<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
From the transition period from __________________ to __________________
Commission file number 0-9097
THE PEREGRINE REAL ESTATE TRUST
(Exact name of registrant as specified in its charter)
California 94-2255677
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1300 Ethan Way, Suite 200, Sacramento, CA 95825
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(916) 929-8244
- -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
<PAGE>
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 13, 1998
- ------------------------------------ --------------------------------
Common Shares of Beneficial Interest 4,881,122
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______________________________________________________________________________
THE PEREGRINE REAL ESTATE TRUST
______________________________________________________________________________
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Balance Sheets -
September 30, 1998 and December 31, 1997 1
Statements of Operations -
For the Three Months and Nine Months Ended
September 30, 1998 and 1997 2-3
Statements of Cash Flows -
For the Nine Months Ended
September 30, 1998 and 1997 4
Notes to Financial Statements 5 - 11
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 19
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 20 - 21
<PAGE>
PART I: FINANCIAL INFORMATION
THE PEREGRINE REAL ESTATE TRUST
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited) (Audited)
-------------- -------------
<S> <C> <C>
ASSETS
Investments:
Rental properties, net of accumulated depreciation of $6,909,000 and
$4,684,000 at September 30, 1998 and December 31, 1997, respectively $ 74,935,000 $ 65,700,000
Notes receivable, net of deferred gains of $78,000 and $79,000 at
September 30, 1998 and December 31, 1997, respectively 329,000 332,000
Restricted marketable securities available-for-sale 100,000 117,000
------------- -------------
75,364,000 66,149,000
Cash 420,000 1,247,000
Restricted cash 205,000 183,000
Rents, accrued interest and other receivables, net of allowance of $7,000 and
$41,000 at September 30, 1998 and December 31, 1997, respectively 394,000 720,000
Other assets 2,004,000 1,584,000
------------- -------------
Total assets $ 78,387,000 $ 69,883,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Long-term notes payable, collateralized by deeds of trust on
rental properties $ 24,039,000 $ 24,291,000
Senior Lender Group Notes Payable 26,074,000 26,930,000
Line of credit 19,726,000 8,021,000
Accounts payable and accrued liabilities 2,173,000 2,064,000
Other liabilities 306,000 258,000
------------- -------------
72,318,000 61,564,000
------------- -------------
Commitments and contingencies (Note 5 to financial statements)
Redeemable Convertible Preferred Stock: 25,000,000 shares authorized;
16,764,000 and 15,555,000 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively; net of
unaccreted discount of $1,202,000 and $1,595,000 at September 30, 1998
and December 31, 1997, respectively; liquidation preference of
$33,528,000 and $31,110,000 at September 30, 1998 and December 31, 1997,
Respectively 32,234,000 29,515,000
------------- -------------
Common Shares of Beneficial Interest: 50,000,000 shares authorized; 4,881,000
shares outstanding 13,356,000 13,356,000
Accumulated deficit (39,521,000) (34,552,000)
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 78,387,000 $ 69,883,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
1
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THE PEREGRINE REAL ESTATE TRUST
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Hotel properties $ 3,502,000 $ 3,475,000 $ 10,260,000 $ 10,401,000
Commercial properties 2,161,000 2,354,000 6,756,000 7,108,000
Interest 17,000 47,000 84,000 222,000
Other 8,000 25,000 26,000 310,000
------------- ------------- -------------- --------------
5,688,000 5,901,000 17,126,000 18,041,000
------------- ------------- -------------- --------------
EXPENSES:
Hotel operating expenses 3,138,000 2,681,000 8,401,000 7,724,000
Commercial property operating expenses 739,000 869,000 2,191,000 2,252,000
Hotel and commercial property management fees -- 83,000 -- 479,000
Depreciation and amortization 886,000 815,000 2,510,000 2,377,000
Interest 1,524,000 1,401,000 4,196,000 4,376,000
General and administrative 934,000 970,000 2,453,000 2,526,000
------------- ------------- -------------- --------------
7,221,000 6,819,000 19,751,000 19,734,000
------------- ------------- -------------- --------------
Loss before gain on foreclosure
or sale of investments and extraordinary item
item. (1,533,000) (918,000) (2,625,000) (1,693,000)
Gain on foreclosure or sale of investments 374,000 -- 374,000 1,122,000
------------- ------------- -------------- --------------
Loss before extraordinary item, (1,159,000) (918,000) (2,251,000) (571,000)
Extraordinary item - debt forgiveness -- -- -- 440,000
------------- ------------- -------------- --------------
Net loss $(1,159,000) $ (918,000) $(2,251,000) $ (131,000)
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
2
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THE PEREGRINE REAL ESTATE TRUST
STATEMENTS OF OPERATIONS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
LOSS PER COMMON SHARE OF BENEFICIAL INTEREST:
Net loss $(1,159,000) $ (918,000) $(2,251,000) $ (131,000)
Preferred Stock dividends, net of discounts (806,000) (718,000) (2,326,000) (2,072,000)
Accretion of discounts on Preferred Stock (138,000) (112,000) (393,000) (320,000)
----------- ------------ ------------ -----------
Net loss attributable to Common Shares of
Beneficial Interest $(2,103,000) $ (1,748,000) $ (4,970,000) $(2,523,000)
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
Loss per Common Share of Beneficial Interest
before extraordinary item $ (0.43) $ (0.36) $ (1.02) $ (0.61)
Extraordinary item per Common Share of
Beneficial Interest -- --- -- 0.09
----------- ------------ ------------ -----------
Net loss per share attributable to Common Shares
of Beneficial Interest $ (0.43) $ (0.36) $ (1.02) $ (0.52)
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
Weighted average number of Common Shares of
Beneficial Interest outstanding 4,881,000 4,881,000 4,881,000 4,881,000
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
</TABLE>
See accompanying notes to financial statements.
3
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THE PEREGRINE REAL ESTATE TRUST
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,251,000) $ (131,000)
------------ ----------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Interest and fees added to principal balance of debt 895,000 98,000
Depreciation and amortization 2,489,000 2,377,000
Gain on foreclosure or sale of investments (267,000) (1,122,000)
Extraordinary item, forgiveness of debt -- (440,000)
Changes in other assets and liabilities:
Decrease in rents, accrued interest and other
receivables 318,000 354,000
Increase in other assets (268,000) (443,000)
Increase (decrease) in accounts payable and accrued
liabilities 125,000 (8,000)
Increase (decrease) in other liabilities 48,000 (1,000)
------------ -----------
Total adjustments to net loss 3,340,000 815,000
------------ -----------
Net cash provided by operating activities 1,089,000 684,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 1,019,000 20,332,000
Purchase of marketable securities (1,816,000) (1,829,000)
Principal collections on marketable securities 1,833,000 1,664,000
Purchase of properties (9,000,000) --
Improvements to rental properties (3,558,000) (1,211,000)
Purchase of office equipment (78,000) (39,000)
Principal collections on notes receivable 3,000 388,000
------------ -----------
Net cash provided by (used in) investing activities (11,597,000) 19,305,000
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term notes payable (251,000) (2,431,000)
Principal (payments) borrowings on Line of Credit, net 10,810,000 (1,083,000)
Principal payments on Senior Lender Group Notes Payable (856,000) (16,618,000)
Decrease (increase) in restricted cash (22,000) 854,000
------------ -----------
Net cash provided by (used in) financing activities 9,681,000 (19,278,000)
------------ -----------
Net increase (decrease) in unrestricted cash (827,000) 711,000
Unrestricted cash, beginning of period 1,247,000 5,972,000
Less unrestricted cash, beginning of period, attributable to CalREIT -- (4,698,000)(1)
------------ -----------
Unrestricted cash, end of period $ 420,000 $ 1,985,000
------------ -----------
------------ -----------
</TABLE>
(1) Amount is deducted to reflect Peregrine's sale of its 76% stock ownership
interest in CalREIT on January 3, 1997.
See accompanying notes to financial statements.
4
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THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
__________
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
The Peregrine Real Estate Trust ("Peregrine") was organized under the laws
of the State of California pursuant to a Declaration of Trust dated July 31,
1973, and pursuant to a Plan of Reorganization (the "Plan") under Chapter 11 of
the United States Bankruptcy Code was reorganized under a Restated Declaration
of Trust dated October 7, 1994 (the "Effective Date"). Commencing September 1,
1993, Peregrine became self-administered. Peregrine's obligation of
approximately $80,000,000 to a group of secured lenders (the "Senior Lender
Group") was satisfied by the Plan by the issuance of 52% of the Common Shares of
Beneficial Interest, Redeemable Convertible Preferred Stock ("Preferred Stock")
in the original face amount of $22,500,000, which carries a dividend of 10% per
annum and notes payable in the original face amount of $40,000,000, which bears
interest at 8.5% per annum (the "Senior Lender Group Notes Payable" or "Senior
Lender Group Notes").
At September 30, 1998, Peregrine owned sixteen commercial properties
located primarily in the Sacramento area, four hotel properties located in
Northern California, a partnership interest and one mortgage note secured by
real property. Peregrine's 76% stock ownership interest in the California Real
Estate Investment Trust ("CalREIT") was sold on January 3, 1997, for $20,222,000
in cash.
BASIS OF PRESENTATION
The accompanying financial statements are unaudited; however, they have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in conjunction with the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results for the interim period ended September 30, 1998 are not
necessarily indicative of the results to be obtained for the full fiscal year.
These financial statements should be read in conjunction with the December 31,
1997 audited financial statements and notes thereto, included in The Peregrine
Real Estate Trust's Annual Report on Form 10-K.
5
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THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
__________
1. ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED
NET LOSS PER SHARE
Net loss per Common Share of Beneficial Interest, basic and diluted, has
been computed and presented in accordance with Statement of Financial Accounting
Standard No. 128, "Earnings Per Share", ("SFAS 128"). The weighted-average
number of Common Shares of Beneficial Interest outstanding during the three and
nine months periods ended September 30, 1998 and 1997, was 4,881,000. Common
Shares of Beneficial Interest equivalents are anti-dilutive for the nine month
periods ended September 30, 1998 and 1997, and are not considered in calculating
net loss per Common Share of Beneficial Interest.
COMPREHENSIVE NET INCOME
Effective January 1, 1998, the Trust adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income".
This statement requires that all items recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other annual financial statements. For
the quarter ended September 30, 1998, the Trust had no comprehensive income
items.
2. RESTRICTED MARKETABLE SECURITIES "AVAILABLE FOR SALE"
RESTRICTED MARKETABLE SECURITIES "AVAILABLE-FOR-SALE"
At September 30, 1998, the Trust had $100,000 invested in marketable
securities, which were restricted. The funds represent a portion of an
indemnity trust fund (the "Indemnity Trust Fund") which was established to fund
possible indemnification obligations with respect to Peregrine's former Trustees
and officers. The Indemnity Trust Fund, which is managed by an independent
third-party trustee, is restricted as to use for a period of three years ending
May 29, 2000, as defined in the Indemnity Trust Agreement. At September 30,
1998, Peregrine's "available-for-sale" securities consisted of investment grade
commercial paper with an interest rate of 5.430% and maturity dates ranging from
October 22, 1998 to January 22, 1999. Unrealized gains and losses on marketable
securities were not significant at September 30, 1998. At December 31, 1997,
the Trust had $117,000 invested in U.S. Treasury Notes and investment grade
commercial paper classified, all of which were classified as restricted and
"available-for-sale".
6
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THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
__________
3. ACQUISITION
On July 1, 1998, Peregrine purchased a 191 room hotel property, located in
Concord, California. Peregrine financed the purchase price with $9,000,000 in
borrowing under it's Line of Credit pursuant to an increase in the Line of
Credit that was made to accommodate the purchase of the hotel.
4. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
At September 30, 1998, Peregrine is required by Holiday Inn the License
Agreements to perform certain refurbishments at the Sacramento and Walnut Creek
hotels in order to comply with Holiday Inn standards. At September 30, 1998,
the capital expenditures necessary to complete the required refurbishments are
estimated at approximately $2,700,000 and $750,000 for the Sacramento and Walnut
Creek hotels, respectively. If the required refurbishments are not completed in
a timely manner or should they not meet Holiday Inn's standards, Holiday Inn may
assert that Peregrine is in default of the License Agreement and Holiday Inn
could attempt to terminate the License Agreement. If the License Agreement is
terminated, it could constitute events of default under both the Line of Credit
and Senior Lender Group Notes and could result in termination fees payable to
Holiday Inn of approximately $1,100,000 with respect to the Sacramento hotel and
approximately $900,000 with respect to the Walnut Creek hotel
At September 30, 1998, management of Peregrine believes that, because of
the Trust's borrowing capacity and the improving conditions of the economy and
the commercial and hotel industries, it will be able to fund its day-to-day
business operations, meet its debt service obligations on its Line of Credit,
first mortgage notes and Senior Lender Group notes, and fund its capital
expenditures, including required refurbishments under the licenses agreements.
On January 26, 1999, $7.5 million of the Line of Credit will no longer be
available. This portion of Line of Credit was a six month extension that started
on July 26, 1998.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Peregrine's Redeemable Convertible Preferred Stock in the original face
amount of $22,500,000, carries a dividend of 10% per annum. Dividends are
payable in-kind through October 1, 1998, by means of additional shares of
Preferred Stock issued quarterly; thereafter, dividends are payable quarterly in
cash. The Preferred Stock automatically converts into Common Shares of
Beneficial Interest pursuant to an established formula if any cash dividend
payment is not made in full when due. If all dividends are paid in-kind through
September 30, 1998, no other Common Shares of Beneficial Interest are issued,
and the Preferred Stock dividends payable in cash on
7
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THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
__________
December 31, 1998 are not paid prior to April 10, 1999, the Preferred Stock
would convert to Common Shares of Beneficial Interest on April 10, 1999, and the
Senior Lender Group would, on account of that conversion, acquire approximately
78% of the total Common Shares of Beneficial Interest outstanding after the
conversion, bringing their total holdings to approximately 90% of the
outstanding shares. On November 2, 1998, Peregrine entered into an agreement
with the holders of the preferred shares pursuant to which such holders have
agreed to exchange all of the issued and outstanding preferred shares for the
number of common shares that they would have received upon the mandatory
conversion of the preferred shares in April 1999. See Note 10.
The Preferred Stock has been recorded at a discount to its face amount of
$33,528,000, based on an imputed rate of return of 12%.
6. GAIN ON FORECLOSURE OR SALE OF INVESTMENTS
In August 1998, Peregrine sold the Commerce Circle Industrial Building for
$634,000 resulting in a gain of $205,000.
In September 1998, Peregrine sold the Consumer Street Industrial Building.
for $580,000 resulting in a gain of $169,000.
On January 3, 1997, the date on which Peregrine sold its investment in
CalREIT, the book value of Peregrine's investment in CalREIT was $18,733,000.
CalREIT was sold for $20,222,000 in cash, with $477,000 in related selling costs
incurred, resulting in a gain of $1,012,000.
In June 1997, Peregrine sold a $275,000 face value note collateralized by a
second deed of trust on real property in Corona, California to the borrower for
$110,000. The book value of the note was $0, resulting in the recognition of a
$110,000 gain.
8
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THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
__________
7. RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 1998, Peregrine paid $10,000 to
one of its current officers, Brian Engstrom, for services performed as a
consultant prior to the commencement of his employment as an officer of the
Trust.
Peregrine utilized the services of certain of its former independent Trustees
during the nine month periods ended September 30, 1997 in connection with its
analysis of alternative operating strategies, asset dispositions and day-to-day
management activities. In addition, certain of the former independent Trustees
were paid for time incurred in connection with a lawsuit filed against Peregrine
by MDC REIT Holdings, L.L.C. In connection with the consulting services
performed, the following amounts were paid to such Trustees (or affiliated
companies) during the nine month periods ended September 30, 1997, in addition
to the quarterly and meeting fees paid to the Trustees:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1997
<S> <C>
The McMahan Group (John McMahan, former Trustee) $ 9,000
John F. Salmon, former Trustee $ 6,000
The Presidio Group (Kenneth T. Seeger, former Trustee) $ 59,000
Hickey & Hill, Inc. (E. Lawrence Hill, Jr., former Trustee) $ 5,000
</TABLE>
8. EXTRAORDINARY ITEM, FORGIVENESS OF DEBT
During the second quarter 1997, Peregrine benefited from a forgiveness of
debt of $418,000 in connection with an agreement with the mortgage lender on
3900 Lennane Drive, and during the first quarter of 1997, Peregrine benefited
from a $22,000 forgiveness of debt related to the extinguishment of certain debt
related to the bankruptcy proceedings. No such amount was recorded during the
nine and three months ended September 30, 1998.
9. STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
On September 30, 1998 and 1997, Peregrine issued Redeemable Convertible
Preferred Stock in the face amounts of $835,000 and $756,000, respectively,
as payment in kind for the dividends then due on the outstanding Preferred
Stock. During the nine months ended September 30, 1998, increases under the
Line of Credit included $11,704,000 for draws, interest, fees, and
reimbursable expenses incurred.
Cash paid for interest during the nine-month periods ended September 30,
1998 and 1997, was $4,193,000 and $4,396,000, respectively.
9
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THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
__________
10. SUBSEQUENT EVENTS
On November 2, 1998, Peregrine entered into an agreement with holders of
all the issued and outstanding preferred shares to exchange the preferred
shares for common shares of beneficial interest. The agreement accelerates
the mandatory conversion that was anticipated to occur in April 1999 pursuant
to the terms of the preferred shares. Pursuant to the exchange agreement, the
preferred holders have agreed to exchange all of the issued and outstanding
preferred shares for the number of the common shares that they would have
received pursuant to anticipated mandatory conversion in April 1999. It is
anticipated that all of the issued and outstanding preferred shares will be
exchanged for an aggregate of 17,671,317 of common shares in November 1998.
The exchange is subject to the prior satisfaction of numerous conditions,
including receipt of various third-party consents.
10
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______________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
______________________________________________________________________________
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Form 10-Q. Historical
results set forth are not necessarily indicative of the future financial
position and results of operations of Peregrine.
In addition to historical information, the Form 10-Q contains
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, such forward looking statements include
statements such as those pertaining to Peregrine's ability to fund its
operations or otherwise satisfy capital requirements, both in the short and
long term; to undertake property repairs, maintenance, improvements,
refurbishments, or other capital expenditures; and to negotiate satisfactory
terms with creditors, licensors, franchisors, or others. Forward-looking
statements involve numerous risks and uncertainties. The following factors,
among others discussed herein, could cause results and future events to
differ materially from those set forth or contemplated in the forward-looking
statements: increased interest rates and operating costs, deteriorating
market conditions affecting occupancy or lease rates, difficulties in finding
buyers for property dispositions, environmental uncertainties, risks related
to natural disasters, financial market fluctuations, availability of
financing, continuation of license agreements, changes in real estate laws,
real property taxes, and governmental regulation, as well as general economic
trends and the factors discussed herein. Readers are cautioned not to place
undue reliance on forward-looking statements, which reflect management's
analysis only as of the date hereof. Peregrine assumes no obligation to
update forward-looking statements. Readers should refer to Peregrine's
reports to be filed from time to time with the Securities and Exchange
Commission pursuant to the Exchange Act.
OVERVIEW
During the quarter ended September 30, 1998, management of Peregrine
continued to concentrate on the developing and implementing an operating
strategy designed to maximize the income stream from the commercial and hotel
properties and to dispose of real estate assets with negative cash flows
and/or which require significant capital expenditures beyond the resources
available. Pursuant to this strategy, management continued its efforts to
improve the physical and operating condition of its commercial and hotel
properties by completing repairs and deferred maintenance on the commercial
properties, developing and implementing plans to complete the required
refurbishments at the hotel properties, controlling property expenses and
improving both occupancy levels and collections of rent. Due to capital
constraints in 1996 and during the first half of 1997, Peregrine was unable
to complete certain refurbishments required by Holiday Inn with respect to
its Chico and Sacramento hotels within the required time frame. As a result,
in February 1997, Peregrine received notices of default on its Holiday Inn
Franchise Agreements with respect to its Chico and Sacramento hotels.
Peregrine was able to obtain an
11
<PAGE>
extension of time in which to complete the necessary refurbishments. The
refurbishments were completed at the Chico hotel in September 1997, and in
October 1997, Peregrine received a written notice from Holiday Inn that the
inspection had been completed and the default had been cured. In September
1998, Peregrine, in agreement with Holiday Inn, voluntarily removed the
Sacramento hotel from the Holiday Inn system. During September 1998,
Peregrine management decided to temporary close the Sacramento hotel as of
October 1, 1998, to hotel ease time constraints for the refurbishment
process. The Sacramento is currently expected to open it's guest rooms on
December 1, 1998 in the Holiday Inn franchise system. The total cost of the
required refurbishments at the Sacramento hotel is estimated to be
$2,700,000. If the required refurbishments at the Sacramento hotel do not
meet Holiday Inn's standards, Holiday Inn may assert that Peregrine is in
default of the License Agreement and Holiday Inn could attempt to terminate
the License Agreement. If the License Agreement is terminated, it could
constitute events of default under both the line of credit and Senior Lender
Group Notes and could result in termination fees payable to Holiday Inn of
approximately $1,100,000 with respect to the Sacramento hotel. Additionally,
in accordance with the new Holiday Inn License Agreement for Walnut Creek,
Peregrine is required to complete approximately $750,000 in refurbishments at
the Walnut Creek hotel prior to December 18, 1998. If the required
refurbishments at the Walnut Creek hotel are not completed in a timely manner
or should they not meet Holiday Inn's standards, Holiday Inn may assert that
Peregrine is in default of the License Agreement and Holiday Inn could
attempt to terminate the License Agreement. If the License Agreement is
terminated, it could constitute events of default under both the line of
credit and Senior Lender Group Notes and could result in termination fees
payable to Holiday Inn of approximately $900,000 with respect to the Walnut
Creek hotel. Currently, Peregrine expects to complete refurbishments at the
hotels that will comply with the requirements of Holiday Inn.
COMPARISON OF THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES
Total revenues were $17,126,000 during the nine months ended June 30, 1998,
down $915,000, or 5%, from total revenues of $18,041,000 during the nine
months ended September 30, 1997. Total revenues were $5,688,000 during the
three months ended September 30, 1998, a decrease of $213,000, or 4%, from
revenues of $5,901,000 during the three months ended September 30, 1997.
HOTEL REVENUES. Hotel revenues decreased $141,000, or 1%, to $10,260,000 for
the nine months ended September 30, 1998, down from $10,401,000 for the nine
months ended September 30, 1997. Hotel revenues increased from $3,475,000 for
the three months ended September 30, 1997 to $3,502,000 for the three months
ended September 30, 1998, an increase of $27,000. The decrease during the
nine months ended September 30, 1998 was attributable to the partial closure
of the Sacramento hotel in September, offset by income from the Concord
hotel, purchased in July 1998. The increase for the three months ending
September 30, 1998 was due to revenues received from the Concord hotel,
offset by lower occupancy at the Sacramento hotel during the renovation.
12
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COMMERCIAL PROPERTY REVENUES. Commercial property revenues for the nine
months ended September 30, 1998 were $6,756,000, a decrease of $352,000, or
5%, from revenues of $7,108,000 for the nine months ended September 30, 1997.
Commercial property revenues decreased $193,000, or 8%, to $2,161,000 for
the three months ended September 30, 1998, down from $2,354,000 for the three
months ended September 30, 1997. The decrease is attributable to the absence
of revenues from the Pomona Road property, which was sold in December 1997;
and an overall combined decrease in revenues from all other commercial
properties in Peregrine's portfolio due primarily to decreased occupancy at
the retail shopping centers and industrial buildings; partially offset by an
increase in occupancy at the mini-storage facilities.
INTEREST REVENUE. Interest revenue decreased $138,000, or 62%, to $84,000
for the nine months ended September 30, 1998, and $29,000, or 62%, to $17,000
for the three months ended September 30, 1998. This was down from $222,000
for the nine months ended September 30, 1997, and $47,000 for the three
months ended September 30, 1997. The decrease is primarily attributable to
the absence of interest revenue from a mortgage note which was received in
full in July 1997; and a decrease in interest revenue on cash accounts
resulting from a decreased cash balance.
OTHER REVENUE. Other revenue decreased $284,000, or 92%, to $26,000 for the
nine months ended September 30, 1998, and $17,000, or 68%, to $8,000 for the
three months ended September 30, 1998. This was down from $310,000 and
$25,000 for the nine and three months ended September 30, 1997, respectively.
Other revenue during the nine months ended September 30, 1997 was primarily
attributable to revenue of $250,000 recognized in connection with the
settlement of two corporate lawsuits; $21,000 in revenue attributable to a
settlement with a former tenant; and revenue of $13,000 which resulted from
prior year property tax refunds on properties formerly owned by Peregrine.
Other revenue during the three months ended September 30, 1997 was primarily
attributable to the revenue of $21,000 recognized in connection with a
settlement with a former tenant, as discussed above.
TOTAL EXPENSES
Total expenses were $19,751,000 during the nine months ended September 30,
1998, an increase of $17,000, or less than 1%, from total expenses of
$19,734,000 during the nine months ended September 30, 1997. Total expenses
were $7,221,000 during the three months ended September 30, 1998, an increase
of $402,000 or 6%, over total expenses of $6,819,000 during the three months
ended September 30, 1997.
OPERATING EXPENSES. Hotel operating expenses increased $677,000, or 9%, from
$7,724,000 during the nine months ended September 30, 1997, to $8,401,000
during the nine months ended September 30, 1998. Hotel operating expenses
increased $457,000, or 17%, to $3,138,000 during the three months ended
September 30, 1998, up from $2,681,000 for the three months ended September
30, 1997. The increase for the nine and three months ended September 30,
1998 was attributable to additional expenses from the Concord hotel purchased
in July 1998.
Commercial property operating expenses decreased $61,000, or 2%, to
$2,191,000 for the nine months ended September 30, 1998, and $130,000, or
15%, to $739,000 for the three months
13
<PAGE>
ended September 30, 1998. This was down from $2,252,000 and $869,000 for the
six and three months ended September 30, 1997, respectively. The decrease
resulted from the absence of expenses at the Pomona Road, Commerce Circle,
and Consumer Street properties which were sold in December 1997, August 1998,
and September 1998, respectively.
COMMERCIAL AND HOTEL PROPERTY MANAGEMENT FEES. Commercial and hotel property
management fees decreased $479,000, or 100%, from $479,000 for the nine
months ended September 30, 1997, to zero for the nine months ended September
30, 1998. Management fees decreased $83,000, or 100%, to zero during the
three months ended September 30, 1998, down from $83,000 during the three
months ended September 30, 1997. The decrease is attributable to the
termination of the outside management contract in August 1997; and the
absence of management fees at the hotels due to the termination of the
outside management contracts in October 1997.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
increased $133,000, or 6%, from $2,377,000 for the nine months ended
September 30, 1997, to $2,510,000 for the nine months ended September 30,
1998. Depreciation and amortization increased $71,000, or 9%, to $886,000 for
the three months ended September 30, 1998, up from $815,000 for the three
months ended September 30, 1997. The increase is primarily attributable to an
increase in depreciation and amortization due to the purchase of the Concord
hotel, capital improvements, tenant improvements and lease commissions at the
commercial and hotels properties completed during the first nine months of
1998. The increases were offset by a decrease in depreciation at the Pomona
Road Commerce Circle, and Consumer Street properties, which were sold in
December 1997, August 1998, and September 1998, respectively.
INTEREST EXPENSE. Interest expense decreased $180,000, or 4%, from
$4,376,000 for the nine months ended September 30, 1997, to $4,196,000 for
the nine months ended September 30, 1998. Interest expense increased
$123,000, or 9%, to $1,524,000 during the three months ended September 30,
1998, from $1,401,000 during the three months ended September 30, 1997. The
decrease is primarily attributable to the absence of interest on the first
mortgage note on the 3900 Lennane Drive property, which was paid in full in
July 1997; a decrease in interest expense on the Senior Lender Group Notes
during the nine months ending September 30, 1998 resulting from a lower
principal balance due to paydowns in 1997. The increase in interest expense
for the three months ending September 30, 1998 was primarily due to an
interest expense on the Line of Credit due to a higher average balance
outstanding under the Line of Credit.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $2,453,000 during the nine months ended September 30, 1998; a decrease
of $73,000, or 3%, from expenses of $2,526,000 for the nine months ended
September 30, 1997. General and administrative expenses decreased $36,000,
or 4%, to $934,000 during the three months ended September 30, 1998, down
from $970,000 for the three months ended September 30, 1997. The decrease is
primarily attributable to decreases in audit and legal fees.
Many of the administrative costs to service Peregrine's large shareholder
base and to meet public regulatory requirements are fixed costs. As a
result, Peregrine expects its general and
14
<PAGE>
administrative expenses to continue to be disproportionately high compared to
the size of its asset base; however, Peregrine's new management team is
currently analyzing general and administrative expenses to determine those
areas in which costs can be reduced, including a reorganization, that would
change the form of entity of Peregrine and its state of organization and
reduce the number of shareholders of Peregrine.
GAIN ON FORECLOSURE OR SALE OF INVESTMENTS
During the nine and three months ended September 30, 1998, Peregrine recorded
gains from the sales of the Consumer Road and Commerce Circle properties
totaling $374,000. During the nine and three months ended September 30,
1997, total gains on the foreclosure or sale of investments of $1,122,000 and
$0 during the six and three months ended September 30, 1997, respectively.
In the first quarter of 1997, Peregrine recorded a gain of $1,012,000 upon
the sale of CalREIT. At the time of the transaction, January 3, 1997, the
book value of Peregrine's investment in CalREIT was $18,733,000. CalREIT was
sold for $20,222,000 in cash, with $477,000 in related selling costs
incurred, resulting in a gain of $1,012,000. During the second quarter of
1997, Peregrine recorded a gain of $110,000 when it sold a mortgage, which
had been in default since 1993 and whose book value was $0, back to the
borrower.
EXTRAORDINARY ITEM, FORGIVENESS OF DEBT
During the second quarter 1997, Peregrine benefited from a forgiveness of
debt of $418,000 in connection with an agreement with the mortgage lender on
3900 Lennane Drive, and during the first quarter of 1997, Peregrine benefited
from a $22,000 forgiveness of debt related to the extinguishment of certain
debt related to the bankruptcy proceedings. No such amount was recorded
during the nine and three months ended September 30, 1998.
DIVIDENDS
Peregrine made no cash distributions during the nine and three months ended
September 30, 1998 or 1997. In addition, Peregrine is substantially
restricted from paying dividends pursuant to the terms of the Line of Credit
and Senior Lender Group Notes and does not anticipate making any cash
distributions to shareholders in the foreseeable future.
15
<PAGE>
COMMERCIAL AND HOTEL PROPERTY OPERATIONS
At September 30, 1998 and September 30, 1997, overall average weighted
occupancy levels by property type were as follows:
<TABLE>
<CAPTION>
Overall Occupancy
Property Type September 30, September 30,
------------- ------------- -------------
1998 1997
---- ----
<S> <C> <C>
Retail Shopping Centers 72% 77%
Office Buildings 85% 75%
Industrial Buildings 81% 88%
Mini-Storage Facilities 89% 87%
Hotels 60% 71%
</TABLE>
The weighted average occupancy level is calculated by multiplying the
occupancy by square footage and dividing the total by the total square
footage in the portfolio. The overall weighted average occupancy for
Peregrine's commercial portfolio was 81% as of both September 30, 1998 and
1997.
LIQUIDITY AND CAPITAL RESOURCES
Peregrine had $420,000 in unrestricted cash at September 30, 1998,
compared to $1,247,000 in unrestricted cash at December 31, 1997. During the
nine months ended September 30, 1998, Peregrine's principal sources of funds
were from operating income, and principal and interest payments on mortgage
notes receivable. At September 30, 1998, $7,774,000 remained available on
the Line of Credit. Subsequent to September 30, 1998, the unrestricted cash
available was reduced by approximately $9,000,000 as a result of a pending
purchase of the Concord Inn on July 1, 1998. Peregrine's Line of Credit and
Senior Lender Group Notes contain numerous covenants relating to Peregrine's
operations and activities, including debt service coverage ratios and
restrictions on indebtedness, loans, affiliate transactions, creating or
permitting liens, capital expenditures, dispositions of collateral, leases,
prepayment and repayments of indebtedness, mergers and dividends and
distributions. As of September 30, 1998, Peregrine was in compliance with
such covenants. On January 26, 1999, $7.5 million of the Line of Credit will
no longer be available. This portion of Line of Credit was a six-month
extension that started on July 26, 1998.
Debt service paid on Peregrine's first mortgage notes totaled $2,082,000
during the nine months ended September 30, 1998. Total debt service
requirements on first mortgage notes in 1998 are approximately $2,948,000.
Interest paid on the Senior Lender Group Notes during the nine months ended
September 30, 1998 totaled $1,705,000. Interest on the Senior Lender Group
Notes is required to be paid in cash on a monthly basis, with aggregate
interest payable during 1998 currently estimated at $1,728,000, based on
actual interest during the nine months ended September 30, 1998, and interest
for the last quarter of 1998 based upon the current principal balance
outstanding of $26,074,000.
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<PAGE>
The face value of Preferred Stock dividends in-kind issued during the nine
months ended September 30, 1998 totaled $2,419,000. Dividends on the
Preferred Stock are payable in-kind through September 30, 1998, and will be
required to be paid in cash thereafter. On November 2, 1998, Peregrine
entered into an agreement with holders of all the issued and outstanding
preferred shares to exchange the preferred shares for common shares of
beneficial interest. The agreement accelerates the mandatory conversion that
was anticipated to occur in April 1999 pursuant to the terms of the preferred
shares. Pursuant to the exchange agreement, the preferred holders have agreed
to exchange all of the issued and outstanding preferred shares for the number
of the common shares that they would have received pursuant to anticipated
mandatory conversion in April 1999. It is anticipated that all of the issued
and outstanding preferred shares will be exchanged for an aggregate of
17,671,317 of common shares in November 1998. The exchange is subject to the
prior satisfaction of numerous conditions, including receipt of various
third-party consents.
At September 30, 1998, Peregrine's short and long term cash commitments
include approximately $3,450,000 to refurbish the Sacramento and Walnut Creek
hotel properties in accordance with Holiday Inn franchise standards; debt
service payments on it first mortgages of approximately $2,646,000 per year;
interest on its Senior Lender Group Notes currently estimated at $2,321,000
per year; repayment of its Line of Credit obligations on September 30, 2000;
and repayment of principal on the Senior Lender Group Notes in October 2000.
It is anticipated that the Preferred Stock cash dividend requirement will be
eliminated through the conversion to Common Shares of Beneficial Interest as
discussed above.
Based on cash flows from operations and its revolving Line of Credit,
Peregrine anticipates that it will be able to fund its day-to-day business
operations, meet its debt service obligations on its first mortgage notes and
Senior Lender Group Notes, and fund its capital expenditures. However,
should Holiday Inn terminate any license agreement, or should Peregrine be
unable to negotiate an extension of the January 26, 1998 maturity date for
$7.5 million of principal under it's Line of Credit, Peregrine will be
required to seek other forms of financing to fund it operations. There can
be no assurance such sources will be available.
Peregrine experienced a net decrease in unrestricted cash of $827,000
for the nine months ended September 30, 1998 as compared to a net increase in
unrestricted cash of $711,000 for the nine months ended September 30, 1997, a
difference of $1,538,000. For the nine months ended September 30, 1998 cash
provided by operating activities was $1,089,000, up $405,000 from cash (used
in) operating activities of $684,000 during the comparable period in 1997,
which is primarily attributable to changes in gains on foreclosure,
extraordinary items, and current assets and liabilities. Cash (used in)
investing activities during the nine months ended September 30, 1998 was
$11,597,000, down from cash provided by investing activities of $19,305,000
during the nine months ended September 30, 1997, a decrease of $30,902,000.
The decrease is primarily attributable to proceeds received from the sale of
CalREIT in 1997. Cash provided by financing activities was $9,681,000 during
the nine months ended September 30, 1998, as compared to cash used in
financing activities of $19,278,000 during the nine months ended September
30, 1997, a decrease of $28,959,000, which is primarily attributable to the
line of credit.
17
<PAGE>
SIGNIFICANT CHANGES IN THE ECONOMIC ENVIRONMENT
Changing interest rates are not expected to have a significant effect on
Peregrine's operations during the remainder of 1998, as most of Peregrine's
debt obligations are at fixed interest rates. During 1997 and 1998, both
rental rates and real estate values have increased; therefore, the effect of
inflation is not expected to have a significant effect on Peregrine's
operations in 1998.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
Peregrine's computer programs or other date sensitive equipment may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations. Peregrine believes that it has identified all significant
computer applications and other date sensitive equipment and has made any
required modification to ensure Year 2000 compliance. The total cost of the
modifications is not material to the overall financial statements of
Peregrine.
18
<PAGE>
PART II. OTHER INFORMATION
Item 5: On November 2, 1998, Peregrine entered into an agreement with the
holders of the preferred shares pursuant to which such holders
have agreed to exchange all of the issued and outstanding
preferred shares for the number of common shares that they would
have received upon the mandatory conversion of the preferred
shares in April 1999. Exhibit 10.20
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
-------- -----------
3.1(a) Restated Declaration of Trust of The Peregrine Real Estate
Trust (1)
3.1(b) Bylaws of The Peregrine Real Estate Trust (1)
10.1 Second Amended and Restated Note Agreement dated September 27,
1994, by and among Commonwealth Equity Trust, the Noteholders
named therein, and The Prudential Insurance Company of America
as Agent for the Noteholders (1)
10.3 Redeemable Convertible Preferred Stock Purchase Agreement
dated as of October 1, 1994, by and among The Peregrine Real
Estate Trust, Pacific Mutual Life Insurance Company, The
Prudential Insurance Company of America, PRUCO Life Insurance
Company, ORIX USA Corporation, Weyerhaeuser Company Master
Retirement Trust, TCW Special Credits Fund IV, TCW Special
Credits Plus Fund, TCW Special Credits Trust IV, and TCW Special
Credits Trust IVA (1)
10.4 Registration Rights Agreement dated as of October 1, 1994, by and
among The Peregrine Real Estate Trust, Pacific Mutual Life
Insurance Company, The Prudential Insurance Company of America,
PRUCO Life Insurance Company, ORIX USA Corporation, Weyerhaeuser
Company Master Retirement Trust, TCW Special Credits Fund IV,
TCW Special Credits Plus Fund, TCW Special Credits Trust IV, and
TCW Special Credits Trust IVA (1)
10.5 Services and Confidentiality Agreement dated October 1, 1994,
between Commonwealth Equity Trust and FAMA Management, Inc. (1)
10.6 Third Amended Plan of Reorganization of Commonwealth Equity
Trust (2)
10.7 Stock Purchase Agreement, dated as of January 3, 1997, by and
between The Peregrine Real Estate Trust and CalREIT Investors
Limited Partnership (3)
10.8 Form of Indemnification Agreement (4)
10.9 The Peregrine Real Estate Trust Trustee Stock Option Plan (5)
10.13 Form of Indemnification Agreement (7)
10.14 Loan and Security Agreement dated December 4, 1997, by and among
The Peregrine Real Estate Trust and Fleet Capital Corporation (8)
19
<PAGE>
10.15 Second Amendment to Second Amended and Restated Note Agreement dated
December 4, 1997, by and among The Peregrine Real Estate Trust, the
Noteholders named therein, and The Prudential Insurance Company of
America as agent for the Noteholders (8)
10.16 Employment Agreement between The Peregrine Real Estate Trust and Roger
D. Snell, dated September 30, 1997 (9)
10.17 Third Amendment to the Second Amended and Restated Note Agreement
dated May 1, 1998, By and Among The Peregrine Real Estate Trust, the
Noteholders Named Therein, and The Prudential Insurance Company of
America as Agent for the Noteholders. (10)
10.18 Fourth Amendment to the Second Amended and Restated Note Agreement
dated June 30, 1998, By and Among The Peregrine Real Estate Trust, the
Noteholders Named Therein, and The Prudential Insurance Company of
America as Agent for the Noteholders. (10)
10.19 Amendment Number One To Loan And Security Agreement dated June 30,
1998 by and between Fleet Capital Corporation and Peregrine Real
Estate Trust. (11)
10.20 Exchange of Preferred Stock for Common Stock dated November 2,1998.
27 Financial Data Schedule
(1) Incorporated herein by reference to Peregrine's Report on Form 8-K dated
October 7, 1994.
(2) Incorporated herein by reference to Peregrine's Report on Form 8-K dated
August 25, 1994.
(3) Incorporated herein by reference to Peregrine's Report on Form 8-K dated
January 17, 1997.
(4) Incorporated herein by reference to Peregrine's Report on Form 10-Q for the
period ended September 30, 1996.
(5) Incorporated herein by reference to Peregrine's Report on Form 10-K for the
year ended December 31, 1996.
(6) Incorporated herein by reference to Peregrine's Report on Form 10-Q for the
period ended March 31, 1997.
(7) Incorporated herein by reference to Peregrine's Report on Form 10-Q for the
period ended June 30, 1997.
(8) Incorporated herein by reference to Peregrine's Report on Form 8-K dated
December 23, 1997.
(9) Incorporated herein by reference to Peregrine's Report on Form 10-K for the
year ended December 31, 1997.
(10) Incorporated herein by reference to Peregrine's Report on Form 10-Q for the
period ended March 31, 1998.
(11) Incorporated herein by reference to Peregrine's Report on Form 10-Q for the
period ended June 30, 1998.
20
<PAGE>
(b) Reports on Form 8-K
Form 8-K, reported Item 2, The Acquisition of the Concord hotel, and
Item 5 Amendment to the bridge agreement with Fleet Capital Trust.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PEREGRINE REAL ESTATE TRUST
November 16, 1998 /s/ Larry Knorr
- ----------------- ---------------------------
Date Larry Knorr
Vice President and
Chief Accounting Officer
22
<PAGE>
EXHIBIT 10.20
THE PEREGRINE REAL ESTATE TRUST
1300 ETHAN WAY, SUITE 200
SACRAMENTO, CALIFORNIA 95825
November 2, 1998
To each of the parties listed
on the signature pages hereto
Gentlemen:
This letter agreement (the "Letter Agreement") is entered into by and among The
Peregrine Real Estate Trust, a California real estate investment trust (the
"Company"); The Prudential Insurance Company of America and Gateway Recovery
Trust (collectively, the "Prudential Entities"); TCW SPECIAL CREDITS FUND IV,
TCW SPECIAL CREDIT PLUS FUND, TCW SPECIAL CREDITS TRUST IV, TCW SPECIAL CREDITS
TRUST IVA AND TCW SPECIAL CREDITS, AS INVESTMENT MANAGER OF THE WEYERHAEUSER
COMPANY MASTER RETIREMENT TRUST SEPARATE ACCOUNT (collectively, "TCW"); OCM REAL
ESTATE OPPORTUNITIES FUND A, L.P., OCM REAL ESTATE OPPORTUNITIES FUND B, L.P.,
and OAKTREE CAPITAL MANAGEMENT, LLC as investment manager of Weyerhaeuser
Company Master Retirement Trust and Real Estate Opportunities Separate Account
(collectively, "Oaktree"). The Prudential Entities, TCW and Oaktree are
collectively referred to herein as the "Preferred Stockholders".
The Company and Preferred Stockholders hereby agree, subject to the terms and
conditions set forth in this Letter Agreement as follows:
DEFINITIONS
"Common Stock" shall mean Common Shares of beneficial interest of the Company
authorized and issued pursuant to the Declaration of Trust.
"Declaration of Trust" shall mean the Restated Declaration of Trust of the
Company dated as of October 7, 1994.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Preferred Stock" shall mean Preferred Shares of beneficial interest of the
Company issued pursuant to the Declaration of Trust and that certain Redeemable
Convertible Preferred Stock Purchase Agreement dated as of October 1, 1994 by
and among the Company and Pacific Mutual Life Insurance Company, The Prudential
Insurance Company of America, Pruco Life Insurance Company, ORIX USA
Corporation, Weyerhauser Company Master Retirement Trust, TCW
1
<PAGE>
Special Credits Fund IV, TCW Special Credits Plus Fund, TCW Special Credits
Trust IV, and TCW Special Credits Trust IVA.
"SEC" shall mean the United States Securities and Exchange Commission.
"Securities" shall mean the Preferred Stock and Common Stock (including
Conversion Shares (as defined herein)).
"Securities Act" shall mean the Securities Act of 1933, as amended.
Section 1 EXCHANGE OF PREFERRED STOCK FOR COMMON STOCK
1.1 EXCHANGE. Subject to the terms and conditions set forth
herein, each of the Preferred Stockholders hereby agrees to exchange each
share of Preferred Stock held by such Preferred Stockholder for a number of
shares of Common Stock to be issued by the Company pursuant to the following
conversion ratio (the "Conversion Shares"): (a) the sum of (i) the number of
shares of Preferred Stock that would have been issued and outstanding on
October 10, 1998 if the Preferred Stock issued and outstanding as of the
Closing Date (as defined herein) had remained outstanding until and as of
such date (it being agreed that such number of shares of Preferred Stock is
16,764,135) plus (ii) the quotient of (A) the amount of cash dividends that
would have accrued on the Preferred Stock between the date of this Agreement
and April 10, 1999 (it being agreed that such amount is $1,814,364) divided
by (B) the conversion price set forth in the Declaration of Trust (it being
agreed that such amount is $2.00), divided by (b) the number of shares of
Preferred Stock issued and outstanding as of the Closing Date (as defined
herein). Subject to the terms and conditions set forth herein, the Company
hereby agrees to issue the Conversion Shares upon receipt of share
certificates representing all of the issued and outstanding shares of
Preferred Stock from the Preferred Stockholders.
1.2 THE CLOSING. At the closing of the transactions described
herein (the "Closing"), (a) each of the Preferred Stockholders will deliver
to the Company the certificates evidencing the shares of Preferred Stock held
by such holder together with duly executed blank stock powers, (b) the
Company will accept and cancel such certificates representing shares of
Preferred Stock and (c) the Company will deliver to Preferred Stockholders
certificates for the Conversion Shares, registered in the denominations and
names specified by each Preferred Stockholder. The Closing shall be held at
the offices of Milbank, Tweed, Hadley & McCloy, 601 S. Figueroa St.,
thirtieth floor, Los Angeles, California 90017, on the third business day
following satisfaction of the conditions set forth herein or at such other
time and place as all parties to this Letter Agreement may mutually agree
(the "Closing Date").
Section 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents, warrants and covenants to each Preferred
Stockholder as follows:
2
<PAGE>
2.1 ORGANIZATION; POWER AND AUTHORITY. The Company is a real estate
investment trust duly organized, validly existing and in good standing under the
laws of the State of California. The Company has all requisite power and
authority to transact its business as now transacted and proposed to be
transacted, to execute and deliver this Agreement, to issue and exchange the
Conversion Shares for the Preferred Shares and to perform the provisions of this
Letter Agreement.
2.2 AUTHORIZATION, ETC. The execution, delivery and performance of
this Letter Agreement and the other documents contemplated herein to which the
Company is a party, the issuance and exchange of Conversion Shares for the
Preferred Stock, and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by all necessary action on the part of the
Company, and this Letter Agreement has been executed and delivered by the
Company, and this Letter Agreement constitutes a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms.
2.3 CAPITAL STOCK. The total number of shares of capital stock
which the Company has authority to issue is 75,000,000 shares, consisting of
50,000,000 shares of Common Stock and 25,000,000 shares of Preferred Stock.
As of October 1, 1998, the total number of outstanding shares of Common Stock
was 4,881,122, the total number of outstanding shares of Preferred Stock was
16,764,135 and there were options and warrants to purchase an aggregate of
119,998 shares of Common Stock outstanding and options to purchase 1,450,000
shares of Common Stock had been granted subject to shareholder approval.
2.4 ISSUANCE OF THE CONVERSION SHARES. Upon issuance, the
Conversion Shares will be duly authorized, validly issued, outstanding, fully
paid and non-assessable. The delivery to each Preferred Stockholder of a
certificate or certificates representing the Conversion Shares at the Closing
will transfer to such Preferred Stockholder good and valid title to the
Conversion Shares which it is entitled to receive hereunder, free and clear
of all liens and encumbrances.
2.5 COMPLIANCE WITH LAWS, OTHER INSTRUMENTS OF THE COMPANY, ETC.
Except as described in Schedule 2.5 hereto, none of the execution and
delivery of this Letter Agreement, or the issuance and exchange of the
Conversion Shares for Preferred Stock or the consummation of the transactions
contemplated herein or compliance with the terms and provisions hereof will
conflict with or result in a breach of, or require any consent under, the
Restated Declaration of Trust or Bylaws of the Company, any applicable law or
regulation (other than filings which will be made by the Company as required
by applicable state securities laws), or any order, writ, injunction or
decree of any court or governmental authority or agency, or any agreement or
instrument to which the Company is a party or by which it is bound or to
which it is subject, or constitute a default under any such agreement or
instrument, or result in the creation or imposition of any lien upon any of
the revenues or assets of the Company pursuant to the terms of any such
agreement or instrument.
2.6 GOVERNMENTAL CONSENTS. Other than filings required by applicable
state securities laws which shall be made by the Company, neither the nature of
the Company or of any of its respective businesses or properties, nor any
relationship between the Company and any other person, nor any circumstance in
connection with the offer, issue or exchange of the Securities is such as to
require consent, approval or authorization of, or filing, registration or
3
<PAGE>
qualification with, any governmental authority on the part of the Company as a
condition to the execution, delivery or performance of this Letter Agreement.
2.7 LEGAL PROCEEDINGS. There are no legal actions or
proceedings pending, or to the knowledge of the Company, threatened against,
relating to or affecting the Company which request or threaten to request the
issuance of a court order restraining, enjoining or otherwise prohibiting or
making illegal the consummation of any of the transactions contemplated in
this Letter Agreement (or any similar transaction).
2.8 SHAREHOLDER LIABILITY. The shareholders of the Company are
not personally liable for any written contracts or agreements entered into by
the Company and shall not be personally liable for any obligation of the
Company under this Agreement.
Section 3 REPRESENTATIONS AND WARRANTIES OF THE PREFERRED
STOCKHOLDERS.
Each of the Preferred Stockholders, severally and not jointly, represents,
warrants and covenants to the Company and each other Preferred Stockholder as
follows:
3.1 ORGANIZATION; POWER AND AUTHORITY; AUTHORIZATION, ETC. Such
Preferred Stockholder has all requisite power and authority to execute and
deliver this Letter Agreement and to perform its obligations pursuant to the
provisions of this Letter Agreement. The execution, delivery and performance of
this Letter Agreement, and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary action on the part of such
Preferred Stockholder. This Letter Agreement has been executed and delivered by
a duly authorized representative of such Preferred Stockholder and constitutes a
legal, valid and binding obligation of such Preferred Stockholder enforceable
against such holder in accordance with its terms.
3.2 OWNERSHIP OF SHARES. Such Preferred Stockholder represents that
such Preferred Stockholder is the sole legal owner of the number of shares of
Preferred Stock set forth opposite such holder's name on Schedule 3.2. Such
Preferred Stockholder holds such shares of Preferred Stock of the Company free
and clear of any liens, claims, interests, charges and encumbrances. Such
Preferred Stockholder represents that it has not previously entered into any
agreement (other than this Agreement) to sell, assign, convey, transfer or
otherwise dispose of, in whole or in part, the shares of Preferred Stock to be
exchanged by such Preferred Stockholder pursuant to the terms hereof. Upon
exchange of the Preferred Stock for the Conversion Shares at the Closing, such
Preferred Stockholder will transfer to the Company, good and valid title to the
Preferred Stock held by such holder, free and clear of all liens, claims,
interests, charges and encumbrances.
3.3 ACQUISITION FOR EACH OF THE PREFERRED STOCKHOLDERS' OWN
ACCOUNT; RESTRICTIONS ON TRANSFER; ACCREDITED INVESTORS. Such Preferred
Stockholder represents and warrants to the Company that it is acquiring and
will acquire the Conversion Shares for its own account (or a separate account
managed by it), with no present intention of distributing or reselling its
Conversion Shares or any part thereof in violation of the Securities Act, and
that such Preferred Stockholder is prepared to bear the economic risk of
retaining its Conversion Shares for an
4
<PAGE>
indefinite period of time, all without prejudice; provided that the
disposition of its property shall in all times be and remain with in its
control. Such Preferred Stockholder represents and warrants that it is an
"accredited investor," as such term is defined in Rule 501(a)(3) of
Regulation D promulgated under the Securities Act. Such Preferred
Stockholder further covenants that it will not make any sale, transfer or
other disposition of the Securities of the Company in violation of the
Securities Act, the Exchange Act or the rules of the SEC promulgated
thereunder.
3.4 COMPLIANCE WITH LAWS, OTHER INSTRUMENTS OF EACH OF PREFERRED
STOCKHOLDERS, ETC. Except as described in Schedule 3.4 hereto, none of the
execution and delivery of this Letter Agreement, or the issue and exchange of
the Conversion Shares for Preferred Stock or the consummation of the
transactions contemplated herein or compliance with the terms and provisions
hereof will conflict with or result in a breach of, or require any consent
under, organic foundation documents or bylaws of such Preferred Stockholder
any applicable law or regulation, or any order, writ, injunction or decree of
any court or governmental authority or agency, or any agreement or instrument
to which such Preferred Stockholder is a party or by which it is bound or to
which it is subject, or constitute a default under any such agreement or
instrument, or result in the creation or imposition of any lien upon any of
the revenues or assets of such Preferred Stockholder pursuant to the terms of
any such agreement or instrument.
3.5 GOVERNMENTAL CONSENTS. Neither the nature of such Preferred
Stockholder or of any of its respective businesses or properties, nor any
relationship between such Preferred Stockholder and any other person, nor any
circumstance in connection with the offer, issue or exchange of the
Securities is such as to require consent, approval or authorization of, or
filing, registration or qualification with, any governmental authority on the
part of such Preferred Stockholder as a condition to the execution, delivery
or performance of this Letter Agreement.
Section 4 COVENANTS OF THE COMPANY
The Company hereby covenants and agrees with the Preferred Stockholders that
all times from and after the date hereof until the Closing and, with respect
to any covenant to be performed in whole or in part after the Closing, to the
period specified therein or if no period is specified, indefinitely:
4.1 FAIRNESS OPINION. The Company shall use commercially
reasonable efforts to obtain an independent "fairness" opinion from a
recognized investment banking firm addressed to the trustees of the Company,
together with a letter permitting the Company to deliver the fairness opinion
to each of the Preferred Stockholders, and confirming that the transactions
contemplated hereby are fair, from a financial point of view, to the Company
and the shareholders of the Company other than the Preferred Stockholders.
4.2 CONSENTS. The Company shall use commercially reasonable
efforts to obtain the consents described in Schedule 2.5.
4.3 FULFILLMENT OF CONDITIONS. The Company will take all
commercially reasonable steps to satisfy conditions and obligations of the
Company under this Letter
5
<PAGE>
Agreement and will not take or fail to take any action that could reasonably
be expected to result in non-fulfillment of any such condition or obligation
under this Letter Agreement.
Section 5 CONDITIONS TO CLOSING.
(a) The obligations of each Preferred Stockholder hereunder are
subject to the satisfaction prior to the issuance of the Conversion Shares of
the following conditions:
(i) the Company shall have delivered to Preferred Stockholders a
certificate, dated as of the Closing Date, of the Secretary or an Assistant
Secretary of the Company, (A) attaching a true and complete copy of the
resolutions of the Board of Trustees of the Company, and of all documents
evidencing other necessary corporate or shareholder action taken by the Company
in connection with the matters contemplated by this Agreement, (B) attaching a
true and complete copy of the Restated Declaration of Trust, (C) setting forth
the incumbency of the officer or officers of the Company who sign this Letter
Agreement, the other Documents, and each certificate for the Conversion Shares,
including therein a signature specimen of such officer or officers, and (D)
attaching a certificate of good standing (including tax status, if applicable)
of the California Secretary of State;
(ii) the Company shall have received a "fairness" opinion, in
form and substance satisfactory to each of the Preferred Stockholders, from Duff
& Phelps, LLC (or other recognized investment banking firm) addressed to the
trustees of the Company, together with a letter permitting the Company to
deliver the fairness opinion to each of the Preferred Stockholders, and
confirming that the transactions contemplated hereby are fair, from a financial
point of view, to the Company and the shareholders of the Company other than the
Preferred Stockholders.
(iii) all representations and warranties of the Company
contained in Section 2 shall be true in all material respects on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of the Closing Date (other than representations and
warranties that are dated as of a specified date earlier than the Closing Date,
which shall be certified to be true, correct and complete as of such earlier
date) the Company shall have performed all agreements on its part required to be
performed under this Letter Agreement on or prior to the Closing Date and
Preferred Stockholders shall have received a certificate signed by the chief
executive officer of the Company dated as of the Closing Date, certifying as to
the effect specified in this paragraph;
(iv) the Company shall have delivered to the Preferred
Stockholders such other documents, agreements, instruments, certificates and
evidence relating to the matters contemplated by this Letter Agreement as
Preferred Stockholders or its counsel shall reasonably require;
(v) since December 31, 1997, there shall have been no material
adverse change or development in the business, financial condition, operating
results, assets, operations, business prospects, cash flow, net worth or any
franchiser, customer, tenant, supplier or employee relationship of the Company
(each a "Material Adverse Effect");
6
<PAGE>
(vi) the Company shall have delivered certificates
representing Conversion Shares to each of Preferred Shareholders;
(vii) all of the outstanding shares of Preferred Stock shall
have been tendered to the Company by Preferred Stockholders;
(viii) the Company shall have obtained the consents described
in Schedule 2.5 and each of the Preferred Stockholders shall have obtained the
consents discussed in Section 3.4;
(ix) there shall not be any pending or threatened action or
proceeding (a) challenging this Agreement or the transactions contemplated
hereby or seeking monetary damages in connection therewith or (b) which, in the
reasonable judgement of any Preferred Stockholder, could be reasonably expected
to have a Material Adverse Effect on the Company; and
(x) the Company and each of the Preferred Stockholders shall
have executed and delivered an amendment to that certain Registration Rights
Agreement, dated as of October 1, 1994, by and among the Company and each of the
Preferred Stockholders (the "Registration Agreement") to clarify that (i)
Conversion Shares to be received by the Preferred Stockholders pursuant to the
transactions contemplated herein shall be subject to the registration rights
described in the Registration Agreement; and (ii) any and all securities that
the Preferred Stockholders may receive in exchange for or in respect of
Conversion Shares or thereafter shall be subject to the registration rights
described in the Registration Agreement; and
(xi) the Preferred Stockholders shall have received the opinion
of Milbank, Tweed, Hadley & McCloy, counsel for the Company, in form and
substance reasonably acceptable to the Preferred Stockholders.
(b) The obligations of the Company hereunder are subject to the
satisfaction prior to the issuance of the Common Stock of the following
conditions:
(i) all representations and warranties of each of the Preferred
Stockholders contained in Section 3 shall be true in all material respects on
and as of the Closing Date with the same effect as though such representations
and warranties had been made on and as of the Closing Date; each of the
Preferred Stockholders shall have performed all agreements on its part required
to be performed under this Agreement or any other Document on or prior to the
Closing Date; and the Company shall have received a certificate signed by an
officer, or other comparable representative, of each of the Preferred
Stockholders dated as of the Closing Date, certifying as to the effect specified
in this paragraph;
(ii) each of the Preferred Stockholders shall have delivered to
the Company original certificates representing all shares of Preferred Stock
that it owns beneficially and stock powers duly executed or endorsed in blank;
(iii) the Company shall have received a "fairness" opinion in
form and substance satisfactory to the trustees of the Company and the Preferred
Stockholders, from Duff & Phelps, LLC (or other recognized investment banking
firm) addressed to the trustees of the
7
<PAGE>
Company and confirming that the transactions contemplated hereby are fair,
from a financial point of view, to the Company and the shareholders of the
Company other than the Preferred Stockholders and the Company shall have
received a letter from Duff & Phelps, LLC permitting the Company to deliver
such fairness opinion to each of the Preferred Stockholders;
(iv) the Company shall have obtained the consents described in
Section 2.4 and each of the Preferred Stockholders shall have obtained the
consents discussed in Section 3.4; and
(v) there shall not be pending or threatened any action or
proceeding challenging this Agreement or the transactions contemplated hereby
or seeking monetary damages in connection therewith.
Section 6 NOTICES
6.1 NOTICES.
(a) All communications under this Agreement shall be in writing
and shall be mailed by first class mail, postage prepaid:
(i) if to the Company, at
The Peregrine Real Estate Trust
1300 Ethan Way, Suite 200
Sacramento, California 95825
Attention: Mr. Roger Snell
with copy to:
Milbank, Tweed, Hadley & McCloy
601 South Figueroa Street
Los Angeles, California 90017
Attention: Eric H. Schunk, Esq.
(ii) if to TCW, at:
TCW Special Credits
c/o Oaktree Capital Management, LLC
550 South Hope Street, Suite 2200
Los Angeles, California 90071
Attention: Mr. D. Richard Masson
(iii) if to Prudential, at:
Prudential Insurance Company of America
Prudential Capital Group
4 Gateway Center 7th Floor
100 Mulberry Street
Newark, New Jersey 07102
Attention: Mr. Paul L. Meiring
(iv) if to Oaktree, at:
8
<PAGE>
Oaktree Capital Management, LLC
550 South Hope Street, Suite 2200
Los Angeles, California 90071
Attention: Mr. D. Richard Masson
or at such other address as each such party may have furnished in writing to
each other party to this Letter Agreement and all other holders of Shares at
the time outstanding.
(b) Any notice shall be deemed to have been duly given when
delivered by hand, if personally delivered, and if sent by mail, two business
days after being deposited in the mail, postage prepaid.
6.2 SURVIVAL. All warranties, representations and covenants made
by the parties herein or in any certificate or other instrument delivered by
them or on their behalf under this Letter Agreement shall survive for a
period of one year after the issuance of the Conversion Shares and the
exchange of the Preferred Stock, EXCEPT FOR the representations and
warranties contained in Sections 2.2, 2.3 and 3.2 which shall survive the
issuance of the Conversion Shares and the exchange of the Preferred Stock
until expiration of the applicable statutes of limitations. All statements
in any such certificate or other instrument so delivered shall constitute
representations and warranties by the Company hereunder.
6.3 INDEMNIFICATION. The Company shall indemnify each of the
Preferred Stockholders in respect of, and hold each of them harmless from and
against, any and all losses suffered, incurred or sustained by any of them or
to which any of them becomes subject, resulting from, arising out of or
relating to any breach of representation or warranty or nonfulfillment of or
failure to perform any covenant or agreement on the part of the Company
contained in this Letter Agreement.
6.4 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, this Letter Agreement shall inure to the benefit of and be
binding upon the successors and assigns of each of the Preferred
Stockholders, whether so expressed or not. The Company may not assign its
rights, nor to delegate its duties, under this Letter Agreement.
6.5 AMENDMENT AND WAIVER, ETC. This Agreement may be amended, and
the observance of any term of this Letter Agreement may be waived, but only
with the written consent of each of the Preferred Stockholders. No
supplement, modification or waiver of this Agreement shall be binding unless
executed in writing by the Company and each of the Preferred Stockholders.
No failure or delay on the part of the Preferred Stockholders in exercising
any right, power or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right, power or remedy
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy. No waiver of any of the provisions of this Letter
Agreement shall be deemed to be a waiver of any other provision hereof
(whether or not similar), nor shall such waiver constitute a continuing
waiver unless otherwise expressly provided.
6.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which shall be an original and all of which together
shall constitute one and the same instrument.
9
<PAGE>
6.7 SEVERABILITY. In the event that any one or more of the
provisions contained in this Letter Agreement, or the application thereof in any
circumstance, is held invalid, illegal or unenforceable, the validity, legality
and enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired thereby.
6.8 SPECIFIC PERFORMANCE. The Company acknowledges that the
Preferred Stockholders have no adequate remedy at law for breaches by the
Company of its obligations hereunder, and accordingly the Company irrevocably
agrees that the Preferred Stockholders shall be entitled to the remedy of
specific performance and waives any right the Company may have to object to such
remedy.
6.9 EXPENSES. The Company will pay all costs and reasonable
expenses (including reasonable legal fees of one counsel to the Preferred
Stockholders) incurred by Preferred Stockholders including (a) costs and
expenses relating to the negotiation, execution and delivery of this Letter
Agreement and any other agreement, instrument, document, or certificate
necessary to consummate the transactions contemplated by this Letter
Agreement and the issuance of Conversion Shares, (b) transfer taxes, (c)
costs and expenses relating to printing the instruments evidencing the
Conversion Shares, (d) costs and expenses relating to any amendments, waivers
or consents under this Letter Agreement and (e) costs and expenses incident
to the enforcement by Preferred Stockholders of, or the protection or
preservation of any right or remedy of any Preferred Stockholder under, this
Letter Agreement.
6.10 ENTIRE AGREEMENT. This Agreement, together with all Exhibits
and Schedules hereto, constitutes the entire agreement among the Company and
Preferred Stockholders pertaining to the subject matter hereof and supersedes
all prior agreements, understandings, negotiations and discussions, whether
oral or written, of the parties.
6.11 CHOICE OF LAW. This Letter Agreement shall be governed by,
and construed in accordance with, the laws of the State of California,
without giving effect to its principles of conflict of laws.
6.12 TERMINATION. This Letter Agreement shall terminate (a) at any
time prior to the Closing by mutual written agreement of the parties hereto
or (b) on or after ________, 1998 by any of the Company or the Preferred
Stockholders if the Closing shall not have occurred on or prior to such date
and such failure to consummate is not caused by a breach by the terminating
party. If this Letter Agreement is validly terminated pursuant to clause (a)
of the first sentence of this Section 6.12, this Letter Agreement will
forthwith become null and void, and there will be no liability or obligation
on the part of any party hereto, except for the obligation of the Company to
pay expenses pursuant to Section 6.9. Upon termination of this Agreement
pursuant to clause (b) of the first sentence of this Section 6.12, the
breaching party, if any, whose breach has caused such termination will remain
liable to the non-breaching party for any breach of this Letter Agreement
existing at the time of such termination, and the non-breaching party may use
such remedies, including damages and fees of attorneys, against such
breaching party with respect to such breach as are provided for in this
Letter Agreement or are otherwise available in law or equity.
10
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please so indicate by having an authorized representative sign this Letter
Agreement in the appropriate space provided below and return to us this Letter
Agreement on or prior to October ___, 1998, whereupon this Letter Agreement and
your acceptance shall represent a binding agreement between you and the Company
with respect to the matters set forth herein.
THE PEREGRINE REAL ESTATE TRUST
By:
---------------------------------
Name:
Title:
11
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Letter Agreement
to be duly executed and delivered as of the day and year first written above.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By:
------------------------------------
Name:
Title:
GATEWAY RECOVERY TRUST
By: The Prudential Insurance Company of
America, its Asset Manager
By:
--------------------------------
Name:
Title:
TCW SPECIAL CREDITS FUND IV
By: TCW Special Credits,
Its: General Partner
By: TCW Asset Management Company,
Its: Managing General Partner
By:
-------------------------------
Name:
Title:
By:
-------------------------------
Name:
Title:
12
<PAGE>
TCW SPECIAL CREDITS PLUS FUND
By: TCW Special Credits,
Its: General Partner
By: TCW Asset Management Company,
Its: Managing General Partner
By:
-------------------------------
Name:
Title:
By:
-------------------------------
Name:
Title:
TCW SPECIAL CREDITS TRUST IV
By: Trust Company of the West, Trustee
By:
-------------------------------
Name:
Title:
By:
-------------------------------
Name:
Title:
TCW SPECIAL CREDITS TRUST IVA
By: Trust Company of the West, Trustee
By:
-------------------------------
Name:
Title:
By:
-------------------------------
Name:
Title:
13
<PAGE>
OCM REAL ESTATE OPPORTUNITIES FUND A, L.P.
By: Oaktree Capital Management, LLC
Its: General Partner
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
OCM REAL ESTATE OPPORTUNITIES FUND B, L.P.
By: Oaktree Capital Management, LLC
Its: General Partner
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
WEYERHAEUSER REAL ESTATE OPPORTUNITIES
SEPARATE ACCOUNT
By: Oaktree Capital Management, LLC
Its: Investment Manager
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
14
<PAGE>
WEYERHAEUSER COMPANY MASTER RETIREMENT
TRUST
By: TCW Special Credits,
Its: Investment Manager
By: TCW Asset Management Company
Its: Managing General Partner
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 625
<SECURITIES> 100
<RECEIVABLES> 730
<ALLOWANCES> (7)
<INVENTORY> 0
<CURRENT-ASSETS> 2,004
<PP&E> 81,844
<DEPRECIATION> (6,909)
<TOTAL-ASSETS> 78,387
<CURRENT-LIABILITIES> 2,479
<BONDS> 69,839
0
32,234
<COMMON> 13,356
<OTHER-SE> (39,521)
<TOTAL-LIABILITY-AND-EQUITY> 78,387
<SALES> 0
<TOTAL-REVENUES> 17,126
<CGS> 0
<TOTAL-COSTS> (10,592)
<OTHER-EXPENSES> (4,963)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,196)
<INCOME-PRETAX> (2,625)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,625)
<DISCONTINUED> 0
<EXTRAORDINARY> 374
<CHANGES> 0
<NET-INCOME> (2,251)
<EPS-PRIMARY> (1.02)<F1>
<EPS-DILUTED> (1.02)<F2>
<FN>
<F1>Common shares of beneficial interest equivalents were anti-dilutive. The
figures presented above are simple EPS and included the effects of stock
dividends discounts and accretion of discounts on redeemable convertible
preferred stocks.
<F2>Common shares of beneficial interest equivalents were anti-dilutive. The
figures presented above are simple EPS and included the effects of stock
dividends discounts and accretion of discounts on redeemable convertible
preferred stocks.
</FN>
</TABLE>
