects all of these investments at amortized cost less allowance for loan
losses, acquisition premiums or discounts, deferred loan fees and undisbursed
loan funds. The Company may acquire loans at either premiums or discounts based
on the credit characteristics of such loans. These premiums or discounts are
recognized as yield adjustments over the lives of the related loans. If loans
that were acquired at a premium or discount are prepaid, the Company immediately
recognizes the unamortized premium or discount as a decrease or increase in the
prepayment gain or loss, respectively. Loan origination or exit fees, as well as
direct loan origination costs, are also deferred and recognized over the lives
of the related loans as a yield adjustment. Interest income is recognized using
the effective interest method applied on a loan-by-loan basis.
Certain of the Company's loans provide for accrual of interest at specified
rates which differ from current payment terms. Interest is recognized on such
loans at the accrual rate subject to management's determination that accrued
interest and outstanding principal are ultimately collectible, based on the
underlying collateral and operations of the borrower.
Prepayment penalties or yield maintenance payments from borrowers are
recognized as additional income when received. Certain of the Company's loan
investments provide for additional interest based on the borrower's operating
cash flow or appreciation of the underlying collateral. Such amounts are
considered contingent interest and are reflected as income only upon certainty
of collection.
LEASING INVESTMENTS: Operating lease revenue is recognized on the
straight-line method of accounting from the later of the date of the origination
of the lease or the date of acquisition of the facility subject to existing
leases. Accordingly, contractual lease payment increases are recognized evenly
over the term of the lease. The difference between lease revenue recognized
under this method and actual cash receipts is recorded as a deferred operating
lease income receivable on the balance sheet.
PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's accounting policies
require that an allowance for estimated credit losses be maintained at a level
that management, based upon an evaluation of known and inherent risks in the
portfolio, considers adequate to provide for possible credit losses. Specific
valuation allowances are established for impaired loans in the amount by which
the carrying value, before allowance for estimated losses, exceeds the fair
value of collateral less disposition costs on an individual loan basis.
Management considers a loan to be impaired when, based upon current information
and events, it believes that it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
on a timely basis. Management measures these impaired loans at the fair value of
the loans' underlying collateral less estimated disposition costs. Impaired
loans may be left on accrual status during the period the Company is pursuing
repayment of the loan, however, these loans are
9
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
placed on non-accrual status at such time that the loans either: (i) become
90 days delinquent; or (ii) management determines the borrower is incapable of,
or has ceased efforts toward, curing the cause of the impairment. While on
non-accrual status, interest income is recognized only upon actual receipt.
Impairment losses are recognized as direct write-downs of the related loan with
a corresponding charge to the provision for possible credit losses. Charge-offs
occur when loans, or a portion thereof, are considered uncollectible and of such
little value that further pursuit of collection is not warranted. Management's
periodic evaluation of the allowance for possible credit losses is based upon an
analysis of the portfolio, historical and industry loss experience, economic
conditions and trends, collateral values and quality and other relevant factors.
INCOME TAXES--The Company intends to operate in a manner consistent with and
to elect to be treated as a REIT. As a REIT, the Company is subject to federal
income taxation at corporate rates on its REIT taxable income; however, the
Company is allowed a deduction for the amount of dividends paid to its
stockholders, thereby subjecting the distributed net income of the Company to
taxation at the shareholder level only. IStar Operating and TMOC are not
consolidated for federal income tax purposes and are taxed as corporations. For
financial reporting purposes, current and deferred taxes are provided for in the
portion of earnings recognized by the Company with respect to its interest in
IStar Operating and TMOC.
NET INCOME ALLOCABLE TO COMMON SHARES--Net income allocable to common shares
excludes 1% of net income allocable to the class B shares prior to November 4,
1999. The class A and class B shares were exchanged for Common Stock in
connection with the TriNet Acquisition, as more fully described in Note 4.
EARNINGS (LOSS) PER COMMON SHARES--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").
USE OF ESTIMATES--The preparation of financial statements in conformity with
GAAP 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.
NEW ACCOUNTING STANDARDS--In June 1997, the FASB issued Statement of
Financial Accounting Standards 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 adopted the requirements of this pronouncement in its financial
statements beginning with its reporting for fiscal 1999. As of June 30, 2000,
the Company maintains two basic business segments for reporting purposes: real
estate lending and credit tenant leasing.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). On June 23, 1999 the FASB voted to defer the effectiveness of SFAS
No. 133 for one year. SFAS No. 133 is now effective for fiscal years beginning
after June 15, 2000, but earlier application is permitted as of the beginning of
any fiscal quarter
10
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
subsequent to June 15, 1998. SFAS No. 133 establishes accounting and reporting
standards for derivative financial instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as: (i) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment; (ii) a hedge
of the exposure to variable cash flows of a forecasted transaction; or (iii) in
certain circumstances a hedge of a foreign currency exposure. The Company
currently plans to adopt this pronouncement, as amended by Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities--deferral of the Effective Date of FASB
Statement No. 133" and Statement of Financial Accounting Standards No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an Amendment of FASB Statement No. 133," as required effective
January 1, 2001. The adoption of SFAS No. 133 is not expected to have a material
financial impact on the financial position or results of operations of the
Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company will be required to adopt
SAB 101 by the fourth quarter of fiscal 2001. The Company has not completed its
determination of the impact of the adoption of SAB 101 on its consolidated
financial position or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
will be required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company does not expect the application of
FIN 44 to have a material impact on its consolidated financial position or
results of operations.
NOTE 4--CAPITAL TRANSACTIONS
PRIOR TRANSACTIONS WITH AFFILIATES--Through a series of transactions
beginning in November 1993 and through March 18, 1998, the date of the
Recapitalization Transactions described in the following section, Starwood
Mezzanine Investors, L.P. ("Starwood Mezzanine") and certain other affiliates
(collectively, the "Starwood Investors") had acquired controlling interests in
the Company represented by an aggregate of 874,016 class A shares, or 69.46% of
the then total class A shares outstanding, and 629,167 class B shares,
representing 100% of the then total class B shares outstanding. Together, the
class A and class B shares held by the Starwood Investors represented 79.64% of
the voting interests of the Company.
During the quarter ended March 31, 1998, the Company consummated certain
transactions and entered into agreements which significantly recapitalized and
expanded its capital resources, as well as modified future operations, including
those described herein below in "Recapitalization Transactions" and "Advisor
Transaction."
RECAPITALIZATION TRANSACTIONS--As more fully discussed above, pursuant to a
series of transactions beginning in March 1994 and including the exercise of the
class A and class B warrants in January 1997, the Starwood Investors acquired
joint ownership of 69.46% and 100% of the outstanding class A shares and
11
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
class B shares of the Company, respectively, through which they controlled
approximately 79.64% of the voting interests in the Company as of December 31,
1997. Prior to the consummation of these transactions on March 18, 1998
(collectively, the "Recapitalization Transactions"), Starwood Mezzanine also
owned 761,491 units which represented the remaining 91.95% of APMT Limited
Partnership not held by the Company. Those units were convertible into cash, an
additional 761,491 class A shares of the Company, or a combination of the two,
as determined by the Company.
On March 18, 1998, each outstanding unit held by Starwood Mezzanine was
exchanged for one class A share of the Company and, concurrently, the
partnership was liquidated through a distribution of its net assets to the
Company, its then sole partner.
Simultaneously, Starwood Mezzanine contributed various real estate loan
investments to the Company in exchange for 9,191,333 class A shares and
$25.5 million in cash, as adjusted. Starwood Opportunity Fund IV, L.P., one of
the Starwood Investors ("SOF IV"), contributed loans and other lending
investments, $17.9 million in cash and certain letters of intent in exchange for
41,179,133 class A shares of the Company and a cash payment of $324.3 million.
Concurrently, the holders of the class B shares who were affiliates of the
Starwood Investors acquired 25,565,979 additional class B shares sufficient to
maintain existing voting preferences pursuant to the Company's Amended and
Restated Declaration of Trust. Immediately after these transactions, the
Starwood Investors owned approximately 99.27% of the outstanding class A shares
of the Company and 100% of the class B shares. Assets acquired from Starwood
Mezzanine have been reflected using step acquisition accounting at predecessor
basis adjusted to fair value to the extent of post-transaction third-party
ownership. Assets acquired from SOF IV have been reflected at their fair market
value.
ADVISORY AGREEMENT--In connection with the Recapitalization Transactions,
the Company and its former external advisor (the "Advisor"), an affiliate of the
Starwood Investors, entered into an Advisory Agreement (the "Advisory
Agreement") pursuant to which the Advisor managed the affairs of the Company,
subject to the Company's purpose and investment policy, the investment
restrictions and the directives of the Board of Directors. The services provided
by the Advisor included the following: (i) identifying investment opportunities
for the Company; (ii) advising the Company with respect to and effecting
acquisitions and dispositions of the Company's investments; (iii) monitoring,
managing and servicing the Company's loan portfolio; and (iv) arranging debt
financing for the Company. The Advisor was prohibited from acting in a manner
inconsistent with the express direction of the Board of Directors, and reported
to the Board of Directors and the officers of the Company with respect to its
activities.
The Company paid the Advisor a quarterly base management fee of 0.3125%
(1.25% per annum) of the "Book Equity Value" of the Company determined as of the
last day of each quarter but estimated and paid in advance subject to
recomputation. "Book Equity Value" was generally defined as the excess of the
book value of the assets of the Company over all liabilities of the Company.
In addition, the Company paid the Advisor a quarterly incentive fee of 5.00%
of the Company's "Adjusted Net Income" during each quarter that the Adjusted Net
Income for such quarter (restated and annualized as a rate of return on the
Company's Book Equity Value for such quarter) equaled or exceeded the "Benchmark
BB Rate." "Adjusted Net Income" was generally defined as the Company's gross
income less the Company's expenses for the applicable quarter (including the
base fee for such quarter but not the incentive fee for such quarter). In
calculating both Book Equity Value and Adjusted Net Income, real estate-related
depreciation and amortization (other than amortization of financing costs and
other prepaid
12
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
expenses to the extent such costs and prepaid expenses have previously been
booked as an asset of the Company) were not deducted. The Advisor was also
reimbursed for certain expenses it incured on behalf of the Company.
The Advisory Agreement had an initial term of three years subject to an
automatic renewal for one-year periods unless the Company had been liquidated or
a Termination Event (as defined in the Advisory Agreement and which generally
included violations of the Advisory Agreement by the Advisor, a bankruptcy event
of the Advisor or the imposition of a material liability on the Company as a
result of the Advisor's bad faith, willful misconduct, gross negligence or
reckless disregard of duties) had occurred and was continuing. In addition, the
Advisor could have terminated the Advisory Agreement on 60 days' written notice
to the Company and the Company could have terminated the Advisory Agreement upon
60 days' written notice if a Termination Event had occurred or if the decision
to terminate were based on affirmative vote of the holders of two thirds or more
of the voting shares of the Company at the time outstanding.
Prior to the transactions described below through which, among other things,
the Company became internally-managed, the Company was dependent on the services
of the Advisor and its officers and employees for the successful execution of
its business strategy.
1999 TRANSACTIONS--On November 3, 1999, consistent with previously announced
terms, the Company's shareholders approved a series of transactions including:
(i) the acquisition, through a merger, of TriNet; (ii) the acquisition, through
a merger and a contribution of interests, of 100% of the ownership interests in
the Advisor; and (iii) the change in form, through a merger, of the Company's
organization into a Maryland corporation. TriNet stockholders also approved the
TriNet Acquisition on November 3, 1999. These transactions were consummated on
November 4, 1999. As part of these transactions, the Company also replaced its
dual class common share structure with a single class of Common Stock.
TRINET ACQUISITION--TriNet merged with and into a subsidiary of the Company,
with TriNet surviving as a wholly-owned subsidiary of the Company (the "Leasing
Subsidiary"). In the TriNet Acquisition, each share of TriNet common stock was
converted into 1.15 shares of Common Stock, resulting in an aggregate issuance
of 28.9 million shares of Common Stock. Each share of TriNet Series A, Series B
and Series C Cumulative Redeemable Preferred Stock was converted into a share of
Series B, Series C or Series D (respectively) Cumulative Redeemable Preferred
Stock of the Company. The Company's preferred stock issued to the former TriNet
preferred stockholders has substantially the same terms as the TriNet preferred
stock, except that the new Series B, C, and D preferred stock has additional
voting rights not associated with the TriNet preferred stock. The holders of the
Company's Series A preferred stock will retain the same rights and preferences
as existed prior to the TriNet Acquisition.
The TriNet Acquisition was accounted for as a purchase. Because the
Company's stock prior to the transaction was largely held by the Starwood
Investors, and, as a result, the stock was not widely traded relative to the
amount of shares outstanding, the pro forma financial information presented
below was prepared utilizing a stock price of $28.14 per TriNet share, which was
the average stock price of TriNet during the five-day period before and after
the TriNet Acquisition was agreed to and announced.
ADVISOR TRANSACTION--Contemporaneously with the consummation of the TriNet
Acquisition, the Company acquired 100% of the interests in the Advisor in
exchange for total consideration of four million shares of Common Stock. For
accounting purposes, the Advisor Transaction was not considered the
13
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
acquisition of a "business" in applying Accounting Principles Board Opinion
No. 16, "Business Combinations" and, therefore, the market value of the Common
Stock issued in excess of the fair value of the net tangible assets acquired of
approximately $94.5 million was charged to operating income as a one-time item
in the fourth quarter of 1999, rather than capitalized as goodwill.
INCORPORATION MERGER--Prior to the consummation of the TriNet Acquisition
and the Advisor Transaction, the Company changed its form from a Maryland trust
to a Maryland corporation in the Incorporation Merger, which technically
involved a merger of the Company with a wholly-owned subsidiary formed solely to
effect such merger. In the Incorporation Merger, the class B shares were
converted into shares of Common Stock on a 49-for-one basis (the same ratio at
which class B shares were previously convertible into class A shares), and the
class A shares were converted into shares of Common Stock on a one-for-one
basis. As a result, the Company no longer has multiple classes of common shares.
The Incorporation Merger was treated as a transfer of assets and liabilities
under common control. Accordingly, the assets and liabilities transferred from
Starwood Financial Trust to Starwood Financial Inc. were reflected at their
predecessor basis and no gain or loss was recognized.
The Company declared and paid a special dividend of one million shares of
its Common Stock payable pro rata to all holders of record of its Common Stock
following completion of the Incorporation Merger, but prior to the effective
time of the TriNet Acquisition and the Advisor Transaction.
PRO FORMA INFORMATION--The summary unaudited pro forma consolidated
statement of operations for the six-month period ended June 30, 1999 is
presented as if the following transactions, consummated in November 1999, had
occurred on January 1, 1999: (i) the TriNet Acquisition; (ii) the Advisor
Transaction; and (iii) the borrowing necessary to consummate the aforementioned
transactions. The unaudited pro forma information is based upon the historical
consolidated results of operations of the Company and TriNet for the six-month
period ended June 30, 1999, after giving effect to the events described above.
14
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
FOR THE SIX
MONTHS ENDED
JUNE 30, 1999
-------------
(UNAUDITED)
REVENUE:
Interest income........................................... $105,969
Operating lease income.................................... 94,765
Other income.............................................. 6,236
--------
Total revenue............................................. 206,970
--------
EXPENSES:
Interest expense.......................................... 66,239
Property operating costs.................................. 7,760
Depreciation and amortization............................. 17,911
General and administrative................................ 10,280
Provision for possible credit losses...................... 2,250
Stock option compensation expense......................... 1,134
--------
Total expenses............................................ 105,574
--------
Income before minority interest........................... 101,396
Minority interest in consolidated entities................ (81)
--------
Net income from continuing operations..................... $101,315
--------
Preferred dividend requirements........................... (18,453)
--------
Net income from continuing operations allocable to common
shareholders............................................ $ 82,862
========
BASIC EARNINGS PER SHARE:
Basic earnings per common share............................. $ 0.95
========
Weighted average number of common shares outstanding........ 87,257
========
Investments and dispositions are assumed to have taken place as of
January 1, 1999; however, loan originations and acquisitions are not reflected
in these pro forma numbers until the actual origination or acquisition date by
the Company. General and administrative costs represent estimated expense levels
as an internally-managed Company.
The pro forma financial information is not necessarily indicative of what
the consolidated results of operations of the Company would have been as of and
for the period indicated, nor does it purport to represent the results of
operations for future periods.
15
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND OTHER LENDING INVESTMENTS
The following is a summary description of the Company's loans and other
lending investments (in thousands):
CARRYING VALUE AS OF
# OF ORIGINAL PRINCIPAL -------------------------- EFFECTIVE
BORROWERS COMMITMENT BALANCES JUNE 30, DECEMBER 31, MATURITY
TYPE OF INVESTMENT UNDERLYING PROPERTY TYPE IN CLASS AMOUNT OUTSTANDING 2000 1999 DATES
- ------------------ ------------------------- --------- ----------- ----------- ----------- ------------ ---------
(UNAUDITED)
Senior Mortgages Office/Hotel/Mixed 19 $1,068,066 $1,007,057 $1,007,277 $ 938,040 2000 to
Use/Apartment/Retail/ 2009
Resort
Subordinated Office/Hotel/Mixed 18 580,835 547,730 530,954 540,441 2000 to
Mortgages (4) Use/Retail/Conference 2007
Center
Partnership Loans/ Office/Hotel/Residential/ 14 408,273 408,162 406,793 309,768 2000 to
Unsecured Notes Land 2028
Loan Participations Office/Retail 4 127,497 128,039 127,897 152,782 2000 to
2005
Other Lending Real Estate-Related 11 N/A N/A 190,918 69,975 2002 to
Investments Securities/Ventures 2007
---------- ----------
Gross Carrying Value $2,263,839 $2,011,006
Provision for Possible Credit Losses (10,500) (7,500)
---------- ----------
Total, Net $2,253,339 $2,003,506
========== ==========
PRINCIPAL PARTICI
CONTRACTUAL INTEREST CONTRACTUAL INTEREST AMORTIZ- PATION
TYPE OF INVESTMENT PAYMENT RATES(1) ACCRUAL RATES(3) ATION FEATURES
- ------------------ -------------------- -------------------- --------- --------
Senior Mortgages Fixed: 7.28% to Fixed: 7.28% to Yes(2) Yes(3)
20.00% 24.00%
Variable: LIBOR + Variable: LIBOR +
1.25% to 5.00% 1.25% to 5.00%
Subordinated Fixed: 9.53% to Fixed: 9.53% to Yes(2) Yes(3)
Mortgages (4) 15.25% 17.00%
Variable: LIBOR + Variable: LIBOR +
4.50% to 5.80% 4.00% to 5.80%
Partnership Loans/ Fixed: 8.00% to Fixed: 8.50% to Yes Yes(3)
Unsecured Notes 15.00% 17.50%
Variable: LIBOR + Variable: LIBOR +
5.37% to 7.50% 5.37% to 7.50%
Loan Participations Fixed: 10.00% to Fixed: 10.00% to No Yes(3)
13.60% 13.60%
Variable: LIBOR + Variable: LIBOR +
4.00% to 6.00% 4.00% to 6.00%
Other Lending Fixed: 10.00% to Fixed: 10.00% to No No
Investments 12.75% 12.75%
Gross Carrying Value
Provision for Possibl
Total, Net
EXPLANATORY NOTES:
- ------------------------
(1) Substantially all variable-rate loans are based on 30-day LIBOR and reprice
monthly.
(2) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity. In addition, one of the loans permits additional
annual prepayments of principal of up to $1.3 million without penalty at the
borrower's option.
(3) Under some of these loans, the Company receives additional payments
representing additional contingent interest from participation in available
cash flow from operations of the property and the proceeds, in excess of a
base amount, arising from a sale or refinancing of the property.
(4) The unfunded commitment amount on one of the Company's construction loans,
included in subordinated mortgages, was $2.6 million and $16.2 million as of
June 30, 2000 and December 31, 1999, respectively.
16
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND OTHER LENDING INVESTMENTS (CONTINUED)
During the six-month periods ended June 30, 2000 and 1999, respectively, the
Company and its affiliated ventures originated or acquired an aggregate of
approximately $361.0 million and $337.3 million in loans and other lending
investments, funded $37.8 million and $22.7 million under existing loan
commitments and received principal repayments of $163.2 million and
$264.3 million.
The Company has reflected additional provisions for possible credit losses
of approximately $1.5 million and $1.3 million in its results of operations
during the three months ended June 30, 2000 and 1999, respectively, and
$3.0 million and $2.3 million during the six months ended June 30, 2000 and
1999, respectively. There was no other activity in the Company's reserve
balances during these periods. These provisions represent portfolio reserves
based on management's evaluation of general market conditions, the Company's and
industry loss experience, likelihood of delinquencies or defaults and the
underlying collateral. No direct impairment reserves on specific loans were
considered necessary. Management may transfer reserves between general and
specific reserves as considered necessary.
NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES
The Company's investments in real estate subject to operating leases, at
cost, were as follows (in thousands):
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
Buildings and improvements.................................. $1,250,545 $1,390,933
Land and land improvements.................................. 354,877 277,872
Less accumulated depreciation............................... (30,907) (14,627)
---------- ----------
1,574,515 1,654,178
Investments in unconsolidated joint ventures................ 78,997 60,106
---------- ----------
Real estate subject to operating leases, net................ $1,653,512 $1,714,284
========== ==========
Under certain leases, the Company receives additional participating lease
payments to the extent gross revenues of the tenant exceed a base amount. The
Company earned no such additional participating lease payments in the three- or
six-month periods ended June 30, 2000 and 1999.
At June 30, 2000, the Company had investments in seven joint ventures:
(i) TriNet Sunnyvale Partners L.P. ("Sunnyvale"), whose external partners are
John D. O'Donnell, Trustee, John W. Hopkins, and Donald S. Grant;
(ii) Corporate Technology Associates LLC ("CTC I"), whose external member is
Corporate Technology Centre Partners LLC; (iii) Sierra Land Ventures ("Sierra"),
whose external joint venture partner is Sierra-LC Land, Ltd.; (iv) Corporate
Technology Centre Associates II LLC ("CTC II"), whose external joint venture
member is Corporate Technology Centre Partners II LLC; (v) TriNet Milpitas
Associates, LLC ("Milpitas"), whose external member is The Prudential Insurance
Company of America; (vi) TN-CP Venture One ("TN-CP"), whose external partner is
Sierra Office Venture Three, Ltd.; and (vii) ACRE Simon, L.L.C. ("ACRE"), whose
external partner is William R. Simon & Sons Realty Investments, L.L.C. These
ventures were formed for the purpose of operating, acquiring and in certain
cases, developing corporate net lease facilities. Effective November 22, 1999,
the joint venture partners, who are affiliates of Whitehall Street Real Estate
Limted Partnership, IX and The Goldman Sachs Group L.P. (collectively, the
"Whitehall Group") in W9/TriNet Poydras, LLC ("Poydras") elected to exercise
their right under the partnership agreement, which was accelerated as a result
of the TriNet Acquisition, to exchange all of their membership units for 350,746
shares of Common Stock of the Company and a $767,000 distribution of available
cash. The Whitehall Group's membership units were valued at $33.32, after
consideration for the 1.15 exchange ratio, (see Note 4) and converted into
shares of Common Stock on a one-for-one basis. As a consequence, Poydras is now
wholly owned and is reflected on a consolidated basis in these financial
statements.
At June 30, 2000, the ventures comprised 29 facilities totaling 3.1 million
square feet, six of which are under development totalling 1.0 million square
feet. Additionally, 17.7 acres of land are held for sale. The Company's combined
investment in these joint ventures at June 30, 2000 was $79.0 million. The joint
ventures' purchase price for the 29 facilities owned at June 30, 2000 was
$348.8 million. The purchase price of the land held for sale was $6.8 million.
In the aggregate, the joint ventures had total assets of $417.8 million, total
liabilities of $322.8 million,
17
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
and net income of $3.9 million. The Company accounts for these investments under
the equity method because its joint venture partners have certain participating
rights which limit the Company's control. The Company's investments in and
advances to unconsolidated joint ventures, its percentage ownership interests,
its respective income and pro rata share of third-party debt as of June 30, 2000
are presented below (in thousands):
ACCRUED JOINT
UNCONSOLIDATED OWNERSHIP EQUITY NOTES INTEREST TOTAL VENTURE INTEREST
JOINT VENTURES % INVESTMENT RECEIVABLE INCOME INVESTMENT INCOME RECEIVABLE
- -------------- ---------- ---------- ---------- -------- ---------- -------- ----------
Operating:
Sunnyvale........................ 44.7% $$13,547 $ -- $ -- $ 13,547 $ 732 $ --
CTC II........................... 50.0% 4,177 21,561 5,070 30,808 (417) 2,669
Milpitas......................... 50.0% 20,762 -- -- 20,762 1,383 --
TN-CP............................ 50.0% 7,595 -- -- 7,595 263 --
ACRE Simon....................... 20.0% 5,111 -- -- 5,111 (3) --
Development:
Sierra........................... 50.0% 5,890 -- -- 5,890 166 --
CTC I............................ 50.0% 21,915 -- -- 21,915 493 --
------- ------- ------- -------- ------- -------
Total.......................... $78,997 $21,561 $ 5,070 $105,628 $ 2,617 $ 2,669
======= ======= ======= ======== ======= =======
PRO RATA
SHARE OF
UNCONSOLIDATED TOTAL THIRD-PARTY
JOINT VENTURES INCOME DEBT
- -------------- -------- -----------
Operating:
Sunnyvale........................ $ 732 $ 7,385
CTC II........................... 2,252 8,190
Milpitas......................... 1,383 40,889
TN-CP............................ 263 18,982
ACRE Simon....................... (3) 4,133
Development:
Sierra........................... 166 724
CTC I............................ 493 36,550
------- --------
Total.......................... $ 5,286 $116,853
======= ========
At June 30, 2000 the Company was the guarantor for 50% of CTC I's
$73.1 million construction loan. CTC I has commenced the development of phase II
of the project. As a result, the Company has an additional commitment to fund
further development costs in the amount of approximately $6.0 million. This
amount will vary depending upon the amount of senior third-party financing
obtained.
Currently, the limited partners of the Sunnyvale partnership have the option
to convert their partnership interest into cash; however, the Company may elect
to deliver 297,728 shares of Common Stock in lieu of cash. Additionally,
commencing in February 2002, subject to acceleration under certain
circumstances, partnership units held by certain partners of Milpitas may be
converted into 984,476 shares of Common Stock.
18
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS
As of June 30, 2000 and December 31, 1999, the Company had debt obligations
under various arrangements with financial institutions as follows (in
thousands):
CARRYING VALUE AS OF
MAXIMUM -----------------------------
AMOUNT JUNE 30, DECEMBER 31,
AVAILABLE 2000 1999 STATED INTEREST RATES
---------- ----------- ------------ --------------------------------
(UNAUDITED)
SECURED REVOLVING CREDIT
FACILITIES:
Line of credit................... $ 675,000 $ 216,024 $ 592,984 LIBOR + 1.50%
Line of credit................... 500,000 114,785 169,952 LIBOR + 1.50% - 1.75%(1)
---------- ---------- ----------
Total secured revolving credit
facilities..................... 1,175,000 330,809 762,936
UNSECURED REVOLVING CREDIT
FACILITIES:
Line of credit................... 350,000 121,700 186,700 LIBOR + 1.55%
Line of credit(2)................ 100,000 -- -- LIBOR + 2.00% - 2.25%
---------- ---------- ----------
Total revolving credit
facilities................... $1,625,000 452,509 949,636
==========
SECURED TERM LOANS:
Secured by real estate under operating
leases....................................... 152,155 153,618 7.44%
Secured by senior and subordinate mortgage
investments.................................. -- 109,398 LIBOR + 1.00%
Secured by senior mortgage investment.......... -- 90,902 LIBOR + 1.00%
Secured by corporate lending investment........ 60,000 -- LIBOR + 2.50%
Secured by real estate under operating
leases....................................... 78,610 78,610 LIBOR + 1.38%
Secured by real estate under operating
leases....................................... 64,689 73,279 Fixed: 6.00% - 11.38%
Variable: LIBOR + 1.00%
Secured by senior mortgage investment.......... 54,000 54,000 LIBOR + 1.75%(6)
---------- ----------
Total term loans............................... 409,454 559,807
Less debt discounts............................ (250) (521)
---------- ----------
Total secured term loans....................... 409,204 559,286
ISTAR ASSET RECEIVABLES SECURED
NOTES:
Class A........................................ 480,795 -- LIBOR + 0.30%
Class B........................................ 94,055 -- LIBOR + 0.50%
Class C........................................ 105,813 -- LIBOR + 1.00%
Class D........................................ 52,906 -- LIBOR + 1.45%
Class E........................................ 123,447 -- LIBOR + 2.75%
---------- ----------
Total IStar Asset Receivables secured notes.... 857,016 --
UNSECURED NOTES:
6.75% Dealer Remarketable Securities(8)........ 125,000 125,000 6.75%
7.30% Notes.................................... 100,000 100,000 7.30%
7.70% Notes.................................... 100,000 100,000 7.70%
7.95% Notes.................................... 50,000 50,000 7.95%
---------- ----------
Total unsecured notes.......................... 375,000 375,000
Less debt discount(9).......................... (20,017) (21,481)
---------- ----------
Total unsecured notes.......................... 354,983 353,519
OTHER DEBT OBLIGATIONS........................... 64,348 38,763 Various
---------- ----------
TOTAL DEBT OBLIGATIONS........................... $2,138,060 $1,901,204
========== ==========
EXPECTED/
SCHEDULED
MATURITY DATE
-----------------
SECURED REVOLVING CREDIT
FACILITIES:
Line of credit................... March 2001
Line of credit................... August 2002(1)
Total secured revolving credit
facilities.....................
UNSECURED REVOLVING CREDIT
FACILITIES:
Line of credit................... May 2001
Line of credit(2)................ January 2002
Total revolving credit
facilities...................
SECURED TERM LOANS:
Secured by real estate under oper
leases......................... March 2009
Secured by senior and subordinate
investments.................... August 2000(3)
Secured by senior mortgage invest August 2000(3)
Secured by corporate lending inve June 2003(4)
Secured by real estate under oper
leases......................... June 2001
Secured by real estate under oper
leases.........................
(5)
Secured by senior mortgage invest November 2000(6)
Total term loans.................
Less debt discounts..............
Total secured term loans.........
ISTAR ASSET RECEIVABLES SECURED
NOTES:
Class A.......................... August 2003(7)
Class B.......................... October 2003(7)
Class C.......................... January 2004(7)
Class D.......................... June 2004(7)
Class E.......................... January 2005(7)
Total IStar Asset Receivables sec
UNSECURED NOTES:
6.75% Dealer Remarketable Securit March 2013
7.30% Notes...................... March 2001
7.70% Notes...................... July 2017
7.95% Notes...................... May 2006
Total unsecured notes............
Less debt discount(9)............
Total unsecured notes............
OTHER DEBT OBLIGATIONS............. Various
TOTAL DEBT OBLIGATIONS.............
EXPLANATORY NOTES:
- ----------------------------------
(1) On February 4, 2000, the Company extended the term of its $500.0 million
facility to August 2002 and increased pricing under the facility to
LIBOR + 1.50% to 1.75%.
(2) As effected for the July 7, 2000 increase from $50.0 million to
$100.0 million through syndication.
(3) On May 17, 2000, the Company repaid these secured term loan obligations.
(4) The Company has a one-year extension option in June 2003.
(5) Other mortgage loans mature at various dates through 2010.
(6) Currently based on a one-month LIBOR contract, which was repriced from a
12-month LIBOR contract in May 2000. In addition, the Company extended its
$54.0 million term loan to November 2000.
(7) Payments on these bonds are dependent on principal repayments on loan assets
which collateralize these obligations. The dates indicated above represent
the expected date on which the final payment would occur for such class
based on the assumptions that the loans which collateralize the obligations
are not voluntarily prepaid, the loans are paid on their effective maturity
dates and no extensions of the effective maturity dates of any of the loans
are granted. The final maturity date for the underlying indenture on
classes A, B, C, D, and E is September 25, 2022.
(8) Subject to mandatory tender on March 31, 2003, to either the dealer or the
Leasing Subsidiary. The initial coupon of 6.75% applies to first five-year
term through the mandatory tender date. If tendered to the dealer, the notes
must be remarketed. The rates reset upon remarketing.
(9) These obligations were assumed as part of the TriNet Acquisition. As part of
the accounting for the purchase, these fixed rate obligations were
considered to have stated interest rates which were below the then
prevailing market rates at which the Leasing Subsidiary could issue new debt
obligations and, accordingly, the Company ascribed a market discount to each
obligation. Such discounts will be amortized as an adjustment to interest
expense using the effective interest method over the related term of the
obligations.
19
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS (CONTINUED)
Availability of amounts under the secured revolving credit facilities are
based on percentage borrowing base calculations. Except as indicated above, all
debt obligations are based on 30-day LIBOR and reprice monthly.
Certain of the Leasing Subsidiary's debt obligations contain financial
covenants pertaining to the subsidiary. Such obligations also establish
restrictions on certain intercompany transactions between the Leasing Subsidiary
and other Company affiliates. Further, such obligations also provide for a limit
on distributions from the Leasing Subsidiary at 85% of cash flow from operations
on a rolling four-quarter basis.
On January 31, 2000, the Company closed a new unsecured revolving credit
facility. The facility is led by a major commercial bank, which committed
$50.0 million of the facility amount. On July 7, 2000, the Company increased the
facility amount to $100.0 million through syndication. The new facility has a
two-year primary term and a one-year extension, at the Company's option, and
bears interest at LIBOR plus 2.00% to 2.25%, depending upon certain conditions.
On February 4, 2000, the Company extended the term of its existing
$500.0 million secured credit facility. The Company extended the original
August 2000 maturity date to August 2002, through a one-year extension to the
facility's draw period and an additional one-year "term out" period during which
outstanding principal amortizes 25% per quarter. In connection with the
extension, the Company and the facility lender also expanded the range of assets
that the lender would accept as collateral under the facility. In exchange for
the extension and expansion, the Company agreed to increase the facility's
interest rate from LIBOR plus 1.25% to 1.50%, to a revised rate of LIBOR plus
1.50% to 1.75%, depending upon certain conditions.
On May 17, 2000, the Company closed the inaugural offering under its
proprietary matched funding program, IStar Asset Receivables ("STARS"),
Series 2000-1. In the initial transaction, a wholly-owned subsidiary of the
Company issued $896.5 million of investment grade bonds secured by the
subsidiary's assets, which had an aggregate outstanding principal balance of
approximately $1.2 billion at inception. Principal payments received on the
assets will be utilized to repay the most senior class of the bonds then
outstanding. The maturity of the bonds match funds the maturity of the
underlying assets financed under the program. The Company initially purchased
the class F bonds at a par value of $38.2 million, which the Company financed
with a $27.8 million repurchase agreement maturing in May 2001, which is
included in other debt obligations in the preceding table. On July 17, 2000, the
Company sold, at par, $5.0 million of the class F bonds to an institutional
investor. For accounting purposes, these transactions were treated as secured
financings.
On June 20, 2000, the Company closed a $60.0 million term loan secured by a
corporate lending investment it originated in the first quarter of 2000. The new
loan replaces a $30.0 million interim facility, and effectively match funds the
expected weighted average maturity of the underlying corporate loan asset. The
loan has a three-year primary term and a one-year extension, at the Company's
option, and bears interest at LIBOR plus 2.50%.
During the six-month period ended June 30, 2000, the Company incurred an
extraordinary loss of approximately $0.3 million as a result of the early
retirement of certain secured debt obligations of its Leasing Subsidiary.
20
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS (CONTINUED)
Future expected/scheduled maturities of outstanding long-term debt
obligations are as follows (in thousands):
2000 (remaining six months)................................. $ 69,236
2001........................................................ 631,120
2002........................................................ 15,170
2003........................................................ 634,850
2004........................................................ 195,015
Thereafter.................................................. 612,936
----------
Total principal maturities.................................. 2,158,327
Net unamortized debt (discounts)/premiums................... (20,267)
----------
Total debt obligations...................................... $2,138,060
==========
NOTE 8--STOCKHOLDERS' EQUITY
Prior to November 4, 1999, the Company was authorized to issue
105.0 million shares, representing 70.0 million class A shares and 35.0 million
class B shares, with a par value of $1.00 and $0.01 per share, respectively.
Class B shares were required to be issued by the Company in an amount equal to
one half of the number of class A shares outstanding. Class A and class B shares
were each entitled to one vote per share with respect to the election of
directors and other matters. Pursuant to the Declaration of Trust, the class B
shares were convertible at the option of the class B shareholders into class A
shares on the basis of 49 class B shares for one class A share. However, the
holder of class B shares had agreed with the Company that it would not convert
the class B shares into class A shares without the approval of a majority of
directors that were not affiliated with such holder. All distributions of cash
were made 99% to the holders of class A shares and 1% to the holders of class B
shares.
On December 15, 1998, for an aggregate purchase price of $220.0 million, the
Company issued 4.4 million shares of Series A Preferred Stock and warrants to
acquire 6.1 million common shares of Common Stock, as adjusted for dilution, at
$34.35 per share. The warrants are exercisable on or after December 15, 1999 at
a price of $34.35 per share and expire on December 15, 2005. The proceeds were
allocated between the two securities issued based on estimated relative fair
values.
As more fully described in Note 4, the Company consummated a series of
transactions on November 4, 1999, in which its class A and class B shares were
exchanged into a single class of Common Stock. The Company's charter now
provides for the issuance of up to 200.0 million shares of Common Stock, par
value $0.001 per share, and 30.0 million shares of preferred stock. As part of
these transactions, the Company adopted articles supplementary creating four
series of preferred stock designated as 9.5% Series A Cumulative Redeemable
Preferred Stock, consisting of 4.4 million shares, 9.375% Series B Cumulative
Redeemable Preferred Stock, consisting of 2.3 million shares, 9.20% Series C
Cumulative Redeemable Preferred Stock, consisting of approximately 1.5 million
shares, and 8.0% Series D Cumulative Redeemable Preferred Stock, consisting of
4.6 million shares. The Series B, C and D Cumulative Redeemable Preferred Stock
were issued in the TriNet Acquisition in exchange for similar issuances of
TriNet stock then outstanding. The Series A, B, C and D Cumulative Redeemable
Preferred Stock are redeemable without premium at the option of the Company at
their respective liquidation preferences beginning on December 15, 2003,
June 15, 2001, August 15, 2001 and October 8, 2002, respectively.
21
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
STOCK REPURCHASE PROGRAM: The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets and excess cash
flow from operations, but also using borrowings under its credit facilities if
the Company determines that it is advantageous to do so. As of June 30, 2000 and
December 31, 1999, the Company had repurchased approximately 2.3 million shares,
at an aggregate cost of approximately $40.4 million.
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
RISK MANAGEMENT--In the normal course of its on-going business operations,
the Company encounters economic risk. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or different bases, than its
interest-earning assets. Credit risk is the risk of default on the Company's
loan assets that results from a property's, borrower's or tenant's inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of loans, securities available for sale and purchased
mortgage servicing rights due to changes in interest rates or other market
factors, including the rate of prepayments of principal and the value of the
collateral underlying loans and the valuation of net lease facilities held by
the Company.
USE OF DERIVATIVE FINANCIAL INSTRUMENTS--The Company's use of derivative
financial instruments is primarily limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposure. The
principal objective of such arrangements is to minimize the risks and/or costs
associated with the Company's operating and financial structure as well as to
hedge specific anticipated transactions. The counterparties to these contractual
arrangements are major financial institutions with which the Company and its
affiliates may also have other financial relationships. The Company is
potentially exposed to credit loss in the event of nonperformance by these
counterparties. However, because of their high credit ratings, the Company does
not anticipate that any of the counterparties will fail to meet their
obligations.
The Company has entered into LIBOR interest rate caps struck at 9.00%, 7.50%
and 7.50% in notional amounts of $300.0 million, $40.4 million and
$38.3 million, respectively, which expire in March 2001, January 2001 and
June 2001, respectively. In addition, in connection with the TriNet Acquisition,
the Company acquired LIBOR interest rate caps currently struck at 7.75%, 7.75%
and 7.50% in notional amounts of $75.0 million, $35.0 million, and
$75.0 million, respectively, which expire in December 2004, December 2004 and
August 2001, respectively.
In connection with the closing of STARS, Series 2000-1 in May 2000, the
Company entered into a LIBOR interest rate cap struck at 10.00% in the notional
amount of $312.0 million, and simultaneously sold a LIBOR interest rate cap with
the same terms. Since these instruments do not reduce the Company's net interest
rate risk exposure, they do not qualify as hedges and changes in their
respective values are charged to earnings. As the significant terms of these
arrangements are substantially the same, the effects of a revaluation of these
two instruments are expected to substantially offset one another. At June 30,
2000 and December 31, 1999, the net fair value of the Company's interest rate
caps were $1.1 million and $2.2 million, respectively.
22
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
The Company has entered into $342.0 million of interest rate swaps to
effectively fix the interest rate on a portion of the Company's floating-rate
term loan obligations. In connection with the TriNet Acquisition, the Company
acquired an interest rate swap agreement which, together with certain existing
interest rate cap agreements, effectively fix the interest rate on
$75.0 million of the Leasing Subsidiary's LIBOR-based borrowings at 5.58% plus
the applicable margin through December 1, 2004. Management expects that it will
have aggregate LIBOR-based borrowings at the Leasing Subsidiary in excess of the
notional amount for the duration of the swap. The actual borrowing cost to the
Company with respect to indebtedness covered by the swap will depend upon the
applicable margin over LIBOR for such indebtedness, which will be determined by
the terms of the relevant debt instruments. In June 2000, an interest rate swap
with a notional amount of approximately $112.0 million matured. At June 30, 2000
and December 31, 1999, the fair value of the Company's interest rate swaps were
$3.4 million and $3.4 million, respectively.
The Company was pursuing and/or recently consummated certain anticipated
long-term fixed rate borrowings and had entered into certain derivative
instruments based on U.S. Treasury securities to hedge the potential effects of
interest rate movements on these transactions. Under these agreements, the
Company would generally receive additional cash flow at settlement if interest
rates rise and pay cash if interest rates fall. The effects of such receipts or
payments will be deferred and amortized over the term of the specific related
fixed-rate borrowings.
In the event that, in the opinion of management, it is no longer probable
that the remaining forecasted transaction will occur under terms substantially
equivalent to those projected, the Company will cease recognizing such
transactions as hedges and immediately recognize related gains or losses based
on actual settlement or estimated settlement value of the underlying derivative
contract.
During the year ended December 31, 1999, the Company settled an aggregate
notional amount of approximately $63.0 million that was outstanding under such
agreements, resulting in a receipt of approximately $0.6 million which had been
deferred pending completion of the planned fixed-rate financing transaction.
Subsequently, the transaction was modified and actually was consummated as a
variable-rate financing transaction. As a result, the previously deferred
receipt no longer qualified for hedge accounting treatment and the $0.6 million
was recognized as a gain included in other income in the consolidated statement
of operations for the three- and six-month periods ended June 30, 2000 in
connection with the closing of STARS, Series 2000-1.
During the year ended December 31, 1999, the Company refinanced its
$125.0 million term loan maturing March 15, 1999 with a $155.4 million term loan
maturing March 5, 2009. The new term loan bears interest at 7.44% per annum,
payable monthly, and amortizes over an approximately 22-year schedule. The new
term loan represented forecasted transactions for which the Company had
previously entered into U.S. Treasury-based hedging transactions. The net
$3.4 million cost of the settlement of the related interest rate hedges has been
deferred and will be amortized as an increase to the effective financing cost of
the new term loan over its effective 10-year term.
CREDIT RISK CONCENTRATIONS--Concentrations of credit risks arise when a
number of borrowers or tenants related to the Company's investments are engaged
in similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations, including those to the Company, to be similarly
affected by changes in economic conditions. The Company regularly monitors
various segments of its portfolio to assess potential concentrations of
23
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
credit risks. Management believes the current credit risk portfolio is
reasonably well diversified and does not contain any unusual concentration of
credit risks.
Substantially all of the Company's real estate subject to operating leases
(including those held by joint ventures), loans and other lending investments
are collateralized by facilities located in the United States, with significant
concentrations (i.e., greater than 10%) as of June 30, 2000 in California
(27.6%) and Texas (14.2%). As of June 30, 2000, the Company's investments also
contain significant concentrations in the following asset/collateral types:
office (49.4%), hotel/resorts (16.6%), retail (7.3%) and industrial (6.6%).
The Company underwrites the credit of prospective borrowers and tenants and
often requires them to provide some form of credit support such as corporate
guarantees or letters of credit. Although the Company's loans and other lending
investments and net lease assets are geographically diverse and the borrowers
and tenants operate in a variety of industries, to the extent the Company has a
significant concentration of interest or operating lease revenues from any
single borrower or tenant, the inability of that borrower or tenant to make its
payment could have an adverse effect on the Company. As of June 30, 2000, the
Company's five largest borrowers or tenants collectively accounted for
approximately 13.2% of the Company's annualized interest and operating lease
revenue.
NOTE 10--INCOME TAXES
Although originally formed to qualify as a REIT under the Code for the
purpose of making and acquiring various types of mortgage and other loans,
during 1993 through 1997, the Company failed to qualify as a REIT. As confirmed
by a closing agreement with the Internal Revenue Service (the "IRS") obtained in
March 1998, the Company was eligible and elected to be taxed as a REIT for the
tax years commencing on January 1, 1998. The Company did not incur any material
tax liabilities as a result of its operations during such years.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and income tax purposes, as well as operating loss and tax credit carry
forwards. A valuation allowance is recorded if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
income tax asset will not be realized. Given the limited nature of the Company's
operations and assets and liabilities from 1993 through 1997, the only deferred
tax assets were net operating loss carry forwards ("NOL's") of approximately
$4.0 million, which arose during such periods. Since the Company has elected to
be treated as a REIT for its tax years beginning January 1, 1998, the NOL's have
expired unutilized. Accordingly, no net deferred tax asset value, after
consideration of a 100% valuation allowance, has been reflected in these
financial statements as of June 30, 2000 or December 31, 1999 nor a net tax
provision for the three- and six-month periods ended June 30, 2000 and 1999.
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS
The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to
provide incentive compensation for officers, other key employees and directors
of the Company. The Plan provides for awards of stock options and restricted
stock and other performance awards. The maximum number of shares of Common Stock
available for awards under the Plan is 9% of the outstanding shares of Common
Stock, calculated on a fully diluted basis, from time to time; provided that,
the number of shares of Common Stock reserved for grants of options designated
as incentive stock options is 5.0 million, subject
24
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
to certain antidilution provisions in the Plan. All awards under the Plan, other
than automatic awards to non-employee directors, are at the discretion of the
Board or a committee of the Board. At June 30, 2000, a total of approximately
7.7 million shares of Common Stock were available for awards under the Plan, of
which options to purchase approximately 4.0 million shares of Common Stock were
outstanding.
Concurrently with the Recapitalization Transactions, the Company issued
approximately 2.5 million (as adjusted) fully vested and immediately exercisable
options to purchase class A shares at $14.72 (as adjusted) per share to the
Advisor with a term of ten years. The Advisor granted a portion of these options
to its employees and the remainder allocated to an affiliate. In general, the
grants to the Advisor's employees provided for scheduled vesting over a
predefined service period of three to five years and, in some cases, provided
for accelerated vesting based on a change in control of the Advisor or
completion of certain liquidity transactions. These options expire concurrently
with the original option grant to the Advisor. Upon consummation of the Advisor
Transaction these individuals became employees of the Company.
In connection with the TriNet Acquisition, outstanding options to purchase
TriNet stock under TriNet's stock option plans were converted into options to
purchase shares of Common Stock on substantially the same terms, except that
both the exercise price and number of shares issuable upon exercise of the
TriNet options were adjusted to give effect to the merger exchange ratio of 1.15
shares of Common Stock for each share of TriNet common stock. In addition,
options held by the directors of TriNet and certain executive officers became
fully vested as a result of the transaction.
The TriNet directors received a number of options of the Company to purchase
Common Stock on a fully vested basis on substantially the same terms as the
TriNet options, in each case giving effect to the 1.15 exchange ratio for their
options.
Also, as a result of the TriNet Acquisition, TriNet terminated its dividend
equivalent rights program. The program called for immediate vesting and cash
redemption of all dividend equivalent rights upon a change of control of 50% or
more of the voting common stock. Concurrent with the TriNet Acquisition, all
dividend equivalent rights were vested and amounts due to former TriNet
employees of approximately $8.3 million were paid by the Company. Such payments
were included as part of the purchase price paid by the Company to acquire
TriNet for financial reporting purposes.
Changes in options outstanding during the six months ended June 30, 2000 was
as follows:
NUMBER OF SHARES
----------------------------------- AVERAGE
NON-EMPLOYEE STRIKE
EMPLOYEES DIRECTORS OTHER PRICE
--------- ------------ -------- --------
OPTIONS OUTSTANDING, DECEMBER 31, 1999.............. 3,001,270 183,177 764,146 $19.08
Granted in 2000................................... 1,697,746 80,000 50,000 $17.01
Exercised in 2000................................. (5,821) -- -- $14.72
Forfeited in 2000................................. (669,906) -- -- $21.59
--------- ------- -------
OPTIONS OUTSTANDING, JUNE 30, 2000.................. 4,023,289 263,177 814,146
========= ======= =======
25
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 2000:
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------ ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE CURRENTLY EXERCISE
EXERCISE PRICE RANGE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------- ----------- ----------- -------- ----------- --------
$14.72.................................. 2,222,055 7.70 $14.72 1,242,253(1) $14.72
$16.69-$16.88........................... 1,220,803 9.54 $16.86 -- $ --
$17.00-$17.56........................... 550,500 9.72 $17.39 -- $ --
$19.50-$19.63........................... 5,250 9.75 $19.51 -- $ --
$21.09.................................. 86,250 2.93 $21.09 86,250 $21.09
$22.45.................................. 149,500 0.86 $22.45 149,500 $ --
$23.32.................................. 167,325 1.75 $23.32 167,325 $ --
$23.64.................................. 67,707 3.90 $23.64 30,800 $ --
$24.13-$24.57........................... 213,162 3.78 $24.40 204,582 $24.39
$24.67.................................. 56,322 0.40 $25.33 56,322 $25.33
$27.88-$28.37........................... 110,710 1.20 $28.35 106,089 $28.35
$29.08.................................. 10,185 8.89 $30.18 10,185 $29.08
$30.33.................................. 225,401 1.79 $30.33 200,769 $30.33
$33.15-$33.70........................... 10,350 4.69 $33.39 7,476 $33.49
$56.44.................................. 5,092 9.09 $58.58 5,092 $56.44
--------- ---- ------ --------- ------
5,100,612 7.24 $18.15 2,266,643 $19.60
========= ==== ====== ========= ======
EXPLANATORY NOTE:
- ------------------------
(1) Includes approximately 764,000 options which were granted, on a fully
exercisable basis, in connection with the Recapitalization Transactions to
an entity related to Starwood Capital Group, and which were subsequently
regranted by that entity to employees of Starwood Capital Group subject to
vesting and exercisability requirements. As a result of those requirements,
less than 2,000 of these options are currently exercisable by the beneficial
owners. In the event that these employees forfeit such options, they revert
to such entity, which may regrant them at its discretion.
The Company has elected to use the intrinsic method for accounting for
options issued to employees or directors, as allowed under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS No. 123") and, accordingly, recognizes no compensation charge in
connection with these options to the extent that the options exercise price
equals or exceeds the quoted price of the Company's common shares at the date of
grant or measurement date. In connection with the Advisor Transaction, as part
of the computation of the one-time charge to earnings, the Company calculated a
deferred compensation charge of approximately $5.1 million. This deferred charge
represents the difference of the closing sales price of the shares of Common
Stock on the date of the Advisor Transaction of $20.25 over the strike price of
the options of $14.72, as adjusted, for the unvested portion of the options
granted to former employees of the Advisor who are now employees of the Company.
This deferred charge
26
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
will be amortized over the related remaining vesting terms to the individual
employees as additional compensation expense.
In connection with the original grant of options to the Advisor, the Company
utilized the option value method as required by SFAS No. 123 to account for the
initial grant of options to the Advisor. An independent financial advisory firm
estimated the value of these options at date of grant to be approximately $2.40
per share using a Black-Scholes valuation model. In the absence of comparable
historical market information for the Company, the advisory firm utilized
assumptions consistent with activity of a comparable peer group of companies
including an estimated option life of five years, a 27.5% volatility rate and an
estimated annual dividend rate of 8.5%. The resulting charge to earnings was
calculated as the number of options allocated to the Advisor multiplied by the
estimated value at consummation. A charge of approximately $6.0 million had been
reflected in the Company's first quarter 1998 financial results for this
original grant.
Future charges may be taken to the extent of additional option grants, which
are at the discretion of the Board of Directors.
During the three- and six-month periods ended June 30, 2000, the Company
granted 61,352 and 15,500 restricted stock units ("RSU's"), respectively. The
RSU's vest over a three-year period, with the exception of 12,500 RSU's, which
were immediately vested on the date of grant.
Effective November 4, 1999, the Company implemented a savings and retirement
plan (the "401 (k) Plan"), which is a voluntary, defined contribution plan. All
employees are eligible to participate in the 401 (k) Plan following completion
of six months of continuous service with the Company. Each participant may
contribute on a pretax basis between 2% and 15% of such participant's
compensation. At the discretion of the Board of Directors, the Company may make
matching contributions on the participant's behalf up to 50% of the first 10% of
the participant's annual contribution. The Company made contributions of
approximately $45,000 and $175,000 to the 401 (k) Plan for the three- and
six-month periods ended June 30, 2000.
NOTE 12--EARNINGS PER SHARE
Prior to November 4, 1999, Basic EPS was computed based on the income
allocable to class A shares (net income reduced by accrued dividends on
preferred shares and by 1% allocated to class B shares) divided by the weighted
average number of class A shares outstanding during the period. Diluted EPS was
based on the net earnings allocable to class A shares plus dividends on class B
shares which were convertible into class A shares, divided by the weighted
average number of class A shares and dilutive potential class A shares that were
outstanding during the period. Dilutive potential class A shares included the
class B shares, which were convertible into class A shares at a rate of 49
class B shares for one class A share, and potentially dilutive options to
purchase class A shares issued to the Advisor and the Company's directors and
warrants to acquire class A shares.
As more fully described in Note 4, in the Incorporation Merger, the class B
shares were converted into shares of Common Stock on a 49-for-one basis (the
same ratio at which class B shares were previously convertible into class A
shares), and the class A shares were converted into shares of Common Stock on a
one-for-one basis. As a result, the Company no longer has multiple classes of
common shares. Basic and
27
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EARNINGS PER SHARE (CONTINUED)
diluted earnings per share are based upon the following weighted average shares
outstanding during the three- and six-month periods ended June 30, 2000 and
1999, respectively (in thousands):
THREE-MONTH SIX-MONTH
PERIODS ENDED PERIODS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
-------------- -------- -------------- --------
(UNAUDITED)
Weighted average common shares outstanding for basic
earnings per common share................................ 85,281 52,471 85,184 52,459
Add effect of assumed shares issued under treasury stock
method for stock options and restricted stock units...... 709 1,706 541 1,712
Add effects of conversion of class B shares (49-for-one)... -- 560 -- 560
Add effects of assumed warrants exercised under treasury
stock method for stock options........................... -- 1,865 -- 1,857
-------------- ------ -------------- ------
Weighted average common shares outstanding for diluted
earnings per common share................................ 85,990 56,602 85,725 56,588
============== ====== ============== ======
NOTE 13--COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective for fiscal
years beginning after December 15, 1997. The statement changes the reporting of
certain items currently reported as changes in the shareholders' equity section
of the balance sheet and establishes standards for the 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 statements. The Company has adopted this standard
effective January 1, 1998. Total comprehensive income was $105.8 million and
$58.4 million for the six-month periods ended June 30, 2000 and 1999,
respectively, and $53.8 million and $30.3 million for the three-month periods
ended June 30, 2000 and 1999, respectively. The primary component of
comprehensive income other than net income was the change in value of certain
investments in marketable securities classified as available-for-sale.
NOTE 14--DIVIDENDS
In order to maintain its election to qualify as a REIT, the Company must
distribute, at a minimum, an amount equal to 95% of its taxable income and must
distribute 100% of its taxable income to avoid paying corporate federal income
taxes. Accordingly, the Company anticipates it will distribute all of its
taxable income to its shareholders. Because taxable income differs from cash
flow from operations due to non-cash revenues or expenses, in certain
circumstances, the Company may be required to borrow to make sufficient dividend
payments to meet this anticipated dividend threshold.
On November 4, 1999, the class A shares were converted into shares of Common
Stock on a one-for-one basis. Total dividends declared by the Company aggregated
$116.1 million, or $1.86 per common share, for the year ended December 31, 1999.
Total common dividends declared by the Company
28
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--DIVIDENDS (CONTINUED)
aggregated $51.2 million or $0.60 per share of Common Stock for the three-and
six-months ended June 30, 2000. On July 1, 2000, the Company declared a dividend
of approximately $51.2 million, or $0.60 per share of Common Stock, applicable
to the second quarter and payable to shareholders of record on July 17, 2000.
The Company also declared dividends aggregating $10.4 million, $2.4 million,
$1.4 million and $4.0 million, respectively, on its Series A, B, C and D
preferred stock, respectively, for the six-month period ended June 30, 2000 and
$5.2 million, $1.2 million, $0.7 million and $2.0 million, respectively, on its
Series A, B, C and D preferred stock, respectively, for the three-month period
ended June 30, 2000. There are no dividend arrearages on any of the preferred
shares currently outstanding.
In November 1999, the Company declared and paid a dividend of a total of one
million shares of Common Stock pro rata to all holders of record of Common Stock
as of the close of business on November 3, 1999.
The Series A preferred stock has a liquidation preference of $50.00 per
share and carry an initial dividend yield of 9.50% per annum. The dividend rate
on the preferred shares will increase to 9.75% on December 15, 2005, to 10.00%
on December 15, 2006 and to 10.25% on December 15, 2007 and thereafter.
Dividends on the Series A preferred shares are payable quarterly in arrears and
are cumulative.
Holders of shares of the Series B preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.375% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.34 per share. Dividends are cumulative from the date of
original issue and are payable quarterly in arrears on or before the 15th day of
each March, June, September and December or, if not a business day, the next
succeeding business day. Any dividend payable on the Series B preferred stock
for any partial dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends will be payable to holders of
record as of the close of business on the first day of the calendar month in
which the applicable dividend payment date falls or on another date designated
by the Board of Directors of the Company for the payment of dividends that is
not more than 30 nor less than 10 days prior to the dividend payment date.
Holders of shares of the Series C preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.20% of the $25.00 liquidation preference per year, equivalent to a fixed
annual rate of $2.30 per share.
Holders of shares of the Series D preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 8.00% of the $25.00 liquidation preference per year, equivalent to a fixed
annual rate of $2.00 per share.
The exact amount of future quarterly dividends to common shareholders will
be determined by the Board of Directors based on the Company's actual and
expected operations for the fiscal year and the Company's overall liquidity
position.
NOTE 15--SEGMENT REPORTING
Statement of Financial Accounting Standard No. 131 ("SFAS No. 131")
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected financial information about operating segments in
interim financial reports issued to stockholders.
29
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT REPORTING (CONTINUED)
The Company has two reportable segments: real estate lending and credit
tenant leasing. The Company does not have substantial foreign operations. The
accounting policies of the segments are the same as those described in Note 3.
The Company has no single customer that accounts for 10% or more of revenues
(see Note 9 for other information regarding concentrations of credit risk).
The Company evaluates performance based on the following financial measures
for each segment. Selected results of operations for the three- and six-month
periods ended June 30, 2000 and 1999 and selected asset information as of
June 30, 2000 and December 31, 1999 regarding the Company's operating segments
are as follows (in thousands):
CREDIT
REAL ESTATE TENANT CORPORATE/ COMPANY
LENDING LEASING (1) OTHER (2) TOTAL
----------- ----------- ---------- ----------
(UNAUDITED)
Total revenues(3):
Three months ended:
June 30, 2000............................... $ 69,468 $ 47,930 $ 516 $ 117,914
June 30, 1999............................... 55,540 3,723 (8) 59,255
Six months ended:
June 30, 2000............................... $ 134,225 $ 94,330 $ 247 $ 228,802
June 30, 1999............................... 107,341 7,450 (112) 114,679
Total operating and interest expense(4):
Three months ended:
June 30, 2000............................... $ 28,295 $ 18,933 $ 17,257 $ 64,485
June 30, 1999............................... 18,773 3,031 7,568 29,372
Six months ended:
June 30, 2000............................... $ 50,813 $ 39,004 $ 33,742 $ 123,559
June 30, 1999............................... 36,816 5,683 14,080 56,579
Net operating income before minority interest
and gain on sale of net lease assets(5):
Three months ended:
June 30, 2000............................... $ 41,173 $ 28,997 $ (16,741) $ 53,429
June 30, 1999............................... 36,767 692 (7,576) 29,883
Six months ended:
June 30, 2000............................... $ 83,412 $ 55,326 $ (33,495) $ 105,243
June 30, 1999............................... 70,525 1,767 (14,192) 58,100
Total long-lived assets(6):
June 30, 2000............................... $2,253,339 $1,653,512 N/A $3,906,851
December 31, 1999........................... 2,003,506 1,714,284 N/A 3,717,790
Total assets:
June 30, 2000............................... N/A N/A $4,041,269 $4,041,269
December 31, 1999........................... N/A N/A 3,813,552 3,813,552
30
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT REPORTING (CONTINUED)
EXPLANATORY NOTES:
- ----------------------------------
(1) Includes the Company's pre-existing Credit Tenant Leasing investments
acquired in the Recapitalization Transactions since March 18, 1998 and the
Credit Tenant Leasing business acquired in the TriNet acquisition since
November 4, 1999.
(2) Corporate and Other represents all corporate-level items, including general
and administrative expenses and any intercompany eliminations necessary to
reconcile to the consolidated Company totals. This caption also includes the
Company's servicing business, which is not considered a material separate
segment.
(3) Total revenues represents all revenues earned during the period from the
assets in each segment. Revenue from the Real Estate Lending Business
primarily represents interest income and revenue from the Credit Tenant
Leasing business primarily represents operating lease income.
(4) Total operating and interest expense represents provision for possible
credit losses for the Real Estate Lending business and property operating
costs (including real estate taxes) for the Credit Tenant Leasing business
and interest expense specifically related to each segment. General and
administrative, advisory fees (prior to November 4, 1999) and stock option
compensation expense is included in Corporate and Other for all periods.
Depreciation and amortization of $8,862 and $1,365 for the three-month
periods ended June 30, 2000 and 1999, respectively, and $17,871 and $2,730
for the six-month periods ended June 30, 2000 and 1999, respectively, are
included in the amounts presented above.
(5) Net operating income before minority interests represents total revenues, as
defined in note (3) above, less total operating and interest expense, as
defined in note (4) above, for each period.
(6) Long-lived assets is comprised of Loans and Other Lending Investments, net
and Real Estate Subject to Operating Leases, net, for each respective
segment.
NOTE 16--SUBSEQUENT EVENTS
On July 7, 2000, the Company increased its existing $50.0 million unsecured
revolving credit facility to $100.0 million by syndicating $50.0 million to a
major commercial bank. All other terms of the facility remain the same.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this report and
also with the Company's Annual Report for 1999 filed on Form 10-K. Unless
otherwise defined in this report, or unless the context otherwise requires, the
capitalized words or phrases referred to in this section have the meaning
ascribed to them in such financial statements and the notes thereto.
GENERAL
As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, on March 18, 1998, the Company completed the Recapitalization
Transactions which, among other things, substantially recapitalized the Company
and modified its investment policy. Effective June 18, 1998, the Company (which
was organized under California law) changed its domicile to Maryland by merging
with a newly-formed subsidiary organized under Maryland law, and issued new
shares of the subsidiary to the Company's shareholders in exchange for their
shares in the Company. Concurrently, the Company consummated a one-for-six
reverse stock split.
Immediately prior to the consummation of the Recapitalization Transactions,
the Company's assets primarily consisted of approximately $11.0 million in
short-term, liquid real estate investments, cash and cash equivalents.
On December 15, 1998, the Company sold $220.0 million of preferred shares
and warrants to purchase class A shares to a group of investors affiliated with
Lazard Freres. Concurrent with the sale of the preferred shares and warrants,
the Company purchased $280.3 million in real estate loans and participation
interests from a group of investors also affiliated with Lazard Freres. These
transactions are referred to collectively as the "Lazard Transaction."
As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, on November 3, 1999, the Company's shareholders approved a series of
transactions including: (i) the acquisition of TriNet; (ii) the acquisition of
the Company's external advisor; and (iii) the reorganization of the Company from
a trust to a corporation and the exchange of the class A and class B shares for
Common Stock. Pursuant to the TriNet Acquisition, TriNet merged with and into a
subsidiary of the Company, with TriNet surviving as a wholly-owned subsidiary of
the Company. In the acquisition, each share of common stock of TriNet was
converted into 1.15 shares of Common Stock. Each share of TriNet Series A,
Series B and Series C Cumulative Redeemable Preferred Stock was converted into a
share of Series B, Series C or Series D (respectively) Cumulative Redeemable
Preferred Stock of the Company. The Company's preferred stock issued to the
former TriNet preferred stockholders has substantially the same terms as the
TriNet preferred stock, except that the new Series B, C, and D preferred stock
have additional voting rights not associated with the TriNet preferred stock.
The Company's Series A Preferred Stock remained outstanding with the same rights
and preferences as existed prior to the TriNet Acquisition. As a consequence of
the acquisition of its external advisor, the Company is now internally-managed
and no longer pays external advisory fees.
The transactions described above and other related transactions have
materially impacted the historical operations of the Company and will continue
to impact the Company's future operations. Accordingly, the reported historical
financial information for periods prior to these transactions is not believed to
be fully indicative of the Company's future operating results or financial
condition.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO THE THREE-MONTH PERIOD ENDED
JUNE 30, 1999
INTEREST INCOME--Interest income increased to $66.9 million for the three
months ended June 30, 2000 from $52.0 million for the same period in 1999. This
increase is a result of the interest generated by
32
$149.1 million of new loan investments originated or acquired by the Company
during the late first quarter and the second quarter of 2000 and an additional
$21.3 million funded under existing loan commitments. The increase was partially
offset by a reduction in interest earned as a result of principal repayments of
approximately $41.4 million made to the Company on its loan investments during
the three months ended June 30, 2000.
OPERATING LEASE INCOME--Operating lease income increased to $47.2 million
for the three months ended June 30, 2000 from $3.7 million for the same period
in 1999. Approximately $43.5 million of this increase is attributable to
operating lease income generated from net lease assets acquired in the TriNet
Acquisition.
OTHER INCOME--Included in other income for the three months ended June 30,
2000 is a prepayment penalty of approximately $2.1 million resulting from a
partial repayment of a senior mortgage.
INTEREST EXPENSE--The Company's interest expense increased by $22.2 million
for the three-month period ended June 30, 2000 over the same period in the prior
year. This was in part due to higher interest rates and higher average
borrowings by the Company on its credit facilities and other term loans, the
proceeds of which were used to fund additional loan origination and acquisition
activities. Further, interest expense in fiscal 2000 includes approximately
$13.0 million of interest expense incurred by the Leasing Subsidiary subsequent
to its acquisition.
PROPERTY OPERATING COSTS--For the three months ended June 30, 2000, property
operating costs, net of recoveries from tenants, increased to approximately $3.0
million.
Property operating costs represent unreimbursed property operating expenses
incurred by the Leasing Subsidiary subsequent to its acquisition. All costs of
this kind were borne directly by the tenant on the Company's pre-existing credit
tenant leasing portfolio prior to the TriNet Acquisition.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased
approximately $7.5 million for the three-month period ended June 30, 2000 over
the same period in the prior year, primarily as a result of depreciation and
amortization on the Leasing Subsidiary's net leased assets subsequent to its
acquisition.
GENERAL AND ADMINISTRATIVE--The Company's general and administrative
expenses during the three-month period ended June 30, 2000 increased by
approximately $6.6 million compared to the same period in 1999. These increases
were generally the result of the increased scope of the Company's operations as
a result of costs associated with additional lending operations, the TriNet
Acquisition and as a result of additional costs incurred subsequent to the
acquisition of the Company's external advisor.
PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's charge for provision for
possible credit losses increased to $1.5 million from $1.3 million as a result
of expanded lending operations as well as additional seasoning of the Company's
existing lending portfolio. As more fully discussed in Note 5 to the Company's
Consolidated Financial Statements, the Company has not realized any actual
losses on any of its loan investments to date.
STOCK OPTION COMPENSATION EXPENSE--Stock compensation expense increased by
approximately $586,000 as a result of charges relating to grants of stock
options to the Company's employees which includes amortization of the deferred
charge incurred in connection with the Advisor Transaction.
ADVISORY FEES--There were no advisory fees during the three-month period
ended June 30, 2000 because, subsequent to the acquisition of the Company's
external advisor, the Company is now internally-managed. No further advisory
fees will be incurred.
MINORITY INTEREST--Minority interest expense of $41,000 for the three months
ended June 30, 2000 represents the limited partners' share of net income from
TriNet Property Partners, L.P., a partnership
33
interest acquired by the Company as part of the TriNet Acquisition. The Company
has a 96.5% interest in TriNet Property Partners, L.P. and is the sole general
partner.
GAIN ON SALE OF NET LEASE ASSETS--On April 25, 2000, the Company sold a
251,850 square foot industrial building located in Conroe, Texas for
$5.5 million and recognized a gain of $11,000. On May 22, 2000, the Company sold
a 442,000 square foot industrial property located in North Reading,
Massachusetts for $47.0 million and recognized a gain of $222,000. On June 1,
2000, the Company sold a 420,000 square foot office building located in
Parsippany, New Jersey for $49.8 million and recognized a gain of $207,000.
SIX-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO THE SIX-MONTH PERIOD ENDED
JUNE 30, 1999
INTEREST INCOME--Interest income increased to $126.9 million for the six
months ended June 30, 2000 from $101.9 million for the same period in 1999. This
increase is a result of the interest generated by $361.0 million of loan
investments newly-originated or acquired by the Company during the fiscal 2000,
an additional $37.8 million funded under existing loan commitments. The increase
was partially offset by a reduction in interest earned as a result of principal
repayments of approximately $163.2 million made to the Company on its loan
investments during the six months ended June 30, 2000.
OPERATING LEASE INCOME--Operating lease income increased to $93.5 million
for the six months ended June 30, 2000 from $7.5 million for the same period in
1999. Approximately $86.0 million of this increase is attributable to operating
lease income generated from net lease assets acquired in the TriNet Acquisition.
OTHER INCOME--Included in other income for fiscal year 2000 are prepayment
fees of approximately $5.4 million resulting from the full or partial repayments
of three loans and a forbearance fee of $1.1 million resulting from the purchase
of a sub-performing loan and subsequent restructuring of such loan to fully
performing status.
INTEREST EXPENSE--The Company's interest expense increased by $40.3 million
for the six-month period ended June 30, 2000 over the same period in the prior
year. This was in part due to higher interest rates and higher average
borrowings by the Company on its credit facilities and other term loans, the
proceeds of which were used to fund additional loan origination and acquisition
activities. Further, interest expense in fiscal 2000 includes approximately
$26.8 million of interest expense incurred by the Leasing Subsidiary subsequent
to its acquisition.
PROPERTY OPERATING COSTS--For the six months ended June 30, 2000, property
operating costs increased to approximately $6.3 million, net of recoveries from
tenants.
Property operating costs represent unreimbursed property operating expenses
incurred by the Leasing Subsidiary subsequent to its acquisition. All costs of
this kind were borne directly by the tenant on the Company's pre-existing credit
tenant leasing portfolio prior to the TriNet Acquisition.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased
approximately $15.1 million for the six-month period ended June 30, 2000 over
the same period in the prior year, primarily as a result of depreciation and
amortization on the Leasing Subsidiary's net leased assets subsequent to its
acquisition.
GENERAL AND ADMINISTRATIVE--The Company's general and administrative
expenses during the six-month period ended June 30, 2000 increased by
approximately $13.0 million compared to the same period in 1999. These increases
were generally the result of the increased scope of the Company's operations as
a result of costs associated with additional lending operations, the TriNet
Acquisition, and as a result of additional costs incurred subsequent to the
acquisition of the Company's external advisor.
PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's charge for provision for
possible credit losses increased to $3.0 million from $2.3 million as a result
of expanded lending operations as well as additional seasoning of the Company's
existing lending portfolio. As more fully discussed in Note 5 to the Company's
34
Consolidated Financial Statements, the Company has not realized any actual
losses on any of its loan investments to date.
STOCK OPTION COMPENSATION EXPENSE--Stock compensation expense increased by
approximately $1.1 million as a result of charges relating to grants of stock
options to the Company's employees, which includes amortization of the deferred
charge incurred in connection with the Advisor Transaction.
ADVISORY FEES--There were no advisory fees during the six-month period ended
June 30, 2000 because, subsequent to the acquisition of the Company's external
advisor, the Company is now internally-managed. No further advisory fees will be
incurred.
MINORITY INTEREST--Minority interest expense of $82,000 for the first six
months of 2000 represents the limited partners' share of net income from TriNet
Property Partners, L.P., a partnership acquired by the Company as part of the
TriNet Acquisition. The Company has a 96.5% interest in TriNet Property
Partners, L.P. and is the sole general partner.
GAIN ON SALE OF NET LEASE ASSETS-- The Company did not sell any credit
tenant lease assets in 1999. During the first six months of 2000, the Company
disposed of five assets. On March 1, 2000, the Company sold a 174,600 square
foot industrial building located in Sunnyvale, California for $13.4 million and
recognized a gain of $238,000. On March 2, 2000, the Company sold a 370,562
square foot office property located in Paoli, Pennsylvania for $32.6 million and
recognized a gain of $295,000. On April 25, 2000, the Company sold a 251,850
square foot industrial building located in Conroe, Texas for $5.5 million and
recognized a gain of $11,000. On May 22, 2000, the Company sold a 442,000 square
foot industrial property located in North Reading, Massachusetts for
$47.0 million and recognized a gain of $222,000. On June 1, 2000, the Company
sold a 420,000 square foot office building located in Parsippany, New Jersey for
$49.8 million and recognized a gain of $207,000.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--Certain of the proceeds
from an asset disposition were used to partially repay $8.1 million of the 1994
Mortgage Loan. In connection with this partial paydown, the Company incurred
prepayment penalties, which resulted in an extraordinary loss of $317,000 during
the first quarter of 2000.
INTEREST RATE RISK MANAGEMENT
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. In
pursuing its business plan, the primary market risk to which the Company is
exposed is interest rate risk. Consistent with its expected election to qualify
as a REIT, the Company has implemented an interest rate risk management policy
based on match funding, with the objective that floating-rate assets be
primarily financed by floating-rate liabilities and fixed-rate assets be
primarily financed by fixed-rate liabilities.
The Company's operating results will depend in part on the difference
between the interest and related income earned on its assets and the interest
expense incurred in connection with its interest-bearing liabilities.
Competition from other providers of real estate financing may lead to a decrease
in the interest rate earned on the Company's interest-bearing assets, which 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
financial markets may affect the spread between the Company's interest-earning
assets and interest-bearing liabilities. Any significant compression of the
spreads between interest-earning assets and 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
interest-bearing 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.
A substantial portion of the Company's loan investments are subject to
significant prepayment protection in the form of lock-outs, yield maintenance
provisions or other prepayment premiums which
35
provide substantial yield protection to the Company. Those assets generally not
subject to prepayment penalties include: (i) variable-rate loans based on LIBOR,
originated or acquired at par, which would not result in any gain or loss upon
repayment; and (ii) discount loans and loan participations acquired at discounts
to face values, which would result in gains upon repayment. Further, while the
Company generally seeks to enter into loan investments which provide for
substantial prepayment protection, in the event of declining interest rates, the
Company could receive such prepayments and may not be able to reinvest such
proceeds at favorable returns. Such prepayments could have an adverse effect on
the spreads between interest-earning assets and interest-bearing liabilities.
While the Company has not experienced any significant credit losses,
delinquencies or defaults, in the event of a significant rising interest rate
environment and/or economic downturn, defaults could increase and result in
credit losses to the Company which adversely affect its liquidity and operating
results. Further, such delinquencies or defaults could have an adverse effect on
the spreads between interest-earning assets and interest-bearing liabilities.
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
conditions, and other factors beyond the control of the Company. As more fully
discussed in Note 9 to the Company's Consolidated Financial Statements, the
Company employs match funding-based hedging strategies to limit the effects of
changes in interest rates on its operations, including engaging in interest rate
caps, floors, swaps, futures and other interest rate-related derivative
contracts. These strategies are specifically designed to reduce the Company's
exposure, on specific transactions or on a portfolio basis, to changes in cash
flows as a result of interest rate movements in the market. The Company does not
enter into derivative contracts for speculative purposes nor as a hedge against
changes in credit risk of its borrowers or of the Company itself.
Each interest rate cap or floor agreement is a legal contract between the
Company and a third party (the "counterparty"). When the Company purchases a cap
or floor contract, the Company makes an up-front payment to the counterparty and
the counterparty agrees to make payments to the Company in the future should the
reference rate (typically one- or three-month LIBOR) rise above (cap agreements)
or fall below (floor agreements) the "strike" rate specified in the contract.
Each contract has a notional face amount. Should the reference rate rise above
the contractual strike rate in a cap, the Company will earn cap income. Should
the reference rate fall below the contractual strike rate in a floor, the
Company will earn floor income. Payments on an annualized basis will equal the
contractual notional face amount multiplied by the difference between actual
reference rate and the contracted strike rate. The cost of the up-front payment
is amortized over the term of the contract.
Interest rate swaps are agreements in which a series of interest rate flows
are exchanged over a prescribed period. The notional amount on which swaps are
based is not exchanged. In general, the Company's swaps are "pay fixed" swaps
involving the exchange of floating-rate interest payments from the counterparty
for fixed interest payments from the Company.
Interest rate futures are contracts, generally settled in cash, in which the
seller agrees to deliver on a specified future date the cash equivalent of the
difference between the specified price or yield indicated in the contract and
the value of that of the specified instrument (e.g., U.S. Treasury securities)
upon settlement. The Company generally uses such instruments to hedge forecasted
fixed-rate borrowings. Under these agreements, the Company will generally
receive additional cash flow at settlement if interest rates rise and pay cash
if interest rates fall. The effects of such receipts or payments will be
deferred and amortized over the term of the specific related fixed-rate
borrowings. In the event that, in the opinion of management, it is no longer
probable that a forecasted transaction will occur under terms substantially
equivalent to those projected, the Company will cease recognizing such
transactions as hedges and immediately recognize related gains or losses based
on actual settlement or estimated settlement value.
While a REIT may freely utilize the types of derivative instruments
discussed above to hedge interest rate risk on its liabilities, the use of
derivatives for other purposes, including hedging asset-related risks
36
such as credit, prepayment or interest rate exposure on the Company's loan
assets, could generate income which is not qualified income for purposes of
maintaining REIT status. As a consequence, the Company may only engage in such
instruments to hedge such risks on a limited basis.
There can be no assurance that the Company's profitability will not be
adversely affected during any period as a result of changing interest rates. In
addition, hedging transactions using derivative instruments involve certain
additional risks such as counterparty credit risk, legal enforceability of
hedging contracts and the risk that unanticipated and significant changes in
interest rates will cause a significant loss of basis in the contract. With
regard to loss of basis in a hedging contract, indices upon which contracts are
based may be more or less variable than the indices upon which the hedged assets
or liabilities are based, thereby making the hedge less effective. The
counterparties to these contractual arrangements are major financial
institutions with which the Company and its affiliates may also have other
financial relationships. The Company is potentially exposed to credit loss in
the event of nonperformance by these counterparties. However, because of their
high credit ratings, the Company does not anticipate that any of the
counterparties will fail to meet their obligations. 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 which exceeds the related costs incurred in
connection with engaging in such hedges.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to fund its investment origination and
acquisition activities and operating expenses. The Company has significant
access to capital resources to fund its existing business plan, which includes
the expansion of its real estate lending and credit tenant leasing businesses.
The Company's capital sources include cash flow from operations, borrowings
under lines of credit, additional term borrowings, long-term financing secured
by the Company's assets, unsecured financing and the issuance of common,
convertible and /or preferred equity securities. Further, the Company may
acquire other businesses or assets using its capital stock, cash or a
combination thereof.
The distribution requirements under the REIT provisions of the Code restrict
the Company's ability to retain earnings and thereby replenish capital committed
to its operations. However, the Company believes that its significant capital
resources and access to financing will provide it with financial flexibility and
market responsiveness at levels sufficient to meet current and anticipated
capital requirements, including expected new lending and leasing transactions.
The Company's ability to meet its long-term (i.e., beyond one year)
liquidity requirements is subject to the renewal of its credit lines and /or
obtaining other sources of financing, including issuing additional debt or
equity from time to time. Any decision by the Company's lenders and investors to
enter into such transactions with the Company will depend upon a number of
factors, such as compliance with the terms of its existing credit arrangements,
the Company's financial performance, industry or market trends, the general
availability of and rates applicable to financing transactions, such lenders'
and investors' resources and policies concerning the terms under which they make
such capital commitments and the relative attractiveness of alternative
investment or lending opportunities.
Based on its monthly interest and other expenses, monthly cash receipts,
existing investment commitments and funding plans, the Company believes that its
existing sources of funds will be adequate for purposes of meeting its short-
and long-term liquidity needs. Material increases in monthly interest expense or
material decreases in monthly cash receipts would negatively impact the
Company's liquidity. On the other hand, material decreases in monthly interest
expense would positively affect the Company's liquidity.
As more fully discussed in Note 7 to the Company's Consolidated Financial
Statements, at June 30, 2000, the Company had existing fixed-rate borrowings of
approximately $152.2 million secured by real estate under operating leases which
mature in 2009, an aggregate of approximately $221.0 million in
37
LIBOR-based, variable-rate loans secured by various senior and subordinate
mortgage investments and real estate under operating leases which mature between
fiscal 2000 and 2003, fixed-rate corporate debt obligations aggregating
approximately $355.0 million which mature between 2001 and 2017, and other
variable- and fixed-rate secured debt obligations aggregating approximately
$100.6 million which mature at various dates through 2010.
In addition, the Company has entered into LIBOR-based secured revolving
credit facilities of $675.0 and $500.0 million which expire in fiscal 2001 and
2002 respectively. As of June 30, 2000, the Company had drawn approximately
$216.0 million and $114.8 million under these facilities. Availability under
these facilities is based on collateral provided under a borrowing base
calculation. The Company has also increased the size of its unsecured revolving
credit facility from $50.0 million to $100.0 million. In addition, the Leasing
Subsidiary has an agreement with a group of 13 banks led by Bank of America,
N.A. which provides it with a $350.0 million unsecured revolving credit
facility. This facility matures on May 31, 2001 and has a one-year extension
period at the Company's option. Interest incurred on the facility is LIBOR-
based with a margin dependent on the Company's credit ratings. Facility fees
under the credit facility are also tied to its credit ratings. All of the
available commitment under the facility may be borrowed for general corporate
and working capital needs of the Leasing Subsidiary, as well as for investments.
Under the terms of this facility, the Leasing Subsidiary is generally permitted
to make cash distributions to the Company in an amount equal to 85% of cash flow
from operations in any rolling four-quarter period. The facility requires
interest-only payments until maturity, at which time outstanding borrowings are
due and payable. As of June 30, 2000, the Company had $121.7 million drawn and
$228.3 million available under this facility.
The Company has entered into LIBOR interest rate caps struck at 9.00%, 7.50%
and 7.50% in notional amounts of $300.0 million, $40.4 million and
$38.3 million, respectively, which expire in March 2001, January 2001 and
June 2001, respectively. In addition, in connection with the TriNet Acquisition,
the Company acquired LIBOR interest rate caps currently struck at 7.75%, 7.75%
and 7.50% in notional amounts of $75.0 million, $35.0 million, and
$75.0 million, respectively, which expire in December 2004, December 2004 and
August 2001, respectively.
In connection with the closing of STARS, Series 2000-1 in May 2000, the
Company entered into a LIBOR interest rate cap struck at 10.00% in the notional
amount of $312.0 million, and simultaneously sold a LIBOR interest rate cap with
the same terms. Since these instruments do not reduce the Company's net interest
rate risk exposure, they do not qualify as hedges and changes in their
respective values are charged to earnings. As the significant terms of these
arrangements are substantially the same, the effects of any revaluation of these
two instruments are expected to substantially offset one another. At June 30,
2000, the net fair value of the Company's interest rate caps was $1.1 million.
The Company has originated or acquired certain assets using proceeds from
LIBOR-based borrowings. In connection with such borrowings, the Company entered
into $342.0 million of interest rate swaps to effectively fix the interest rate
on such obligations. In connection with the TriNet Acquisition, the Company
acquired an interest rate swap which, together with certain existing interest
rate cap agreements, effectively fix the interest rate on $75.0 million of the
Leasing Subsidiary's LIBOR-based borrowings at 5.58% plus the applicable margin
through December 1, 2004. Management expects that it will have aggregate LIBOR
based borrowings at the Leasing Subsidiary in excess of the notional amount for
the duration of the swap. The actual borrowing cost to the Company with respect
to indebtedness covered by the swap will depend upon the applicable margin over
LIBOR for such indebtedness, which will be determined by the terms of the
relevant debt instruments. In June 2000, an interest rate swap with a notional
amount of approximately $112.0 million matured. At June 30, 2000, the fair value
of the Company's interest rate swaps was $3.4 million.
The Company was pursuing and/or has consummated certain anticipated
long-term fixed-rate borrowings and had entered into certain derivative
instruments based on U.S. Treasury securities to hedge the
38
potential effects of interest rate movements on these transactions. Under these
agreements, the Company would generally receive additional cash flow at
settlement if interest rates rise and pay cash if interest rates fall. The
effects of such receipts or payments will be deferred and amortized over the
term of the specific related fixed-rate borrowings.
During the year ended December 31, 1999, the Company settled derivative
instruments with an aggregate notional amount of approximately $63.0 million,
resulting in the receipt of approximately $0.6 million which had been deferred
pending completion of the related planned fixed-rate financing transaction.
Since the transaction was subsequently modified and consummated as a
variable-rate financing transaction, the previously deferred receipt no longer
qualified for hedge accounting treatment. Therefore, the $0.6 million was
recognized as a gain included in other income in the consolidated statement of
operations for the three- and six-month periods ended June 30, 2000 in
connection with the closing of STARS, Series 2000-1.
During the year ended December 31, 1999, the Company refinanced its
$125.0 million term loan maturing March 15, 1999 with a $155.4 million term loan
maturing March 5, 2009. The new term loan bears interest at 7.44% per annum,
payable monthly, and amortizes over an approximately 22-year schedule. The new
term loan represented forecasted transactions for which the Company had
previously entered into U.S. Treasury-based hedging transactions. The net
$3.4 million cost of the settlement of such hedges has been deferred and will be
amortized as an increase to the effective financing costs of the new term loan
over its 10-year term.
On May 17, 2000, the Company closed the inaugural offering under its
proprietary matched funding program, STARS, Series 2000-1. In the initial
transaction, a wholly-owned subsidiary of the Company issued $896.5 million of
investment grade bonds secured by the subsidiary's assets, which had an
aggregate outstanding principal balance of approximately $1.2 billion at
inception. Principal payments received on the assets will be utilized to repay
the most senior class of the bonds then outstanding. The maturity of the bonds
match funds the maturity of the underlying assets financed under the program.
The Company initially purchased the class F bonds at a par value of
$38.2 million, which the Company financed with a $27.8 million repurchase
agreement maturing in May 2001. On July 17, 2000, the Company sold, at par,
$5.0 million of the class F bonds to an institutional investor. For accounting
purposes, these transactions were treated as secured financings.
STOCK REPURCHASE PROGRAM: The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets and excess cash
flow from operations, but also using borrowings under its credit facilities if
the Company determines that it is advantageous to do so. As of June 30, 2000 and
December 31, 1999, the Company had repurchased approximately 2.3 million shares,
at an aggregate cost of approximately $40.4 million.
ADJUSTED EARNINGS
Adjusted earnings represents net income computed in accordance with GAAP,
before gains (losses) on sales of net lease assets, extraordinary items and
cumulative effect, plus depreciation and amortization, less preferred stock
dividends, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect adjusted earnings on the same basis.
The Company believes that to facilitate a clear understanding of the
historical operating results of the Company, adjusted earnings should be
examined in conjunction with net income as shown in the Consolidated Statements
of Operations. Adjusted earnings should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indicator of the Company's
performance or to
39
cash flows from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs.
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Adjusted earnings:
Income before gains/losses on sales
of net lease assets and
extraordinary items.............. $ 53,388 $29,883 $105,160 $ 58,100
Real estate depreciation........... 8,862 1,365 17,871 2,730
Joint venture depreciation......... 832 169 1,442 338
Amortization....................... 3,054 1,379 5,288 2,920
Preferred dividend requirement..... (9,227) (5,308) (18,454) (10,615)
Net income allocable to class B
shares(1)........................ -- (275) -- (535)
-------- ------- -------- --------
Adjusted earnings allocable to common
shareholders:
Basic.............................. $ 56,909 $27,213 $111,307 $ 52,938
======== ======= ======== ========
Diluted............................ $ 57,144 $27,488 $111,779 $ 53,473
======== ======= ======== ========
Adjusted earnings per common share:
Basic.............................. $ 0.67 $ 0.52 $ 1.31 $ 1.01
======== ======= ======== ========
Diluted............................ $ 0.66 $ 0.49 $ 1.30 $ 0.94
======== ======= ======== ========
EXPLANATORY NOTE:
-------------------------------
(1) For the quarter ended June 30, 1999, net income allocable to
class B shares represents 1% of net income allocable to the Company's
class B shares. On November 4, 1999, the class B shares were
exchanged for common shares in connection with the Company's
acquisition of TriNet and related transactions. As a result, the
Company now has a single class of common shares outstanding.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting Standards
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 adopted the requirements of this
pronouncement in its financial statements beginning with its reporting for
fiscal 1999. As of December 31, 1999, the Company is currently segmented between
its lending and credit tenant lease businesses.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). On June 23, 1999 the FASB voted to defer the effectiveness of
SFAS 133 for one year. SFAS No. 133 is now effective for fiscal years beginning
after June 15, 2000, but earlier application is permitted as of the beginning of
any fiscal quarter subsequent to June 15, 1998. SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as: (i) a hedge of the exposure to changes in
40
the fair value of a recognized asset or liability or an unrecognized firm
commitment; (ii) a hedge of the exposure to variable cash flows of a forecasted
transaction; or (iii) in certain circumstances a hedge of a foreign currency
exposure. The Company currently plans to adopt this pronouncement, as amended by
Statement of Financial Accounting Standards No. 137 "Accounting for Derivative
Instruments and Hedging Activities--deferral of the Effective Date of FASB
Statement No. 133" and Statement of Financial Accounting Standards No. 138
"Accounting for Certain Hedging Activities--an Amendment of FASB No. 133," as
required effective January 1, 2001. The adoption of SFAS No. 133 is not expected
to have a material financial impact on the financial position or results of
operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company will be required to adopt
SAB 101 by the fourth quarter of fiscal 2001. The Company has not completed its
determination of the impact of the adoption of SAB 101 on its consolidated
financial position or results of operation.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
will be required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company does not expect the application of
FIN 44 to have a material impact on its consolidated financial position or
results of operations.
OTHER MATTERS
1940 ACT EXEMPTION
The Company at all times intends to conduct its business so as to not become
regulated as an investment company under the Investment Company Act of 1940. If
the Company were to become regulated as an investment company, then the
Company's ability to use leverage would be substantially reduced. The Investment
Company Act exempts entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" (i.e., "Qualifying Interests"). Under the current interpretation of
the staff of the SEC, in order to qualify for this exemption, the Company must
maintain at least 55% of its assets directly in Qualifying Interests. As of
June 30, 2000, the Company calculates that it is in and has maintained
compliance with this requirement.
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q, in future SEC filings or in press releases or
other written or oral communications, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Company
cautions that such forward looking statements speak only as of the date made and
that various factors including regional and national economic conditions,
changes in levels of market interest rates, credit and other risks of lending
and investment activities, and competitive and regulatory factors could affect
the Company's financial performance and could cause actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect events or circumstances after
the date of such statements except as required by law.
41
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 23, 2000, the Company held its 2000 annual meeting of shareholders to
vote on various proposals described in the following summary:
ELECTION OF BOARD OF DIRECTORS:
The eight directors elected as a result of the meeting to hold office until
their respective successors are elected are Robert W. Holman, Robin Josephs,
Merrick R. Kleeman, Jeffrey G. Dishner, Jonathan D. Eilian, Madison Grose,
Michael G. Medzigian, and George R. Puskar. Jay Sugarman, Spencer B. Haber,
Willis Andersen, Jr., William M. Matthes, John G. McDonald, Stephen B. Oresman,
Barry S. Sternlicht, and Kneeland C. Youngblood are members of the Board of
Directors whose office did not expire in 2000 and who continue as directors.
DIRECTOR ELIGIBLE VOTES FOR WITHHELD
- -------- -------------- ---------- --------
Robert W. Holman........................... 82,824,947 82,232,967 591,980
Robin Josephs.............................. 82,824,947 82,355,903 469,044
Merrick R. Kleeman......................... 82,824,947 82,331,239 493,708
Jeffrey G. Dishner......................... 82,824,947 82,326,415 498,532
Jonathan D. Eilian......................... 82,824,947 82,326,524 498,423
Madison Grose.............................. 82,824,947 82,333,426 491,521
Michael G. Medzigian....................... 82,824,947 82,349,631 475,316
George R. Puskar........................... 82,824,947 82,258,818 566,129
OTHER PROPOSALS:
ELIGIBLE VOTES FOR AGAINST ABSTAIN
-------------- ---------- -------- --------
Proposal:
- -------------------------------------------
1. To ratify the appointment of
PricewaterhouseCoopers LLP as
the Independent Auditors for the fiscal
year ended December 31, 2000............. 82,824,947 82,606,509 140,546 77,892
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM-8-K
A. EXHIBITS
3.1 Amended By-Laws of the Company
27.1 Financial Data Schedule.
B. REPORTS ON FORM 8-K
None.
42
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ISTAR FINANCIAL INC.
----------------------------------------
REGISTRANT
Date: August 14, 2000
/s/ Jay Sugarman
----------------------------------------
CHAIRMAN OF THE BOARD OF DIRECTORS,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Date: August 14, 2000
/s/ Spencer B. Haber
----------------------------------------
EXECUTIVE VICE PRESIDENT--FINANCE,
CHIEF FINANCIAL OFFICER, DIRECTOR AND SECRETARY
43
Exhibit 3.1
iSTAR FINANCIAL INC.
BYLAWS
______________________________________
ARTICLE I
OFFICES
Section 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office
of iStar Financial Inc. (the "Company") shall be located at such place or places
as the Board of Directors may designate.
Section 2. ADDITIONAL OFFICES. The Company may have additional offices
at such places as the Board of Directors may from time to time determine or the
business of the Company may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE. All meetings of shareholders shall be held at the
principal office of the Company or at such other place within the United States
as sha ll be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the shareholders for
the election of directors and the transaction of any business within the powers
of the Company shall be held on such date as shall be set by the Board of
Directors. Except as the Amended and Restated Charter of the Company, as further
amended (the "Charter") or statute provides otherwise, any business may be
considered at an annual meeting without the purpose of the meeting having been
specified in the notice. Failure to hold an annual meeting does not invalidate
the Company's existence or affect any otherwise valid corporate acts.
Section 3. SPECIAL MEETINGS. The president, chief executive officer or
Board of Directors may call special meetings of the shareholders. Special
meetings of shareholders shall also be called by the secretary of the Company
upon the written request of the holders of shares entitled to cast not less than
a majority of all the votes entitled to be cast at such meeting. Such request
shall state the purpose of such meeting and the matters proposed to be acted on
at such meeting. The secretary shall inform such shareholders of the reasonably
estimated cost of preparing and mailing notice of the meeting and, upon payment
to the Company by such shareholders of such costs, the secretary shall give
notice to each shareholder entitled to notice of the meeting.
Section 4. NOTICE OF MEETINGS; WAIVER OF NOTICE. Not less than ten nor
more than 90 days before each shareholders' meeting, the Secretary shall give
notice of the meeting to each shareholder entitled to vote at the meeting and
each other shareholder entitled to notice of the meeting in any manner permitted
under Maryland General Corporation
1
Law now or hereafter enforced. The notice shall state the time and place of the
meeting and, if the meeting is a special meeting or notice of the purpose is
required by statute, the purpose of the meeting. Notice is given to a
shareholder when it is personally delivered to him or her, left at his or her
residence or usual place of business, mailed to him or her at his or her address
as it appears on the records of the Company, or electronically delivered in
accordance with Maryland General Corporation Law now or hereafter enforced.
Notwithstanding the foregoing provisions, each person who is entitled to notice
waives notice if he or she before or after the meeting signs a waiver of the
notice which is filed with the records of shareholders' meetings, or is present
at the meeting in person or by proxy.
Section 5. ORGANIZATION. At every meeting of shareholders, the Chairman
of the Board, if there be one, shall conduct the meeting or, in the case of
vacancy in office or absence of the Chairman of the Board, one of the following
officers present shall conduct the meeting in the order stated: the Vice
Chairman of the Board, if there be one, the President, the Vice Presidents in
their order of rank and seniority, or a Chairman chosen by the shareholders
entitled to cast a majority of the votes which all shareholders present in
person or by proxy are entitled to cast, shall act as Chairman, and the
secretary of the Company, or, in his absence, an assistant secretary of the
Company, or in the absence of both the Secretary and assistant secretaries, a
person appointed by the Chairman shall act as Secretary.
Section 6. QUORUM; ADJOURNMENTS. At any meeting of shareholders, the
presence in person or by proxy of shareholders entitled to cast a majority of
all the votes entitled to be cast at such meeting shall constitute a quorum; but
this section shall not affect any requirement under any statute or the Charter
of the Company for the vote necessary for the adoption of any measure. If,
however, such quorum shall not be present at any meeting of the shareholders,
the shareholders entitled to vote at such meeting, present in person or by
proxy, shall have the power to adjourn the meeting from time to time to a date
not more than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.
Section 7. VOTING. A plurality of all the votes cast at a meeting of
shareholders duly called and at which a quorum is present shall be sufficient to
elect a director. Each share may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted. A majority of the votes cast at a meeting of shareholders duly called and
at which a quorum is present shall be sufficient to approve any other matter
which may properly come before the meeting, unless more than a majority of the
votes cast is required by statute or by the Charter. Unless otherwise provided
in the Charter, each outstanding share, regardless of class, shall be entitled
to one vote on each matter submitted to a vote at a meeting of shareholders.
Section 8. PROXIES. A shareholder may authorize another person to act
as proxy by transmitting, or authorizing the transmission of, a telegram,
cablegram, datagram, or other means of electronic transmission to the person
authorized to act as proxy or to a proxy solicitation firm, proxy support
service organization, or other person authorized by the person who will act as
proxy to receive the transmission. Unless a proxy provides otherwise, it is not
valid more than 11 months after its date. A proxy is revocable by a shareholder
at any time without condition or qualification unless the proxy states that it
is irrevocable and the proxy is
2
coupled with an interest. A proxy may be made irrevocable for so long as it is
coupled with an interest. The interest with which a proxy may be coupled
includes an interest in the stock to be voted under the proxy or another general
interest in the Company or its assets or liabilities.
Section 9. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the Company
registered in the name of a corporation, partnership, trust or other entity, if
entitled to be voted, may be voted by the president or a vice president, a
general partner or trustee thereof, as the case may be, or a proxy appointed by
any of the foregoing individuals, unless some other person who has been
appointed to vote such stock pursuant to a bylaw or a resolution of the
governing body of such corporation or other entity or agreement of the partners
of a partnership presents a certified copy of such bylaw, resolution or
agreement, in which case such person may vote such stock. Any director or other
fiduciary may vote stock registered in his name as such fiduciary, either in
person or by proxy.
Shares of stock of the Company directly or indirectly owned by it shall
not be voted at any meeting and shall not be counted in determining the total
number of outstanding shares entitled to be voted at any given time, unless they
are held by it in a fiduciary capacity, in which case they may be voted and
shall be counted in determining the total number of outstanding shares at any
given time.
The Board of Directors may adopt by resolution a procedure by which a
shareholder may certify in writing to the Company that any shares of stock
registered in the name of the shareholder are held for the account of a
specified person other than the shareholder. The resolution shall set forth the
class of shareholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Company; and any other provisions with respect to the procedure which the
Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the shareholder of record of
the specified stock in place of the shareholder who makes the certification.
Section 10. INSPECTORS. At any meeting of shareholders, the chairman of
the meeting may, or upon the request of any shareholder shall, appoint one or
more persons as inspectors for such meeting. Such inspectors shall ascertain and
report the number of shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all the shareholders.
Each report of an inspector shall be in writing and signed by him or by
a majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be PRIMA FACIE evidence thereof.
Section 11. NOMINATIONS AND SHAREHOLDER BUSINESS
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(a) ANNUAL MEETINGS OF SHAREHOLDERS. Nominations of persons for
election to the Board of Directors and the proposal of business to be considered
by the shareholders may be made at an annual meeting of shareholders (i)
pursuant to the Company's notice of meeting, (ii) by or at the direction of the
Board of Directors or (iii) by any shareholder of the Company who was a
shareholder of record at the time notice of such meeting was sent.
(b) SPECIAL MEETINGS OF SHAREHOLDERS. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the Company's notice of meeting. Nominations of persons
for election to the Board of Directors may be made at a special meeting of
shareholders at which directors are to be elected (i) pursuant to the Company's
notice of meeting, (ii) by or at the direction of the Board of Directors or
(iii) provided that the Board of Directors has determined that directors shall
be elected at such special meeting, by any shareholder of the Company who is a
shareholder of record at the time of giving of notice provided for in this
Section 11(b), who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 11(b). In the event the Company
calls a special meeting of shareholders for the purpose of electing one or more
directors to the Board of Directors, any such shareholder may nominate a person
or persons (as the case may be) for election to such position as specified in
the Company's notice of meeting.
(c) GENERAL. (1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 11 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of shareholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 11. The presiding officer of the meeting shall have
the power and duty to determine whether a nomination or any business proposed to
be brought before the meeting was made in accordance with the procedures set
forth in this Section 11 and, if any proposed nomination or business is not in
compliance with this Section 11, to declare that such defective nomination or
proposal be disregarded.
(2) Notwithstanding the foregoing provisions of this Section 11, a
shareholder shall also comply with all applicable requirements of state law with
respect to the matters set forth in this Section 11.
Section 12. VOTING BY BALLOT. Voting on any question or in any election
may be VIVA VOCE unless the presiding officer shall order or any shareholder
shall demand that voting be by ballot.
Section 13. LIST OF SHAREHOLDERS. At each meeting of shareholders, a
full, true and complete list of all shareholders entitled to vote at such
meeting, showing the number and class of shares held by each and certified by
the transfer agent for such class or by the secretary of the Company, shall be
furnished by the secretary of the Company.
Section 14. INFORMAL ACTION BY SHAREHOLDERS. Any action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if there is filed with the records of shareholders meetings a unanimous
written consent which sets forth the action and is signed by each shareholder
entitled to vote on the matter and a written waiver of any right to dissent
signed by each shareholder entitled to notice of the meeting but not entitled to
vote at it.
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Section 15. MEETING BY CONFERENCE TELEPHONE. Shareholders may
participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means
constitutes presence in person at a meeting.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS; QUALIFICATIONS. The business and affairs of
the Company shall be managed under the direction of its Board of Directors. All
powers of the Company may be exercised by or under authority of the Board of
Directors, except as conferred on or reserved to the shareholders by statute or
by the Charter or Bylaws.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting or
at any special meeting called for that purpose, a majority of the entire Board
of Directors may establish, increase or decrease the number of directors,
provided that the number thereof shall never be less than 7 nor more than 18,
and shall never be less than the minimum number required by the Maryland General
Corporation Law now or hereafter enforced, and further provided that the tenure
of office of a director shall not be affected by any decrease in the number of
directors. The directors shall be divided into two classes as nearly equal in
number as possible. At each successive annual meeting of shareholders, the
holders of stock present in person or by proxy at such meeting and entitled to
vote thereat shall elect members of such successive class to serve for two year
terms and until their successors are elected and qualify. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as nearly equal
as possible, and any additional director of any class shall, subject to Section
13, hold office for a term that shall coincide with the remaining term of that
class, but in no case shall a decrease in the number of directors shorten the
term of any incumbent director.
Section 3. RESIGNATION. Any director may resign at any time by sending
a written notice of such resignation to the principal executive office of the
Company addressed to the Chairman of the Board or the President. Unless
otherwise specified therein such resignation shall take effect upon receipt
thereof by the Chairman of the Board or the President.
Section 4. REMOVAL OF DIRECTOR. Any director or the entire Board of
Directors may be removed only in accordance with the provisions of the Charter.
Section 5. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board
of Directors shall be held immediately after and at the same place as the annual
meeting of shareholders, no notice other than this Bylaw being necessary. The
Board of Directors may provide, by resolution, the time and place, either within
or without the State of Maryland, for the holding of regular meetings of the
Board of Directors without other notice than such resolution.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the chairman of the board (or any
co-chairman of the board if more than one), president or by a majority of the
directors then in office. The person or persons authorized to call special
meetings of the Board of Directors may fix any place, either
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within or without the State of Maryland, as the place for holding any special
meeting of the Board of Directors called by them.
Section 7. NOTICE. Except as provided in Sections 5 and 6, the
Secretary shall give notice to each director of each regular and special meeting
of the Board of Directors. The notice shall state the time and place of the
meeting. Notice is given to a director when it is delivered personally to him or
her, left at his or her residence or usual place of business, or sent by
telegraph, facsimile transmission, electronic transmission (in accordance with
Maryland General Corporation Law now or hereafter enforced) or telephone, at
least 24 hours before the time of the meeting or, in the alternative by mail to
his or her address as it shall appear on the records of the Company, at least 72
hours before the time of the meeting. Unless these Bylaws or a resolution of the
Board of Directors provides otherwise, the notice need not state the business to
be transacted at or the purposes of any regular or special meeting of the Board
of Directors. No notice of any meeting of the Board of Directors need be given
to any director who attends except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened, or to any director who, in writing
executed and filed with the records of the meeting either before or after the
holding thereof, waives such notice. Any meeting of the Board of Directors,
regular or special, may adjourn from time to time to reconvene at the same or
some other place, and no notice need be given of any such adjourned meeting
other than by announcement.
Section 8. QUORUM. A majority of the directors shall constitute a
quorum for transaction of business at any meeting of the Board of Directors,
provided that, if less than a majority of such directors are present at said
meeting, a majority of the directors present may adjourn the meeting from time
to time without further notice, and provided further that if, pursuant to the
Charter of the Company or these Bylaws, the vote of a majority of a particular
group of directors is required for action, a quorum must also include a majority
of such group.
The Board of Directors present at a meeting which has been duly called
and convened may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.
Section 9. VOTING. The action of the majority of the directors present
at a meeting at which a quorum is present shall be the action of the Board of
Directors, unless the concurrence of a greater proportion is required for such
action by applicable statute.
Section 10. PRESUMPTION OF ASSENT. A director of the Company who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his or her dissent or abstention shall be entered in the minutes of the meeting
or unless he or she shall file his or her written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the Secretary of the Company
immediately after the adjournment of the meeting. Such right to dissent shall
not apply to a director who votes in favor of such action.
Section 11. TELEPHONE MEETINGS. Directors may participate in a meeting
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
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Section 12. INFORMAL ACTION BY DIRECTORS. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by each
director and such written consent is filed with the minutes of proceedings of
the Board of Directors.
Section 13. VACANCIES. If for any reason any or all the directors cease
to be directors, such event shall not terminate the Company or affect these
Bylaws or the powers of the remaining directors hereunder (even if fewer than
three directors remain). Any vacancy on the Board of Directors for any cause
other than an increase in the number of directors shall be filled by a majority
of the remaining directors, although such majority is less than a quorum. Any
vacancy in the number of directors created by an increase in the number of
directors may be filled by a majority vote of the entire Board of Directors. Any
individual so elected as director shall hold office for the unexpired term of
the director he is replacing.
Section 14. COMPENSATION. Directors shall not receive any stated salary
for their services as directors but, by resolution of the Board of Directors,
may receive fixed sums per year and/or per meeting and/or per visit to real
property owned or to be acquired by the Company and for any service or activity
they performed or engaged in as directors. Directors may be reimbursed for
expenses of attendance, if any, at each annual, regular or special meeting of
the Board of Directors or of any committee thereof and for their expenses, if
any, in connection with each property visit and any other service or activity
they performed or engaged in as directors; but nothing herein contained shall be
construed to preclude any directors from serving the Company in any other
capacity and receiving compensation therefor.
Section 15. LOSS OF DEPOSITS. No director shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or stock have been
deposited.
Section 16. SURETY BONDS. Unless required by law, no director shall be
obligated to give any bond or surety or other security for the performance of
any of his duties.
Section 17. RELIANCE. Each director, officer, employee and agent of the
Company shall, in the performance of his duties with respect to the Company, be
fully justified and protected with regard to any act or failure to act in
reliance in good faith upon the books of account or other records of the
Company, upon an opinion of counsel or upon reports made to the Company by any
of its officers or employees or by the adviser, accountants, appraisers or other
experts or consultants selected by the Board of Directors or officers of the
Company, regardless of whether such counsel or expert may also be a director.
Section 18. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND
AGENTS. The directors shall have no responsibility to devote their full time to
the affairs of the Company. Any director or officer, employee or agent of the
Company, in his personal capacity or in a capacity as an affiliate, employee, or
agent of any other person, or otherwise, may have business interests and engage
in business activities similar to or in addition to or in competition with those
of or relating to the Company.
ARTICLE IV
COMMITTEES
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Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors
may appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee and other committees, composed of one or more directors,
to serve at the pleasure of the Board of Directors; provided, however, that the
Audit Committee, if formed, shall consist only of independent directors and the
Compensation Committee, if formed, shall consist of two or more Independent
Directors. For purposes of this section, an "Independent Director" shall mean
any person if, in the opinion of the Board of Directors such person will
exercise independent judgment and will materially assist in the function of the
committee, except that such person shall not be an officer or employee of the
Company, or a director who represents a close relative of a person who would not
qualify as an Independent Director.
Section 2. POWERS. The Board of Directors may delegate to committees
appointed under Section 1 of this Article any of the powers of the Board of
Directors, except the power to authorize dividends on stock, elect directors,
issue stock other than as provided in the next sentence, recommend to the
shareholders any action which requires shareholder approval, amend these Bylaws,
or approve any merger or share exchange which does not require shareholder
approval. If the Board of Directors has given general authorization for the
issuance of stock providing for or establishing a method or procedure for
determining the maximum number or shares to be issued, a committee of the Board
of Directors, in accordance with that general authorization or any stock option
or other plan or program adopted by the Board of Directors, may authorize or fix
the terms of stock subject to classification or reclassification and the terms
on which any stock may be issued, including all terms and conditions required or
permitted to be established or authorized by the Board of Directors.
Section 3. MEETINGS. Notice of committee meetings shall be given in the
same manner as notice for special meetings of the Board of Directors. A majority
of the members of the committee shall constitute a quorum for the transaction of
business at any meeting of the committee. The act of a majority of the committee
members present at a meeting shall be the act of such committee. The Board of
Directors may designate a chairman of any committee, and such chairman or any
two members of any committee may fix the time and place of its meeting unless
the Board shall otherwise provide. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint another director to act in the place of such
absent member. Each committee shall keep minutes of its proceedings.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent in writing to such action is signed
by each member of the committee and such written consent is filed with the
minutes of proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all
8
vacancies, to designate alternate members to replace any absent or disqualified
member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Company shall
include a chief executive officer, a president, a secretary and a chief
financial officer and may include a chairman of the board (or one or more
co-chairmen of the board), a vice chairman of the board, one or more executive
vice presidents, one or more senior vice presidents, one or more vice
presidents, a chief operating officer, a treasurer, one or more assistant
secretaries and one or more assistant treasurers. In addition, the Board of
Directors may from time to time appoint such other officers with such powers and
duties as they shall deem necessary or desirable or authorize any committee or
officer to appoint assistant or subordinate officers. The officers of the
Company shall be elected annually by the Board of Directors at the first meeting
of the Board of Directors held after each annual meeting of shareholders, except
that the chief executive officer may appoint one or more vice presidents,
assistant secretaries and assistant treasurers. If the election of officers
shall not be held at such meeting, such election shall be held as soon
thereafter as may be convenient. Each officer shall hold office at the pleasure
of the Board of Directors or until his death, resignation or removal in the
manner hereinafter provided. Any two or more offices except president and vice
president may be held by the same person. In its discretion, the Board of
Directors may leave unfilled any office except that of president, treasurer and
secretary. Election of an officer or agent shall not of itself create contract
rights between the Company and such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the Company
may be removed by the Board of Directors if in its judgment the best interests
of the Company would be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Any officer
of the Company may resign at any time by giving written notice of his
resignation to the Board of Directors, the chairman of the board (or any
co-chairman of the board if more than one), the president or the secretary. Any
resignation shall take effect at any time subsequent to the time specified
therein or, if the time when it shall become effective is not specified therein,
immediately upon its receipt. The acceptance of a resignation shall not be
necessary to make it effective unless otherwise stated in the resignation. Such
resignation shall be without prejudice to the contract rights, if any, of the
Company.
Section 3. CHIEF EXECUTIVE OFFICER. The Board of Directors may
designate a chief executive officer. In the absence of such designation, the
chairman of the board (or, if more than one, the co-chairmen of the board in the
order designated at the time of their election or, in the absence of any
designation, then in the order of their election) shall be the chief executive
officer of the Company. The chief executive officer shall have general
responsibility for implementation of the policies of the Company, as determined
by the Board of Directors, and for the management of the business and affairs of
the Company.
Section 4. CHIEF OPERATING OFFICER. The Board of Directors may
designate a chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
9
Section 5. CHIEF FINANCIAL OFFICER. The Board of Directors may
designate a chief financial officer. The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 6. CHAIRMAN OF THE BOARD. The Board of Directors shall
designate a chairman of the board (or one or more co-chairmen of the board). The
chairman of the board shall preside over the meetings of the Board of Directors
and of the shareholders at which he shall be present. If there be more than one,
the co-chairmen designated by the Board of Directors will perform such duties.
The chairman of the board shall perform such other duties as may be assigned to
him or them by the Board of Directors.
Section 7. CHAIRMAN OF THE BOARD EMERITUS. The directors may elect by a
majority vote, from time to time, a chairman of the board emeritus (or one or
more co-chairmen of the board emeritus). The chairman of the board emeritus
shall be an honorary position and shall have no vote on any matter considered by
the directors. The chairman of the board emeritus shall serve for such term as
determined by the Board of Directors and may be removed by a majority role of
directors with or without cause.
Section 8. PRESIDENT. The president or chief executive officer, as the
case may be, shall in general supervise and control all of the business and
affairs of the Company. In the absence of a designation of a chief operating
officer by the Board of Directors, the president shall be the chief operating
officer. He may execute any deed, mortgage, bond, contract or other instrument,
except in cases where the execution thereof shall be expressly delegated by the
Board of Directors or by these Bylaws to some other officer or agent of the
Company or shall be required by law to be otherwise executed; and in general
shall perform all duties incident to the office of president and such other
duties as may be prescribed by the Board of Directors from time to time.
Section 9. VICE PRESIDENTS. In the absence of the president or in the
event of a vacancy in such office, the vice president (or in the event there be
more than one vice president, the vice presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the president and when so acting
shall have all the powers of and be subject to all the restrictions upon the
president; and shall perform such other duties as from time to time may be
assigned to him by the president or by the Board of Directors. The Board of
Directors may designate one or more vice presidents as executive vice president
or as vice president for particular areas of responsibility.
Section 10. SECRETARY. The secretary shall (a) keep the minutes of the
proceedings of the shareholders, the Board of Directors and committees of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in accordance with the provisions of these Bylaws or
as required by law; (c) be custodian of the corporate records and of the seal of
the Company; (d) keep a register of the post office address of each shareholder
which shall be furnished to the secretary by such shareholder; (e) have general
charge of the share transfer books of the Company; and (f) in general perform
such other duties as from time to time may be assigned to him by the chief
executive officer, the president or by the Board of Directors.
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Section 11. TREASURER. The treasurer shall have the custody of the
funds and securities of the Company and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall deposit
all moneys and other valuable effects in the name and to the credit of the
Company in such depositories as may be designated by the Board of Directors. In
the absence of a designation of a chief financial officer by the Board of
Directors, the treasurer shall be the chief financial officer of the Company.
The treasurer shall disburse the funds of the Company as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the president and Board of Directors, at the regular meetings of
the Board of Directors or whenever it may so require, an account of all his
transactions as treasurer and of the financial condition of the Company.
If required by the Board of Directors, the treasurer shall give the
Company a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Company, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, moneys and other property of whatever kind in his possession or under
his control belonging to the Company.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretaries and assistant treasurers, in general, shall perform such
duties as shall be assigned to them by the secretary or treasurer, respectively,
or by the president or the Board of Directors. The assistant treasurers shall,
if required by the Board of Directors, give bonds for the faithful performance
of their duties in such sums and with such surety or sureties as shall be
satisfactory to the Board of Directors.
Section 13. SALARIES. The salaries and other compensation of the
officers shall be fixed from time to time by the Board of Directors and no
officer shall be prevented from receiving such salary or other compensation by
reason of the fact that he is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument in
the name of and on behalf of the Company and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by one or more of the directors or by an authorized person
shall be valid and binding upon the Board of Directors and upon the Company when
authorized or ratified by action of the Board of Directors.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Company shall be signed by such officer or agent of the Company in
such manner as shall from time to time be determined by the Board of Directors.
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Section 3. DEPOSITS. All funds of the Company not otherwise employed
shall be deposited from time to time to the credit of the Company in such banks,
trust companies or other depositories as the Board of Directors may designate.
ARTICLE VII
STOCK
Section 1. CERTIFICATES. The Board of Directors may determine to issue
certificated or uncertificated shares of capital stock and other securities of
the Company.
Section 2. TRANSFERS. Upon surrender to the Company or the transfer
agent of the Company of a stock certificate duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the Company
shall issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books.
The Company shall be entitled to treat the holder of record of any
share of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
Notwithstanding the foregoing, transfers of shares of any class of
stock will be subject in all respects to the Charter of the Company and all of
the terms and conditions contained therein. Notwithstanding any other provision
of the Charter or these Bylaws, Title 3, Subtitle 7 of the Maryland General
Corporation Law (or any successor statute) shall not apply to any acquisition by
any person of shares of stock of the Company. This section may be repealed, in
whole or in part, at any time, whether before or after an acquisition of control
shares and, upon such repeal, may, to the extent provided by any successor or
bylaw, apply to any prior or subsequent control share acquisition.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board
of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Company alleged to have been lost, stolen
or destroyed upon the making of an affidavit of that fact by the person claiming
the certificate to be lost, stolen or destroyed. When authorizing the issuance
of a new certificate, an officer designated by the Board of Directors may, in
his discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or the owner's legal
representative to advertise the same in such manner as he shall require and/or
to give bond, with sufficient surety, to the Company to indemnify it against any
loss or claim which may arise as a result of the issuance of a new certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
Board of Directors may set, in advance, a record date for the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders or determining shareholders entitled to receive payment of any
dividend or the allotment of any other rights, or in order to make a
determination of shareholders for any other proper purpose. Such date, in any
case, shall not be prior to the close of business on the day the record date is
fixed and shall be not more than 90 days and, in the case of a meeting of
shareholders, not less than ten days, before the
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date on which the meeting or particular action requiring such determination of
shareholders of record is to be held or taken.
In lieu of fixing a record date, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not longer
than 20 days. If the stock transfer books are closed for the purpose of
determining shareholders entitled to notice of or to vote at a meeting of
shareholders, such books shall be closed for at least ten days before the date
of such meeting.
If no record date is fixed and the stock transfer books are not closed
for the determination of shareholders, (a) the record date for the determination
of shareholders entitled to notice of or to vote at a meeting of shareholders
shall be at the close of business on the day on which the notice of meeting is
mailed or transmitted or the 30th day before the meeting, whichever is the
closer date to the meeting; and (b) the record date for the determination of
shareholders entitled to receive payment of a dividend or an allotment of any
other rights shall be the close of business on the day on which the resolution
of the directors, declaring the dividend or allotment of rights, is adopted.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except when (i) the determination has been
made through the closing of the transfer books and the stated period of closing
has expired or (ii) the meeting is adjourned to a date more than 120 days after
the record date fixed for the original meeting, in either of which case a new
record date shall be determined as set forth herein.
Section 5. STOCK LEDGER. The Company shall maintain at its principal
executive office or at the office of its counsel, accountants or transfer agent,
an original or duplicate share ledger containing the name and address of each
shareholder and the number of shares of each class held by such shareholder.
Section 6. CERTIFICATION OF BENEFICIAL OWNERS. The Board of Directors
may adopt by resolution a procedure by which a shareholder of the Company may
certify in writing to the Company that any shares of stock registered in the
name of the shareholder are held for the account of a specified person other
than the shareholder. The resolution shall set forth the class of shareholders
who may certify; the purpose for which the certification may be made; the form
of certification and the information to be contained in it; if the certification
is with respect to a record date or closing of the stock transfer books, the
time after the record date or closing of the stock transfer books within which
the certification must be received by the Company; and any other provisions with
respect to the procedure which the Board of Directors considers necessary or
desirable. On receipt of a certification which complies with the procedure
adopted by the Board of Directors in accordance with this Section, the person
specified in the certification is, for the purpose set forth in the
certification, the holder of record of the specified stock in place of the
shareholder who makes the certification.
Section 7. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors
may issue fractional stock or provide for the issuance of scrip, all on such
terms and under such conditions as they may determine. Notwithstanding any other
provision of the Charter or these Bylaws, the Board of Directors may issue units
consisting of different securities of the Company. Any security issued in a unit
shall have the same characteristics as any
13
identical securities issued by the Company, except that the Board of Directors
may provide that for a specified period securities of the Company issued in such
unit may be transferred on the books of the Company only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix
the fiscal year of the Company by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the
stock of the Company may be authorized and declared by the Board of Directors,
subject to the provisions of law and the Charter of the Company. Dividends and
other distributions may be paid in cash, property or stock of the Company,
subject to the provisions of law and the Charter.
Section 2. CONTINGENCIES. Before payment of any dividends or other
distributions, there may be set aside out of any assets of the Company available
for dividends or other distributions such sum or sums as the Board of Directors
may from time to time, in its absolute discretion, think proper as a reserve
fund for contingencies, for equalizing dividends or other distributions, for
repairing or maintaining any property of the Company or for such other purpose
as the Board of Directors shall determine to be in the best interest of the
Company, and the Board of Directors may modify or abolish any such reserve in
the manner in which it was created.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the Charter of the Company, the Board of
Directors may from time to time adopt, amend, revise or terminate any policy or
policies with respect to investments by the Company as it shall deem appropriate
in its sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL. The Board of Directors may authorize the adoption of a
seal by the Company. The seal shall contain the name of the Company and the year
of its incorporation. The Board of Directors may authorize one or more duplicate
seals and provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Company is permitted or required
to affix its seal to a document, it shall be sufficient to meet the requirements
of any law, rule or regulation relating to a seal to place the word "(SEAL)"
adjacent to the signature of the person authorized to execute the document on
behalf of the Company.
14
ARTICLE XII
INDEMNIFICATION AND ADVANCES FOR EXPENSES
Section 1. PROCEDURE. Any indemnification, or payment of expenses in
advance of the final disposition of any proceeding, shall be made promptly, and
in any event within 60 days, upon the written request of the director or officer
entitled to seek indemnification (the "Indemnified Party"). The right to
indemnification and advances hereunder shall be enforceable by the Indemnified
Party in any court of competent jurisdiction, if (i) the Company denies such
request, in whole or in part, or (ii) no disposition thereof is made within 60
days. The Indemnified Party's costs and expenses incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such action shall also be reimbursed by the Company. It shall be a
defense to any action for advance for expenses that (a) a determination has been
made that the facts then known to those making the determination would preclude
indemnification or (b) the Company has not received both (i) an undertaking as
required by law to repay such advance sin the event it shall ultimately be
determined that the standard of conduct has not been met and (ii) a written
affirmation by the Indemnified Party of such Indemnified Party's good faith
belief that the standard of conduct necessary for indemnification by the Company
has been met.
Section 2. EXCLUSIVITY, ETC. The indemnification and advance of
expenses provided by the Charter and these Bylaws shall not be deemed exclusive
of any other rights to which a person seeking indemnification or advance of
expenses may be entitled under any law (common or statutory), or any agreement,
vote of shareholders or disinterested directors or other provision that is
consistent with law, both as to action in his or her official capacity and as to
action in another capacity while holding office or while employed by or acting
as agent for the Company, shall continue in respect of all events occurring
while a person was as director or officer after such person has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of such person. The Company shall not be liable for
any payment under this Bylaw in connection with a claim made by a director or
officer to the extent such director or officer has otherwise actually received
payment under insurance policy, agreement, vote or otherwise, of the amounts
otherwise indemnifiable hereunder. All rights to indemnification and advance of
expenses under the Charter of the Company and hereunder shall be deemed to be a
contract between the Company and each director or officer of the Company who
serves or served in such capacity at any time while this Bylaw is in effect.
Nothing herein shall prevent the amendment of this Bylaw, provided that no such
amendment shall diminish the rights of any person hereunder with respect to
events occurring or claims made before its adoption or as to claims made after
its adoption in respect of events occurring before its adoption. Any repeal or
modification of this Bylaw shall not in any way diminish any rights to
indemnification or advance of expenses of such director or officer or the
obligations of the Company arising hereunder with respect to events occurring,
or claims made, while this Bylaw or any provision hereof is in force.
Section 3. SEVERABILITY; DEFINITIONS. The invalidity or
unenforceability of any provision of this Article XII shall not affect the
validity or enforceability of any other provision hereof. The phrase "this
Bylaw" in this Article XII means this Article XII in its entirety.
15
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Charter of
the Company or these Bylaws or pursuant to applicable law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at nor the purpose of any
meeting need be set forth in the waiver of notice, unless specifically required
by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting, except where such person attends a meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
In accordance with the Charter, these Bylaws may be repealed, altered,
amended or rescinded (a) by the shareholders of the Company but only by the
affirmative vote of not less than 80% of all the votes entitled to be cast by
the outstanding shares of capital stock of the Company entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the shareholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting) or (b) by affirmative vote of not less
than two-thirds of the Board of Directors at a meeting held in accordance with
the provisions of these Bylaws.
ARTICLE XV
MISCELLANEOUS
Section 1. BOOKS AND RECORDS. The Company shall keep correct and
complete books and records of its accounts and transactions and minutes of the
proceedings of its shareholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors. The
books and records of the Company may be in written form or in any other form
which can be converted within a reasonable time into written form for visual
inspection. Minutes shall be recorded in written form but may be maintained in
the form of a reproduction. The original or a certified copy of these Bylaws
shall be kept at the principal office of the Company.
Section 2. VOTING STOCK IN OTHER COMPANIES. Stock of other corporations
or associations, registered in the name of the Company, may be voted by the
President, a Vice-President, or a proxy appointed by either of them. The Board
of Directors, however, may by resolution appoint some other person to vote such
shares, in which case such person shall be entitled to vote such shares upon the
production of a certified copy of such resolution.
Section 3. MAIL. Any notice or other document which is required by
these Bylaws to be mailed shall be deposited in the United States mails, postage
prepaid.
16
Section 4. ELECTRONIC NOTICES. Any notice provided by the Company as
required by these Bylaws may be delivered electronically when permitted under,
and in accordance with, Maryland General Corporation Law now or hereafter
enforced.
Section 4. EXECUTION OF DOCUMENTS. A person who holds more than one
office in the Company may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by law to be executed,
acknowledged, or verified by more than one officer.
17
5
1,000
6-MOS
DEC-31-2000
JAN-01-2000
JUN-30-2000
32,718
95
2,282,231
10,500
0
61,438
1,605,422
30,907
4,041,269
57,761
2,138,060
0
11
85
1,842,787
4,041,269
0
228,802
0
0
40,000
3,000
80,559
106,135
0
105,161
0
317
0
87,364
1.03
1.02
