<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF
1934
(AMENDMENT NO. 2)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] CONFIDENTIAL, FOR USE OF THE
[X] Preliminary Proxy Statement COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
MORTGAGE AND REALTY TRUST
(Name of Registrant as Specified in Its Charter)
MORTGAGE AND REALTY TRUST
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
DISCLOSURE STATEMENT AND
PROXY STATEMENT FOR THE SOLICITATION
OF VOTES FOR THE PREPACKAGED PLAN OF REORGANIZATION OF
MORTGAGE AND REALTY TRUST
Mortgage and Realty Trust, a Maryland real estate investment trust (the
"Company"), upon the terms and subject to the conditions set forth in this
Disclosure Statement and Proxy Statement for the Solicitation of Votes for the
Prepackaged Plan of Reorganization of Mortgage and Realty Trust (this
"Disclosure Statement") and the accompanying forms of Ballot (the "Ballot")
and/or Master Ballot (the "Master Ballot"), hereby solicits (the "Plan
Solicitation" or "Solicitation") from each holder of Outstanding Notes,
Outstanding Common Shares, Other Secured Claims and Unsecured Claims (as each
such term is hereinafter defined) (collectively, the "Holders") as of the close
of business on July 7, 1995 (the "Record Date"), acceptance of a prepackaged
plan of reorganization (the "Prepackaged Plan") under chapter 11 of title 11 of
the United States Code, as amended (the "Bankruptcy Code").
Consummation of the Prepackaged Plan will result in the restructuring
described in this Disclosure Statement (the "Restructuring"). The Prepackaged
Plan provides, among other things, that holders of the Company's debt
securities as of the date the Prepackaged Plan becomes effective (the
"Effective Date") shall receive the following securities, after giving effect
to a one for 33.33 reverse stock split (the "Reverse Stock Split") of the
Company's Common Shares, par value $1.00 per share (the "Common Shares"):
<TABLE>
<CAPTION>
FOR EACH $1,000 PRINCIPAL AMOUNT OF: THE HOLDER WILL RECEIVE:
------------------------------------ ------------------------
<C> <S>
Senior Secured Uncertificated Notes (a) $379.31 in principal amount of new
due 1995 (the "Outstanding Notes") 11-1/8% Senior Secured Notes due 2002
(the "New Senior Notes") (an aggregate of
$110,000,000 principal amount), (b) a pro
rata portion of an aggregate of at least
$50,000,000 less $25,000,000 paid pro
rata to the holders of Outstanding Notes
on April 11, 1995 and any additional
amounts paid between March 1, 1995 and
the date on which the Company files its
voluntary petition for relief commencing
the Bankruptcy Case (as hereinafter
defined) (the "Petition Date") pursuant
to the Agreement of Understanding (as
hereinafter defined) (plus such
additional amount, if any, based upon
cash available in excess of the Initial
Cash Reserve Fund (as hereinafter
defined)) and (c) 37.55 Common Shares
(the "New Common Shares"). The due,
punctual and full payment of the
principal of and interest on the New
Senior Notes will be jointly, severally
and unconditionally guaranteed by the
Subsidiaries (as defined under the New
Senior Note Indenture) of the Company.
</TABLE>
Under the Prepackaged Plan, holders of the Company's currently outstanding
Common Shares (the "Outstanding Common Shares") will retain their existing
Common Shares, subject to the Reverse Stock Split and the issuance of the New
Common Shares to holders of Outstanding Notes as described above. However, the
total equity ownership in the Company of existing holders of Outstanding Common
Shares will be reduced from 100% to 3% under the Prepackaged Plan. IF THE CLASS
OF HOLDERS OF OUTSTANDING COMMON SHARES DOES NOT VOTE TO ACCEPT THE PREPACKAGED
PLAN, THE PREPACKAGED PLAN PROVIDES FOR A "CRAMDOWN" UNDER WHICH ALL
OUTSTANDING COMMON SHARES WILL BE CANCELLED AND HOLDERS OF OUTSTANDING COMMON
SHARES WILL NOT RECEIVE OR RETAIN ANYTHING. If the "cramdown" is effected, the
New Common Shares distributed to holders of Outstanding Notes will represent
99.5% of the Company's outstanding equity securities after the Restructuring
and the remaining 0.5% will be distributed to charities designated by the
Principal Holders (as hereinafter defined).
THE PLAN SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
AUGUST 17, 1995, UNLESS EXTENDED (THE "EXPIRATION DATE").
----------------
This Disclosure Statement is first being mailed to Record Holders on July 12,
1995.
(cover page continued on the following pages)
<PAGE>
(cover page continued)
The Prepackaged Plan also provides that (a) holders of Other Secured Claims
(as defined below) will (at the option of the Company and with the consent of
the Principal Holders (as hereinafter defined)) (i) be paid in full, in cash,
on the Effective Date (or as soon as practicable after the date on which any
such claim is allowed if the date of allowance is later than the Effective
Date), (ii) be paid upon such other less favorable terms as may be mutually
agreed upon by the Company and the holder of such claim, or (iii) be
reinstated and paid or performed by the Company in accordance with section
1124 of the Bankruptcy Code, or the legal, equitable and contractual rights to
which such claim entitles the holder of such claim shall be left unaltered,
and (b) holders of Unsecured Claims (as defined below) will receive cash equal
to the amount of such claim unless the holder of such claim agrees to a less
favorable treatment, as described in this Disclosure Statement. "Other Secured
Claims" means any Claim (as hereinafter defined) against the Company, other
than a Claim of a holder of Outstanding Notes, or a Class 2 Expense Claim (as
hereinafter defined), of a creditor secured by a lien on property of the
Company, to the extent of the value, as determined by the Bankruptcy Court (as
hereinafter defined) pursuant to section 506(a) of the Bankruptcy Code of such
creditor's interest in such property of the Company. "Unsecured Claim" means
any Claim against the Company, that is not an Administrative Claim (as
hereinafter defined), a Priority Claim (as hereinafter defined), a Claim under
or evidenced by the Outstanding Notes, the Outstanding Note Indenture (as
hereinafter defined), the Outstanding Collateral Agreement (as hereinafter
defined) or the Prior Plan (as hereinafter defined), any Other Secured Claim,
or a Claim based upon the Outstanding Common Shares or Outstanding Stock
Rights (as hereinafter defined).
The Outstanding Notes and the Outstanding Common Shares are referred to
herein collectively as the "Outstanding Securities." The New Senior Notes and
the New Common Shares are referred to herein collectively as the "New
Securities."
It is important that Holders read and carefully consider the matters
described in this Disclosure Statement and respond promptly to the Plan
Solicitation. Currently, the Company's capital structure is highly leveraged,
and the Company is unable to meet its substantial debt service requirements.
The Company is undertaking the Restructuring in order to adjust its capital
structure to reflect its present projected prospects. By March 31, 1995, the
Company had defaulted in the payment of $152.6 million in principal and $51.3
million of interest due in respect of the Outstanding Notes. As a result of
the Company's financial condition and the current condition of the United
States real estate markets, the Company will be unable to meet its debt
service requirements and make scheduled payments in the absence of the
Restructuring. Consequently, there can be no assurance that the Outstanding
Note Trustee and the Outstanding Collateral Agent (as each such term is
hereinafter defined) will not take remedial or enforcement action with respect
to the Company's bank accounts or other properties, including acceleration of
the Outstanding Notes and foreclosure. See "The Prepackaged Plan--Background
of the Restructuring." Therefore, with or without the requisite acceptances of
the Prepackaged Plan, it will be necessary for the Company to file for
protection under chapter 11 of the Bankruptcy Code ("Chapter 11").
According to special purpose valuation reports prepared by Kenneth Leventhal
& Company ("Kenneth Leventhal"), as of March 31, 1995, the range of enterprise
going concern value of the Company is $265 million to $285 million and the
range of liquidation value of the Company is $220 million to $260 million. As
of May 31, 1995, the Company had $290 million in Outstanding Notes plus
accrued interest of $32.9 million net of the April 11, 1995 payment of $25.0
million. Consequently, if the Prepackaged Plan is not consummated, holders of
claims against the Company, whether or not asserted or allowed, as defined in
section 101(5) of the Bankruptcy Code ("Claims") may not receive cash or
securities of the same value and having as favorable terms as under the
Prepackaged Plan and holders of Outstanding Common Shares may not receive or
retain anything in the event of a foreclosure, nonconsensual bankruptcy or
liquidation. THE COMPANY RECOMMENDS THAT ALL HOLDERS VOTE IN FAVOR OF THE
PREPACKAGED PLAN. THE PRINCIPAL HOLDERS, WHO HOLD IN EXCESS OF 80% OF THE
OUTSTANDING NOTES, HAVE AGREED TO VOTE WHEN SOLICITED IN FAVOR OF THE
PREPACKAGED PLAN. For a discussion of certain important factors that should be
considered in connection with the Restructuring, see "Special Factors and
Certain Considerations."
For the Prepackaged Plan to be confirmed (without the use of "cramdown"
procedures as to classes of Holders entitled to vote on the Prepackaged Plan),
the Company must receive acceptances ("Plan Acceptances") from the Holders of
(i) Claims constituting at least two-thirds in dollar amount and more than
one-half in number of the allowed Claims in each impaired class of Claims that
have actually voted on the Prepackaged Plan, and (ii) equity
ii
<PAGE>
(cover page continued)
interests constituting at least two-thirds in amount of the allowed equity
interests in each impaired class of equity interests that have actually voted
on the Prepackaged Plan (the "Requisite Plan Acceptances"). ONLY VOTES ACTUALLY
CAST WILL BE COUNTED IN DETERMINING WHETHER THE REQUISITE PLAN ACCEPTANCES FROM
EACH VOTING CLASS HAVE BEEN OBTAINED. IF THE COMPANY RECEIVES THE REQUISITE
PLAN ACCEPTANCES FROM THE HOLDERS OF OUTSTANDING NOTES BUT HOLDERS OF
OUTSTANDING COMMON SHARES OR OTHER IMPAIRED CLAIMS REJECT THE PREPACKAGED PLAN,
THE COMPANY WILL SEEK CONFIRMATION OF THE PREPACKAGED PLAN PURSUANT TO SECTION
1129(b) OF THE BANKRUPTCY CODE, PURSUANT TO "CRAMDOWN" PROCEDURES. IF THE
COMPANY DOES NOT RECEIVE THE REQUISITE PLAN ACCEPTANCES FROM THE CLASS OF
HOLDERS OF OUTSTANDING COMMON SHARES, THE PREPACKAGED PLAN PROVIDES THAT ALL
OUTSTANDING COMMON SHARES WILL BE CANCELLED AND HOLDERS OF OUTSTANDING COMMON
SHARES WILL NOT RECEIVE OR RETAIN ANYTHING. If the Company must invoke
"cramdown" procedures, the Company may propose alternatives to the terms
proposed in the Prepackaged Plan. For a discussion of "cramdown" procedures and
the effects thereof, see "The Prepackaged Plan--Confirmation of the Prepackaged
Plan--Nonconsensual Confirmation." Unless otherwise stated or otherwise
indicated by context, the discussion contained in this Disclosure Statement
assumes that the Prepackaged Plan will be confirmed with the approval of the
holders of Outstanding Common Shares and that, consequently, holders of
Outstanding Common Shares will retain their interests as provided in the
Prepackaged Plan.
If the Requisite Plan Acceptances are received from the holders of
Outstanding Notes, the Company will commence a case under Chapter 11 (the
"Reorganization Case" or "Bankruptcy Case") and use the Plan Acceptances
received to obtain confirmation of the Prepackaged Plan. On the Effective Date,
the Outstanding Notes will be exchanged for the consideration set forth above,
and the Amended and Restated Declaration of Trust of the Company (the "Amended
and Restated Declaration of Trust"), including the Reverse Stock Split, will be
effected, each on the terms set forth in the Prepackaged Plan. After giving
effect to the Reverse Stock Split and the distributions of New Common Shares
under the Prepackaged Plan, there would be approximately 11,227,000 Common
Shares outstanding, of which the Outstanding Common Shares held by existing
shareholders would represent approximately 3% of the total number of
outstanding Common Shares. Under the Agreement of Understanding (as hereinafter
defined), the Principal Holders (who hold in excess of 80% of the Outstanding
Notes), among other things, agreed to vote when solicited in favor of the
Prepackaged Plan.
The Prepackaged Plan also includes provisions relating to (i) the initial
composition of the board of trustees of the Company (the "Board of Trustees"),
(ii) certain registration rights granted in favor of certain holders of New
Senior Notes and New Common Shares and (iii) release of certain claims by the
Company and Holders. See "The Prepackaged Plan."
The Company will not hold a meeting to vote on the Prepackaged Plan. Rather,
the Company is soliciting acceptances of the Prepackaged Plan by means of
Ballots and Master Ballots. Any Holder who wishes to vote with respect to the
Prepackaged Plan should complete, sign and return the applicable Ballot or
Master Ballot in accordance with the instructions set forth in this Disclosure
Statement.
IF THE PREPACKAGED PLAN IS CONFIRMED BY THE BANKRUPTCY COURT (AS HEREINAFTER
DEFINED), ALL HOLDERS (INCLUDING THOSE WHO ABSTAIN OR VOTE TO REJECT THE
PREPACKAGED PLAN) OF CLAIMS AGAINST AND EQUITY INTERESTS IN THE COMPANY WILL BE
BOUND BY THE PREPACKAGED PLAN AND THE TRANSACTIONS CONTEMPLATED THEREBY.
The Company reserves the right to amend, modify or supplement the Prepackaged
Plan, subject to the conditions in the Prepackaged Plan, prior to its
effectiveness. The Company also reserves the right to cancel the Solicitation
at any time prior to the Expiration Date and revoke the Prepackaged Plan,
subject to the conditions contained in the Prepackaged Plan. The Company will
give the Record Holders (as hereinafter defined) notice of any amendments,
modifications or supplements as may be required by applicable law. See "The
Plan Solicitation; Voting Procedures--Expiration Date; Extension; Amendments"
and "The Prepackaged Plan--Modification of the Prepackaged Plan."
No appraisal rights are available to holders of Outstanding Common Shares in
connection with the Prepackaged Plan.
iii
<PAGE>
(cover page continued)
----------------
ALL HOLDERS SHOULD READ AND CAREFULLY CONSIDER THIS DISCLOSURE STATEMENT
PRIOR TO RESPONDING TO THE PLAN SOLICITATION AND THE OTHER MATTERS ADDRESSED
HEREIN, INCLUDING, WITHOUT LIMITATION, ALL OF THE FACTORS SET FORTH UNDER THE
HEADING "SPECIAL FACTORS AND CERTAIN CONSIDERATIONS." Holders should not
construe the contents of this Disclosure Statement as providing any legal,
business, financial or tax advice. Each Holder should, therefore, consult with
its own legal, business, financial and tax advisors on any matters concerning
the contents of this Disclosure Statement and the transactions contemplated
hereby.
THE BOARD OF TRUSTEES HAS VOTED UNANIMOUSLY TO APPROVE THE RESTRUCTURING, HAS
DETERMINED THAT THE RESTRUCTURING IS FAIR TO THE UNAFFILIATED HOLDERS OF THE
COMPANY'S OUTSTANDING SECURITIES AND OTHER CLAIMS AND INTERESTS, AND RECOMMENDS
THAT ALL HOLDERS, INCLUDING HOLDERS OF OUTSTANDING COMMON SHARES, VOTE IN FAVOR
OF THE PREPACKAGED PLAN.
----------------
The Outstanding Common Shares are listed for trading on the New York Stock
Exchange (the "NYSE") and the Pacific Stock Exchange (the "PSE") under the
symbol "MRT." On June 26, 1995, the last reported sale price of the Outstanding
Common Shares on the NYSE was $.25 per share. See "Market and Trading
Information."
The Outstanding Notes are not listed on any national or regional exchange.
The Outstanding Notes trade on a limited basis in the over-the-counter market.
Prior to the Plan Solicitation, there has been no established trading market
for the New Senior Notes. The Company does not contemplate that the New Senior
Notes will be listed on a national or regional securities exchange, and there
can be no assurance that the New Senior Notes will be eligible for listing or
listed on any national or regional exchange in the future. Consequently, there
can be no assurance concerning the prices at which the New Senior Notes will
trade or whether a market will exist for the trading thereof.
To the extent that the Solicitation is deemed to result in offers of new
securities that are not exempted by section 1145(a) of the Bankruptcy Code,
they are being made by the Company in reliance on the exemption from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), afforded by Section 4(2) or Section 3(a)(9) thereof. The
Company will not pay any commission or other remuneration to any broker,
dealer, salesman or other person for soliciting acceptances of the Prepackaged
Plan. Regular employees of the Company, who will not receive additional
compensation therefor, may solicit acceptances. The Company has made no
arrangements for and has no understandings with any broker, dealer, salesman or
other person regarding the Plan Solicitation.
----------------
NEITHER THE NEW SECURITIES OFFERED HEREBY NOR THE PREPACKAGED PLAN HAS BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
DISCLOSURE STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BECAUSE NO BANKRUPTCY CASE HAS YET BEEN FILED, THIS DISCLOSURE STATEMENT HAS
NOT BEEN APPROVED BY ANY BANKRUPTCY COURT WITH RESPECT TO THE ADEQUACY OF
INFORMATION OR ANY OTHER MATTER. HOWEVER, IF A CASE IS SUBSEQUENTLY COMMENCED,
THE COMPANY WILL SEEK BANKRUPTCY COURT APPROVAL OF THIS DISCLOSURE STATEMENT AS
PART OF THE ORDER CONFIRMING THE PREPACKAGED PLAN.
iv
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SOLICITATION AGENT AND INFORMATION AGENT
The Company, or its designee, will act as solicitation agent for the
Solicitation (the "Solicitation Agent"). All correspondence in connection with
the Plan Solicitation, the Ballots and the Master Ballots should be addressed
to the Company at 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania
19027-1590, attention: Daniel F. Hennessey (telephone: (215) 881-1525).
The Company, or its designee, will act as information agent in connection
with the Solicitation (the "Information Agent"). Questions and requests for
assistance may be directed to the Company at 8380 Old York Road, Suite 300,
Elkins Park, Pennsylvania 19027-1590, attention: Daniel F. Hennessey
(telephone: (215) 881-1525).
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). In addition,
the Company has filed with the Commission an application on Form T-3 for
qualification under the Trust Indenture Act of 1939, as amended, of the
indenture governing the New Senior Notes. Such application contains certain
information and exhibits not contained in the Disclosure Statement. Such
application, reports, proxy statements and other information can be inspected
and copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located in the New York Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048 and the
Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be
obtained at prescribed rates from the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549. In
addition, such reports, proxy statements and other information can be inspected
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005, or at the offices of the Pacific Stock Exchange, 233 South Beaudry
Avenue, Los Angeles, California 90017, on which the Company's Common Shares are
listed.
The Company has not included all of the exhibits to the Prepackaged Plan in
this Disclosure Statement. Such exhibits may be inspected at the offices of the
Company. If you desire to review or obtain a copy of any exhibit to the
Prepackaged Plan not included in the Disclosure Statement, you should contact
Daniel F. Hennessey, Treasurer of the Company, 8380 Old York Road, Suite 300,
Elkins Park, Pennsylvania 19027-1590. The Company's telephone number is (215)
881-1525.
No person has been authorized to give any information or to make any
representation not contained in this Disclosure Statement in connection with
the Plan Solicitation and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company or any other
person. The Plan Solicitation is not being made to, nor will the Company accept
votes or tenders from, Holders in any jurisdiction in which the Solicitation
would not be in compliance with the securities or blue sky laws of such
jurisdiction. This Disclosure Statement does not constitute an offer to sell or
a solicitation of any offer to purchase any securities to any person in any
jurisdiction in which such offer or solicitation is unlawful. Neither the
delivery of this Disclosure Statement nor any exchange made hereunder shall,
under any circumstances, create any implication that there has been no change
in the affairs of the Company and its subsidiaries since the respective dates
as of which information is given herein.
v
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SUMMARY..................................................................... 1
The Company................................................................ 1
Background of the Restructuring............................................ 1
Purposes of the Restructuring.............................................. 5
Effects of the Prepackaged Plan............................................ 6
Recommendation of the Board of Trustees.................................... 8
Special Purpose Valuation Reports of Kenneth Leventhal .................... 10
The Plan Solicitation...................................................... 11
Special Factors and Certain Considerations................................. 13
Summary Projected Financial Information.................................... 15
Summary Pro Forma Financial Information.................................... 17
Summary Historical Financial Information................................... 18
Certain Federal Income Tax Consequences.................................... 19
SPECIAL FACTORS AND CERTAIN CONSIDERATIONS.................................. 20
Financial Condition of the Company;
Liquidity................................................................. 20
Continuing Leverage........................................................ 20
Foreclosure and Bankruptcy Alternatives.................................... 20
Possible Further Decline of Real Estate Markets............................ 21
Disruption of the Company's Business....................................... 22
Considerations Relating to the Prepackaged Plan............................ 22
Certain Bankruptcy Considerations if the Prepackaged Plan is Not Confirmed
and the Restructuring is Not Otherwise Consummated....................... 23
Certain Consequences to Non-Voting Holders of Common Shares................ 24
Material Dilution of Common Equity......................................... 24
Risks Relating to the Projections.......................................... 24
Restricted Payments........................................................ 24
Absence of Public Market................................................... 25
Delisting of the Common Shares from Trading on the NYSE.................... 25
Releases................................................................... 26
Federal Income Tax Considerations.......................................... 26
THE PREPACKAGED PLAN........................................................ 28
Background of the Restructuring............................................ 28
Recommendation of the Board of Trustees.................................... 39
Special Purpose Valuation Reports of Kenneth Leventhal..................... 41
Reports of Houlihan Lokey as Financial Advisor to the Company.............. 42
Brief Explanation of Chapter 11 Reorganization............................. 46
Classification and Treatment of Claims and
Interests................................................................ 46
Summary of Other Provisions of the
Prepackaged Plan......................................................... 50
Means For Implementation of the
Prepackaged Plan......................................................... 53
Modification of the Prepackaged Plan....................................... 57
Revocation of the Prepackaged Plan......................................... 57
Confirmation of the Prepackaged Plan....................................... 57
Effects of Prepackaged Plan Confirmation................................... 64
Alternatives to Confirmation and Consummation of the Prepackaged Plan...... 65
Insider and Affiliate Claims............................................... 66
Applicability of Federal And Other
Securities Laws To Resales of New
Common Shares and New Senior Notes....................................... 66
THE PLAN SOLICITATION; VOTING PROCEDURES.................................... 67
General.................................................................... 67
Voting Record Date......................................................... 69
Required Votes............................................................. 69
How to Vote................................................................ 69
Agreements Upon Furnishing Ballots Accepting the Restructuring............. 71
Waivers of Defects, Irregularities, Etc. .................................. 71
Expiration Date; Extension; Amendments..................................... 71
Revocation Rights.......................................................... 72
Solicitation Agent......................................................... 72
Information Agent.......................................................... 72
Other Matters.............................................................. 72
FINANCIAL PROJECTIONS....................................................... 73
ACCOUNTING TREATMENT........................................................ 79
PRO FORMA FINANCIAL INFORMATION............................................. 79
SELECTED FINANCIAL DATA..................................................... 86
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................. 87
Liquidity and Capital Resources............................................ 87
Results of Operations...................................................... 88
BUSINESS.................................................................... 92
General.................................................................... 92
Investments................................................................ 93
Allowance for Losses....................................................... 96
Properties................................................................. 97
Legal Proceedings.......................................................... 97
MANAGEMENT.................................................................. 98
Executive Compensation..................................................... 99
Executive Compensation Tables.............................................. 99
Aggregated Option/SAR Exercises in Last Fiscal Year and Year-End Values.... 100
</TABLE>
vi
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<TABLE>
<S> <C>
Pension Plans.............................................................. 100
Trustee Compensation....................................................... 101
Savings Incentive Plan..................................................... 101
Employee Retention Plan.................................................... 102
Compensation Committee Interlocks and Insider Participation................ 103
Termination of Employment and Change-In-Control Arrangements............... 103
Indemnification............................................................ 103
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 104
Current Holders............................................................ 104
Certain Holders After Restructuring........................................ 105
MARKET AND TRADING INFORMATION.............................................. 106
Common Shares.............................................................. 106
Outstanding Notes.......................................................... 107
DESCRIPTION OF NEW SENIOR NOTES............................................. 108
General.................................................................... 108
Optional Redemption........................................................ 108
Mandatory Redemption....................................................... 108
Notice and Selection....................................................... 108
Guarantee.................................................................. 109
Asset Sale Proceeds........................................................ 109
Change of Control.......................................................... 111
Certain Covenants of the Company........................................... 112
Collateral and Security.................................................... 113
Amendment, Supplement and Waiver........................................... 114
Events of Default.......................................................... 115
Successor Company.......................................................... 116
Defeasance................................................................. 116
The New Indenture Trustee and New
Collateral Agent.......................................................... 118
Certain Definitions........................................................ 118
DESCRIPTION OF CAPITAL STOCK................................................ 123
DESCRIPTION OF OUTSTANDING NOTES............................................ 127
General.................................................................... 127
Denomination and Modification.............................................. 127
Payments................................................................... 127
Certain Covenants of the Company........................................... 129
Redemption................................................................. 131
Security................................................................... 131
Amendment, Supplement and Waiver........................................... 132
Events of Default.......................................................... 132
Merger; Sale of Assets; Permitted Financings............................... 133
Restrictions on Transfer................................................... 134
Satisfaction and Discharge................................................. 134
The Outstanding Note Trustee and Collateral Agent.......................... 135
Certain Definitions........................................................ 135
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................... 139
Tax Consequences to Creditors.............................................. 139
Recapture of Gain on Subsequent Sale of New Common Shares.................. 141
Tax Treatment of Holders of Outstanding Common Shares...................... 142
Tax Consequences of Holding New Senior Notes............................... 142
Tax Consequences of Holding New Common Shares.............................. 142
REIT Status and Taxation of Company Under the Prepackaged Plan............. 142
Additional Tax Consequences to the Company from the Prepackaged Plan....... 147
FINANCIAL ADVISOR........................................................... 151
FEES AND EXPENSES........................................................... 151
ADDITIONAL INFORMATION CONCERNING THE COMPANY............................... 152
PREPACKAGED PLAN OF REORGANIZATION.......................................ANNEX A
AMENDED AND RESTATED DECLARATION OF TRUST................................ANNEX B
SPECIAL PURPOSE VALUATION REPORT OF KENNETH LEVENTHAL & COMPANY:
RANGE OF GOING CONCERN VALUES...........................................ANNEX C
SPECIAL PURPOSE VALUATION REPORT OF KENNETH LEVENTHAL & COMPANY:
RANGE OF LIQUIDATION VALUES.............................................ANNEX D
ALSO ACCOMPANYING THIS DISCLOSURE STATEMENT:
The Company's Annual Report on Form 10-K for the Year Ended September 30, 1994
The Company's Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1995
</TABLE>
vii
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
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<S> <C>
1991 Plan.............................................................. 1
1992 Modifications..................................................... 28
1992 Restructuring..................................................... 1
1993 Agreement in Principle............................................ 3
1994 Agreement in Principle............................................ 5
Additional Payment Date................................................ 128
Adjusted Prime Rate.................................................... 135
Adjusted Rate.......................................................... 28
Administrative Claims.................................................. 47
Affiliate.............................................................. 118, 135
Agreement of Understanding............................................. 5
Allowed Claim.......................................................... 8, 47
Allowed Interests...................................................... 47
Amended and Restated Declaration of Trust.............................. iii
AMT.................................................................... 150
AMTI................................................................... 150
April 1994 Proposal.................................................... 4
Asset Sale............................................................. 118, 135
Asset Sale Account..................................................... 118
Asset Sale Offer....................................................... 109
Asset Sale Proceeds.................................................... 118, 135
Assignments of Leases.................................................. 118
August Term Sheet...................................................... 3
Available Cash......................................................... 119, 135
Ballot................................................................. i
Bank of America........................................................ 7
Bankruptcy Case........................................................ iii
Bankruptcy Code........................................................ i
Bankruptcy Court....................................................... 1
Bankruptcy Rules....................................................... 12
Beneficial Attribution Rules........................................... 123
Best Interests Test.................................................... 23
Board of Trustees...................................................... iii
Business Day........................................................... 119
Capital Base........................................................... 136
Capital Expenditures................................................... 119
Cash Equivalents....................................................... 119, 136
Change of Control...................................................... 119
Change of Control Offer................................................ 111
Change of Control Payment.............................................. 111
Change of Control Payment Date......................................... 111
Chapter 7.............................................................. 6
Chapter 11............................................................. ii
Claims................................................................. ii
Class 2 Expense Claims................................................. 49
Class 3 Creditor Obligations........................................... 102
COD.................................................................... 19
Code................................................................... 1
Collateral............................................................. 119, 136
Collateral Assignment of Leases........................................ 119
Collateral Assignments of Mortgages.................................... 120
Commission............................................................. v
Common Shares.......................................................... i
Company................................................................ i
Completion Fee......................................................... 43, 151
Completion Fee Balance................................................. 43, 151
Confirmation Date...................................................... 13
Confirmation Order..................................................... 51
Consolidated Net Worth................................................. 120
</TABLE>
<TABLE>
<CAPTION>
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<S> <C>
Constructive Ownership Limit......................................... 124
Constructive Ownership Rules......................................... 123
Contingent Obligation................................................ 120, 136
Contractual Obligation............................................... 136
Creditor Obligation.................................................. 127
Creditor Releasees................................................... 11
Creditor/Shareholder Release......................................... 26, 52
Creditors' Committee................................................. 1
Creditors' Committee Advisors........................................ 2
Debtor in Possession................................................. 57
Debtor Release....................................................... 26, 52
Debtor Releasees..................................................... 11, 26, 52
Declaration of Trust................................................. 24
Default.............................................................. 120
Defaulted Interest................................................... 128
Defeasance........................................................... 117
Deferred Payment..................................................... 128
Disbursing Agents.................................................... 54
Disclosure Statement................................................. i
Disputed Claim....................................................... 54
Disputed Interest.................................................... 54
Dividend Overpayments................................................ 136
Earning Assets....................................................... 136
Effective Date....................................................... i
Effective Period..................................................... 102
Entity............................................................... 57
Equities............................................................. 92
Equity Committee..................................................... 1
Equity Committee's Advisor........................................... 32
Estate............................................................... 47
Event of Default..................................................... 115, 132
Exchange Act......................................................... v
Excluded Claims...................................................... 52
Existing Holder Limit................................................ 124
Existing Holders..................................................... 124
Expiration Date...................................................... i
Feasibility Test..................................................... 22
Final Order.......................................................... 48
First Lien Debt...................................................... 120
Foreign Shareholders................................................. 147
GAAP................................................................. 77, 120
Governmental Securities.............................................. 120
Guarantor............................................................ 120
Houlihan Lokey....................................................... 2
Houlihan Lokey Materials............................................. 44
Holders.............................................................. i
Indebtedness......................................................... 120, 136
Information Agent.................................................... v
Initial Cash Reserve Fund............................................ 49
Instruments.......................................................... 55
Interested Group..................................................... 2
Interests............................................................ 11
Internal Revenue Code................................................ 1
Investment........................................................... 121, 137
Kenneth Leventhal.................................................... ii
Kenneth Leventhal Reports............................................ 41
Lease................................................................ 121
Legal Holiday........................................................ 121
Lien................................................................. 121, 137
Loss Corporation..................................................... 147
</TABLE>
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(cover page continued)
INDEX OF DEFINED TERMS (CONTINUED)
<TABLE>
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<S> <C>
Major Holder............................................................ 3
Master Ballot........................................................... i
Material Subsidiary..................................................... 121
Milbank................................................................. 35
Monthly Fee............................................................. 43, 151
Mortgages............................................................... 121
Named Executive Officers................................................ 99
Net Cash Value.......................................................... 137
New Collateral Agent.................................................... 54
New Collateral Documents................................................ 121
New Common Shares....................................................... i
New Indenture Trustee................................................... 108
New Major Holder........................................................ 5
New Monthly Fee......................................................... 43, 151
New Securities.......................................................... ii
New Senior Note Indenture............................................... 49
New Senior Notes........................................................ i
NOLs.................................................................... 34
Non-Earning Assets...................................................... 137
Non-Earning Loans....................................................... 137
Non-Earning Properties.................................................. 137
Notice.................................................................. 38
NYSE.................................................................... iv
Offer Amount............................................................ 109
Offer Period............................................................ 109
Officers' Certificate................................................... 121
Original Effective Period............................................... 102
Other Priority Claims................................................... 48
Other Secured Claims.................................................... ii
Outstanding Collateral Agent............................................ 30
Outstanding Collateral Agreement........................................ 29
Outstanding Common Shares............................................... i
Outstanding Indenture Trustee........................................... 53
Outstanding Note Indenture.............................................. 29
Outstanding Note Trustee................................................ 29
Outstanding Notes....................................................... i
Outstanding Pledge Agreement............................................ 54
Outstanding Securities.................................................. ii
Outstanding Stock Rights................................................ 50
Ownership Limit......................................................... 123
Pension Plan............................................................ 101
Permitted Deferred Payment.............................................. 128
Permitted Financing..................................................... 134
Petition Date........................................................... i
Plan Acceptances........................................................ ii
Plan Solicitation....................................................... i
Pledge Agreement........................................................ 122
PNB..................................................................... 92
Preferred Stock......................................................... 122
Prepackaged Plan........................................................ i
Principal Holders....................................................... 3
Principal Holders' Advisor.............................................. 3
</TABLE>
<TABLE>
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<S> <C>
Prior Plan............................................................. 29
Priority Claim......................................................... 48
Priority Tax Claims.................................................... 48
Projections............................................................ 73
Promissory Note........................................................ 137
PSE.................................................................... iv
Purchase Date.......................................................... 109
Real Estate............................................................ 122, 138
Record Date............................................................ i
Record Holders......................................................... 67
Reference Rate......................................................... 138
REIT................................................................... 1
REIT Provisions........................................................ 142
REIT Requirements...................................................... 142
REIT Taxable Income.................................................... 145
Registration Rights Agreement.......................................... 49
Related Party Tenant................................................... 144
Released Claims........................................................ 12
Reorganization Case.................................................... iii
Reorganization Value................................................... 79
Reorganized Debtor..................................................... 47
Required Holders....................................................... 122, 138
Required Payment Date.................................................. 127
Requisite Plan Acceptances............................................. iii
Restructure Value...................................................... 44
Restructuring.......................................................... i
Retention Plan......................................................... 102
Retirement Plan........................................................ 100
Reverse Stock Split.................................................... i
Savings Plan........................................................... 101
Section 382 Limitation................................................. 147
Securities Act......................................................... iv
Security Agreement..................................................... 122
Share Trust............................................................ 124
Shares-in-Trust........................................................ 124
Shelf Registration..................................................... 67
Solicitation........................................................... i
Solicitation Agent..................................................... v
SOP 90-7............................................................... 79
Standing Instruction................................................... 110
Standstill Period...................................................... 30
Stock Ownership Limit Provisions....................................... 123
Subsidiary............................................................. 122, 138
Sutro.................................................................. 92
Tax Security........................................................... 19
Termination Date....................................................... 138
Title 11 Case.......................................................... 148
Title 11 Exception..................................................... 148
Underlying Loan Documents.............................................. 122
Underlying Mortgages................................................... 122, 138
Underlying Promissory Notes............................................ 122
Unsecured Claim........................................................ ii
</TABLE>
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SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere herein and the financial statements and
the related notes thereto referred to under "Additional Information Concerning
the Company."
THE COMPANY
The Company is a self-administered real estate investment trust (a "REIT")
that satisfies the conditions under sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code" or "Code"), and
under other applicable law that was organized in 1970 under the laws of the
State of Maryland. As of May 31, 1995, the Company had available cash of
approximately $46.5 million and invested assets consisting of 34 mortgage loans
and 37 investments in real estate located throughout the United States. For a
further description of the business of the Company, see "Business."
The Company's principal offices are located at 8380 Old York Road, Suite 300,
Elkins Park, Pennsylvania 19027-1590 and 3500 West Olive Avenue, Suite 600,
Burbank, California 91505-4628; the Company's telephone numbers are (215) 881-
1525 and (818) 953-7700, respectively.
BACKGROUND OF THE RESTRUCTURING
Previous Chapter 11 Case and 1991 Plan of Reorganization. On April 12, 1990,
the Company filed a voluntary petition for reorganization under Chapter 11 in
the United States Bankruptcy Court (the "Bankruptcy Court"). Following the
Chapter 11 filing, the United States Trustee appointed the creditors' committee
(the "Creditors' Committee") and an equity security holders' committee
representing the Company's shareholders (the "Equity Committee"). In February
1991, a Joint Plan of Reorganization (the "1991 Plan") proposed by the Company,
the Creditors' Committee and the Equity Committee was confirmed. Following
confirmation of the 1991 Plan, the Creditors' Committee and the Equity
Committee continued to represent their respective constituencies. The 1991 Plan
provided for a restructuring of the Company's outstanding indebtedness and
provided the Company with the right to defer payment of certain amounts for up
to 24 months or until December 31, 1995, when all deferred payments would be
due. The forecast on which the 1991 Plan was based assumed that real estate
markets would begin to improve in fiscal 1992. However, the markets continued
to deteriorate significantly and the Company was in danger of imminent default.
After several months of negotiations with the Creditors' Committee, the Company
completed an out-of-court restructuring of its outstanding debt in July 1992
(the "1992 Restructuring").
Pursuant to the 1992 Restructuring, the outstanding debt was restructured
through the issuance of the Outstanding Notes. The 1992 Restructuring (i)
increased the amount of principal that could be deferred (while retaining the
final payment date for deferred payments at December 31, 1995), (ii) extended
the permitted repayment period of such deferred amounts from 24 months to 30
months from the date a deferral is utilized, (iii) established a limit on the
maximum rate of interest to be paid in cash on a current basis at 9% through
June 30, 1994, with any excess being accrued and paid at December 31, 1995,
(iv) changed certain required financial covenants to reflect the then-existing
financial condition of the Company and then-existing real estate market
conditions, (v) provided for the release of collateral for certain financings
by the Company upon approval of the holders of 66 2/3% of the Outstanding
Notes, and (vi) provided for the payment of additional consideration to the
holders of the Outstanding Notes equal to 1% of the principal amount of the
Outstanding Notes, payable in four semi-annual installments commencing on the
date the 1992 Restructuring became effective.
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The financial projections on which the 1992 Restructuring was based assumed
that the real estate markets would stop or slow their decline by 1993 and show
some improvement in 1994. Instead, since the effective date of the 1992
Restructuring, the real estate markets have failed to improve in any
significant way. The Company's business operations, including its ongoing
efforts to refinance and sell property, have not generated cash flow sufficient
to service the Outstanding Notes.
Development of the Current Restructuring. During December 1992, it became
apparent to the Company that its projected cash flow would not be adequate to
meet its debt obligations in the future. Thus, the Company began to explore
possible restructuring options for its debt obligations. In considering
possible restructuring options, the Company's goals were (i) to survive as a
going concern and preserve the Company as a real estate investment vehicle so
that the Company's shareholders could enjoy the benefits of an improved or
stabilized real estate market, and (ii) to substantially de-leverage the
capital structure of the Company. Early in 1993, the Company retained Houlihan
Lokey Howard & Zukin ("Houlihan Lokey") to advise it in connection with the
Restructuring.
Beginning in December 1993, the Company suspended all payments due in respect
of the Outstanding Notes. By March 31, 1995, the Company had defaulted in the
payment of $152.6 million of principal and $51.3 million in interest. The
Company currently has no agreement with any holders of Outstanding Notes that
suspends its obligations to pay interest, principal or other amounts due in
respect of the Outstanding Notes. On April 11, 1995, the Company paid $25.0
million in accrued interest on the Oustanding Notes, with such payment to be
credited against the cash payment of at least $50 million to be made to the
holders of the Outstanding Notes pursuant to the Prepackaged Plan. The Company
does not currently plan to make any further principal or interest payments in
respect of the Outstanding Notes prior to the Effective Date. Notwithstanding
the uncured events of default under the Outstanding Note Indenture (as
hereinafter defined), the Outstanding Notes have not been accelerated.
Commencing in March 1993 and continuing through August 1993, the Company and
the Creditors' Committee and its advisors (the "Creditors' Committee Advisors")
negotiated regarding a restructuring of the Company. During that same time
period, from time to time the Company and its counsel apprised the Equity
Committee and its advisors of the status of negotiations regarding the
restructuring efforts. During April, May and June 1993, Houlihan Lokey made
numerous formal and informal presentations to the Creditors' Committee designed
to focus the Creditors' Committee on restructuring proposals that would be
consistent with the Company's restructuring goals. These presentations
included, among other things, discussions regarding the proposals submitted by
potential third-party investors and acquirors and the Company's internal
restructuring proposals. See "The Prepackaged Plan--Reports of Houlihan Lokey
as Financial Advisor to the Company--Presentations to the Creditors' Committee"
and "The Prepackaged Plan--Background of the Restructuring--Development of the
Current Restructuring." While the Company was attempting to restructure its
obligations, it continued to operate, even though it was in default, due to the
lack of foreclosure action by the Outstanding Note Trustee (as hereinafter
defined).
While the Company was negotiating with the Creditors' Committee, the Company
and Houlihan Lokey also met with several prospective investors and acquirors to
discuss possible third-party investment in or sale of the Company. Although
several potential third-party investors and acquirors were offered an
opportunity to propose restructuring alternatives, only three prospective
third-party investor groups made proposals to the Company and the Creditors'
Committee (each an "Interested Group"). After reviewing the terms of these
proposals, the Creditors' Committee advised the Company that the offers were
not acceptable because the valuations of the Company reflected by such
proposals were lower than the value placed on the Company by the Creditors'
Committee and were substantially below the amount of the Outstanding Notes. As
a result, the Company suspended the solicitation of potential third-party
investors or acquirors.
On or about August 10, 1993, after extensive negotiations, the Company and
the Creditors' Committee agreed to the broad outlines of a proposed
restructuring, subject to approval by the Board of Trustees. Pursuant to the
terms of the restructuring proposal, the Outstanding Notes would be exchanged
for approximately $195 million of new senior secured notes and common stock
representing approximately 85% of the equity of the reorganized Company. The
restructuring proposal anticipated that the new notes would
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<PAGE>
be issued in two series: $120 million of 7% notes maturing in 2003 with
scheduled annual principal amortization, and approximately $75 million in
additional notes payable principally from available cash flow. In addition, the
restructuring proposal provided for the payment by the Company on September 30,
1993, of all outstanding restructuring fees relating to the 1992 Restructuring
and the interest due on the Outstanding Notes, with interest to accrue
thereafter on the Outstanding Notes at 7%. Interest accruing through March 31,
1994 would be added to the principal of the new cash flow notes and any
interest accruing after March 31, 1994 would be paid at closing. Although
existing holders of the Company's Outstanding Common Shares would have retained
15% of the equity of the reorganized Company under this restructuring proposal,
the Company's remaining debt level under this proposal would have been greater
than the debt levels thought desirable by the Company.
On August 18, 1993, the Board of Trustees unanimously agreed to pursue the
restructuring proposal set forth in a draft term sheet dated August 16, 1993
(the "August Term Sheet"), subject to a number of conditions including, among
other things, the receipt by the Company of written indications of support from
members of the Creditors' Committee and additional holders of sufficient
Outstanding Notes to effect the restructuring through either a prepackaged or
prearranged plan of reorganization under Chapter 11 (the "1993 Agreement in
Principle"). After the terms of the 1993 Agreement in Principle were announced,
trading in the Outstanding Notes increased substantially. Included in the
Outstanding Notes initially traded were all of the Outstanding Notes held by
two members of the Creditors' Committee who had not been in favor of the 1993
Agreement in Principle. By November 1993, one of the three remaining members of
the Creditors' Committee had sold all of its Outstanding Notes, part to one of
the other Creditors' Committee members and the balance to other persons. These
sales left the Creditors' Committee with two members, one of which held in
excess of 33 1/3% of the Outstanding Notes (the "Major Holder"). By December
1993, in excess of 50% of the principal amount of the Outstanding Notes had
traded.
In early September 1993, the Company commenced negotiations with certain
holders who had acquired a significant portion of the Outstanding Notes
(collectively, such holders as variously constituted from time to time,
including, as of March 31, 1995, the New Major Holder (as hereinafter defined),
the "Principal Holders") and the Major Holder regarding the restructuring of
the Company. By the end of November 1993, the Company had still not received
written indications of support for the 1993 Agreement in Principle from any
holders of Outstanding Notes. Thereafter, the Company suspended all actions to
implement the terms of the 1993 Agreement in Principle and resumed responding
to inquiries from third parties regarding participation in a restructuring of
the Company.
In November 1993, the Principal Holders retained Smith Barney Inc. as their
financial advisor (the "Principal Holders' Advisor") to evaluate the
alternatives available to the Company's creditors, analyze the cash flows and
values of the Company's portfolio, participate in talks with the Company and
its creditors and evaluate the proposals submitted by the Interested Groups. In
early December 1993, the Principal Holders' Advisor presented an oral analysis
that included a valuation of the Company at approximately $230 million, an
amount below the values thought reasonable at the time by the Company and the
two remaining members of the Creditors' Committee. Throughout December 1993 and
January 1994, the Company attempted to bridge the gap in valuations placed on
the Company by the various creditor groups, but was ultimately unsuccessful.
From December 1993 to November 1994, the Creditors' Committee, the Major
Holder and the Principal Holders attempted to negotiate a consensual plan to
restructure the Company. The Major Holder and the Principal Holders, however,
had different views regarding how the restructuring of the Company should be
handled: the Principal Holders preferred a substantially deleveraged Company
while the Major Holder preferred substantial levels of senior debt.
On December 13, 1993, the Major Holder submitted a restructuring proposal
that was the basis for a draft term sheet, dated December 14, 1993, prepared by
the Company. At a meeting of the Board of Trustees held on December 15, 1993,
the Company and the Board of Trustees discussed such draft term sheet and the
3
<PAGE>
negotiating stance the Company might assume based on the concepts in the Major
Holder's proposal that the Company considered to be most important.
Throughout the second and third quarters of fiscal 1994, the Company's
management and advisors continued discussions with the Major Holder, the
Principal Holders and their representatives to explore various alternatives for
restructuring the Outstanding Notes that would resolve the impasse between the
Major Holder and the Principal Holders. At a meeting of the Board of Trustees
held on April 20, 1994, the Board of Trustees considered a term sheet for a
prepackaged reorganization plan based on a court-approved valuation of the
Company (assumed to be $230 million). Under this proposal, Outstanding Note
holders would be issued new senior convertible notes equal in aggregate
principal amount to the court-approved value of the Company, whereupon the
Principal Holders would convert their notes into shares representing 100% of the
common stock of the reorganized Company and give shares representing 4% of the
equity of the reorganized Company to the existing shareholders (the "April 1994
Proposal"). For a more detailed discussion of the April 1994 Proposal, see "The
Prepackaged Plan--Background of the Restructuring--Development of the Current
Restructuring." The Major Holder, however, would not agree to the April 1994
Proposal because, among other things, the reorganized Company would not retain
debt levels satisfactory to the Major Holder.
In May and June 1994, the Creditors' Committee, the Principal Holders and the
Company had several contacts with the Equity Committee to attempt to reach
agreement on a consensual plan to restructure the Company. Such attempts,
however, proved unsuccessful because of the inability to agree upon the terms
of a mutually acceptable restructuring.
In June 1994, at the Principal Holders' request, the Company retained Kenneth
Leventhal to perform a special purpose valuation and to provide such valuation
analysis to the Creditors' Committee, the Principal Holders and the Equity
Committee. The Board of Trustees agreed to retain Kenneth Leventhal because it
believed that it would be worth the additional expense if such an additional
special purpose valuation might lead to the negotiation of a consensual
agreement among the creditors and also result in fair treatment of the
shareholders.
On or about September 14, 1994, the Company's advisors, the Equity Committee's
advisors and counsel to the Principal Holders met in a final attempt to
negotiate the treatment of equity in the context of a prepackaged plan of
reorganization based on the April 1994 Proposal. At this meeting, the Company
and the Principal Holders outlined the terms of the April 1994 Proposal to the
Equity Committee's advisors in order to determine whether the Equity Committee
would accept 4% of the common stock of the reorganized Company. At the
conclusion of the meeting, the Equity Committee's advisors agreed to recommend
to the Equity Committee that it accept one of the following two proposals: (i)
5% of the common stock of the reorganized Company and warrants to purchase new
common shares representing 7 1/2% of the common stock of the reorganized
Company; or (ii) 4% of the common stock of the reorganized Company and warrants
to purchase new common shares representing 10% of the common stock of the
reorganized Company.
On October 4, 1994, Kenneth Leventhal produced its special purpose valuation
report, which placed the Company's approximate going concern value as of July
1, 1994, between $255 million and $275 million. Because Kenneth Leventhal's
report placed the Company's value higher than the $230 million value assumed by
the April 1994 Proposal, the Principal Holders decided to abandon the April
1994 Proposal. Thus, the Company renewed its efforts to negotiate a deal with
the Principal Holders that was acceptable to the Equity Committee. The Company,
the Principal Holders and the Equity Committee, however, were unable to reach
agreement on the terms of a restructuring due, among other things, to the
inability to agree on the respective shareholdings of the holders of
Outstanding Notes and the existing shareholders after giving effect to the
issuance of new shares in a restructuring.
On or about October 27, 1994, the Major Holder and the Principal Holders
submitted a proposal for a prepackaged restructuring of the Company. Pursuant
to the proposal, the Company would retain all of its
4
<PAGE>
assets and have between $10 million and $15 million of cash following the
restructuring. The Outstanding Notes would be exchanged for $110 million of new
senior secured notes and 98% of the common stock of the reorganized Company.
Common stock retained by the existing shareholders would represent 2% of the
reorganized Company's common stock. Thereafter, the Company and Houlihan Lokey
spent several weeks negotiating with such holders regarding the proposed equity
split between the holders of Outstanding Notes and the existing shareholders.
In November 1994, the Company reached a non-binding agreement in principle
with the Major Holder and the Principal Holders (the "1994 Agreement in
Principle"). Pursuant to the 1994 Agreement in Principle, upon shareholder
approval for a prepackaged Chapter 11 reorganization, holders of the
Outstanding Notes would receive (i) $110 million of new senior secured notes
due 2002, (ii) approximately $50 million in cash, and (iii) common stock
representing 97% of the common stock of the reorganized Company (or, if the
Company's existing shareholders did not vote to accept the Prepackaged Plan,
substantially all of the common stock of the reorganized Company). The existing
shareholders would retain their shares, which would represent the remaining 3%
of the reorganized Company's common stock, provided that they voted to accept
the Prepackaged Plan. The holders of unsecured claims would receive cash in the
allowed amount of their respective claims.
On November 16, 1994, the Board of Trustees unanimously approved the proposed
Restructuring, subject to approval by the Board of Trustees of the final
documentation necessary to effect the restructuring. On November 17, 1994, the
Company announced that it had reached the 1994 Agreement in Principle with the
Major Holder and the Principal Holders for the Restructuring.
On November 22, 1994, the Equity Committee gave notice that it had dissolved,
claiming, among other things, that the Company had not involved the Equity
Committee or its advisors in the development of the Restructuring and that the
Equity Committee was unable to conclude that the Restructuring was fair or
equitable to the Company's shareholders. On November 29, 1994, the Company
informed the Equity Committee that the Company disagreed with many of the
purported factual statements contained in the Equity Committee's notice and
that the Company believed that the notice was misleading.
Subsequent Developments. On March 15, 1995, the Major Holder sold all of its
Outstanding Notes to one of the Principal Holders who, after giving effect to
such sale, held an aggregate principal amount of $133.8 million or
approximately 46.1% of the Outstanding Notes (the "New Major Holder"). This
change in holdings of Outstanding Notes had no material effect on the terms of
the previously negotiated 1994 Agreement in Principle among the Company, the
Major Holder and the Principal Holders. In April 1995, the Company and the
Principal Holders entered into an agreement of understanding (the "Agreement of
Understanding") pursuant to which the Company agreed to distribute to the
holders of Outstanding Notes $25.0 million in cash prior to the Petition Date.
Under this agreement, the Principal Holders (who hold in excess of 80% of the
Outstanding Notes), among other things, agreed to vote when solicited in favor
of the Prepackaged Plan. On April 11, 1995, the Company paid $25.0 million
pursuant to the Agreement of Understanding, with such payment to be credited
against the cash payment of at least $50 million to be made to the holders of
the Outstanding Notes pursuant to the Prepackaged Plan.
For further information regarding the background and development of the
Restructuring, see "The Prepackaged Plan--Background of the Restructuring."
PURPOSES OF THE RESTRUCTURING
The Restructuring is necessary to make it possible for the Company to satisfy
its outstanding obligations and remain in business. Currently, the Company's
capital structure is highly leveraged and the Company is unable to meet its
substantial debt service requirements. The Restructuring is intended to enhance
the long-
5
<PAGE>
term viability of the Company by adjusting the Company's capitalization to
reduce the principal amount, extend the maturities and adjust the interest
rates on the Company's debt, thereby reducing the Company's debt service
obligations so that such obligations may be paid out of the Company's operating
cash flow and cash reserves. The Restructuring is designed to allow the Company
to continue to operate and expand its business without the need for further
financial restructuring, and to be able to obtain additional financing or
equity infusions or to enter into other financial transactions in the future
when and as management and the Board of Trustees of the reorganized Company so
determine. The Company is currently in default in payment of interest,
principal and other amounts due on the Outstanding Notes, and the Company has
no agreement with any holders of Outstanding Notes that it is not required to
pay such amounts. Consequently, there can be no assurance that the Outstanding
Note Trustee and the Outstanding Collateral Agent will not take remedial or
enforcement action with respect to the Outstanding Notes, including
acceleration of the Outstanding Notes and foreclosure. If the Restructuring is
not consummated, based upon Kenneth Leventhal's analysis of the Company's range
of enterprise going concern value of $265 million to $285 million and range of
liquidation value of $220 million to $260 million, holders of Claims may not
receive cash or securities of the same value and having as favorable terms as
under the Prepackaged Plan, and holders of Outstanding Common Shares may not
receive or retain anything in the event of a foreclosure, nonconsensual
bankruptcy or liquidation. Through the Restructuring, the Company intends to
maximize the recovery to holders of Outstanding Notes and other Claims while
also maximizing the return to holders of Outstanding Common Shares.
The Company believes that the Restructuring is a significantly more
attractive alternative than a traditional bankruptcy case. The Company believes
that acceptance of the Prepackaged Plan before a bankruptcy case is commenced
will be more beneficial to the Company and all of its creditors, holders of
Outstanding Common Shares and other constituencies than seeking to obtain
acceptance of a plan of reorganization after commencement of a bankruptcy case.
The Company believes that the Prepackaged Plan would reduce the risks of
litigation, minimize disputes during the bankruptcy case concerning the
reorganization of the Company, significantly shorten the time required to
accomplish the reorganization, reduce the expenses of a case under Chapter 11,
minimize the disruption of the Company's business that would result from a
protracted and contested bankruptcy case and therefore result in a larger
distribution to creditors of the Company and recovery on investments of holders
of Outstanding Common Shares than would other types of reorganization under
Chapter 11 or a liquidation under Chapter 7 of the Bankruptcy Code ("Chapter
7"). See "The Prepackaged Plan."
After giving effect to the Restructuring as if it had occurred at the
beginning of the fiscal year 1994, the Company anticipates that its annual
interest expense would have been reduced by approximately $19.1 million as a
result of a lower interest rate and reduced principal amount outstanding on the
New Senior Notes compared to the Outstanding Notes. In addition, the New Senior
Notes will have a longer maturity than the Outstanding Notes and will contain
no scheduled amortization requirements. The Restructuring will also reduce the
Company's overall debt obligations from approximately $322.9 million (including
accrued but unpaid interest) on the Outstanding Notes, as of May 31, 1995, to
approximately $110 million. The Company's management believes that, based on
its financial projections, after giving effect to the Restructuring, the
Company will have sufficient operating cash flow to pay cash interest and
scheduled amortization on all of its outstanding indebtedness and fund
anticipated capital expenditures. See "Financial Projections." There can be no
assurance, however, that targeted levels of operating cash flow will actually
be achieved. See "Special Factors and Certain Considerations."
EFFECTS OF THE PREPACKAGED PLAN
The following summary of the effects of the Prepackaged Plan is qualified in
its entirety by reference to all the provisions of the Prepackaged Plan set
forth as Annex A to this Disclosure Statement.
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<PAGE>
Effects on Holders of Outstanding Notes. Pursuant to the Prepackaged Plan,
the Outstanding Notes will be exchanged for (a) $110,000,000 in aggregate
principal amount of New Senior Notes, (b) at least $50,000,000 in cash less the
$25,000,000 paid on April 11, 1995 and any additional amounts paid between
March 1, 1995, and the Petition Date pursuant to the Agreement of Understanding
(plus such additional amount, if any, based upon cash available in excess of
the Initial Cash Reserve Fund (as hereinafter defined), and (c) assuming the
class of holders of Outstanding Common Shares accept the Prepackaged Plan,
approximately 10,890,180 New Common Shares (which will constitute 97% of the
fully diluted Common Shares outstanding after the Restructuring). The New
Senior Notes and the New Common Shares will differ from the Outstanding Notes
in the following respects, among others:
. The principal amount of the Outstanding Notes will be reduced from
approximately $322.9 million (including accrued but unpaid interest) to
$110 million under the New Senior Notes.
. The New Senior Notes will be guaranteed by the Subsidiaries (as defined in
the New Senior Note Indenture) of the Company. The Company currently has
five Subsidiaries: MRT West, Inc., MRT Creekside, Inc., MRT Newark, Inc.,
MRT Santa Monica, Inc., and 150 Rittenhouse Circle, Inc. Each of the
Subsidiaries is a single-asset entity created solely for the purpose of
holding title to a specific property while insulating the Company from
liabilities associated with the ownership of or investment in such property.
As of March 31, 1995, the aggregate net book value of the Subsidiaries
represented 2.6% of the aggregate net book value of the Company on a
consolidated basis.
. The New Senior Notes will have a fixed interest rate. Interest on the New
Senior Notes will accrue at 11 1/8% per annum. Interest on the Outstanding
Notes is payable at the reference rate of Bank of America National Trust and
Savings Association ("Bank of America") plus a margin. The interest rate on
the Outstanding Notes as of January 1, 1995 was the Adjusted Rate (as
hereinafter defined) (13.0%) with the next six-month increase occurring on
July 1, 1995. Interest on the deferred principal of the Outstanding Notes is
payable at such adjusted rate plus two percent.
. Assuming confirmation of the Prepackaged Plan, holders of the Outstanding
Notes will receive, in the aggregate, approximately 10,890,180 New Common
Shares constituting 97% of the fully diluted Common Shares outstanding
after consummation of the Restructuring.
For a more detailed discussion of the terms of the New Senior Notes and the
New Common Shares, see "Description of New Senior Notes" and "Description of
Capital Stock," respectively.
Effects on Holders of Outstanding Common Shares. Pursuant to the Prepackaged
Plan, if the class of holders of Outstanding Common Shares votes in favor of
the Prepackaged Plan, each holder of Outstanding Common Shares will retain its
Common Shares in the Company. Pursuant to the Reverse Stock Split to be
effected as part of the Restructuring, each 33.33 Outstanding Common Shares
automatically will become one Common Share. In addition, the issuance of
approximately 10,890,180 New Common Shares to holders of Outstanding Notes
pursuant to the Prepackaged Plan will reduce the percentage common equity
ownership of holders of Outstanding Common Shares from 100% to 3%. If the class
of holders of Outstanding Common Shares does not vote in favor of the
Prepackaged Plan, however, all Outstanding Common Shares will be cancelled and
holders of Outstanding Common Shares will not receive or retain anything under
the Prepackaged Plan.
Effects on Holders of Other Secured Claims. Pursuant to the Prepackaged Plan,
holders of Other Secured Claims that are also Allowed Claims (as defined below)
will (at the option of the Company and with the consent of the Principal
Holders) (i) be paid in full in cash on the Effective Date (or as soon as
practicable after the date on which any such Claim is allowed if the date of
allowance is later than the Effective Date), (ii) be paid upon such other terms
as may be mutually agreed upon by the Company and the holder of such Claim,
with the consent of the Principal Holders, or (iii) be reinstated and paid or
performed by the Company in accordance with section 1124 of the Bankruptcy
Code, or the legal, equitable and contractual rights to
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<PAGE>
which such Claim entitles the holder of such Claim shall be left unaltered.
"Allowed Claim" means a claim to the extent that (a)(i) a proof of the Claim
was or is timely filed or deemed timely filed under applicable law or by order
of the Bankruptcy Court or (ii) if no proof of Claim is filed, the Claim is
scheduled as liquidated, undisputed, and noncontingent, and (b)(i) the Claim is
not a disputed Claim (but only to the extent that such Claim is not a disputed
Claim), (ii) the Claim is allowed by a final order (but only to the extent
allowed), or (iii) the Claim is allowed under the Prepackaged Plan, but only to
the extent allowed.
Effects on Holders of Unsecured Claims. Pursuant to the Prepackaged Plan,
each holder of an Unsecured Claim that is also an Allowed Claim will receive
cash equal to the amount of such Claim unless such holder agrees to less
favorable treatment.
Common Share Ownership. The following table shows the ownership (as between
holders of Outstanding Common Shares and holders of Outstanding Notes) of the
Company's Common Shares before and after consummation of the Restructuring
(assuming confirmation of the Prepackaged Plan).
<TABLE>
<CAPTION>
COMMON SHARES BEFORE COMMON SHARES AFTER COMMON
REVERSE STOCK SPLIT REVERSE STOCK SPLIT BUT SHARES AFTER
OR CONSUMMATION BEFORE CONSUMMATION OF CONSUMMATION
OF THE RESTRUCTURING THE RESTRUCTURING (a) OF THE RESTRUCTURING (b)
------------------------ ----------------------- ------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF
SHARES COMMON SHARES SHARES COMMON SHARES SHARES COMMON SHARES
---------- ------------- --------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Holders of Outstanding
Notes.................. -0- -0- -0- -0- 10,890,180 97%
Holders of Outstanding
Common Shares.......... 11,226,215 100% 336,820 100% 336,820 3%
</TABLE>
- --------
(a) These columns are provided for illustrative purposes only. The Reverse
Stock Split is conditioned upon the consummation of the Restructuring,
including issuance of the New Common Shares, and will be effected
immediately prior to such issuance. The Reverse Stock Split will not be
effected if the Restructuring is not consummated.
(b) Assumes holders of Outstanding Common Shares vote to approve the
Prepackaged Plan.
Accrued Interest and Unpaid Mandatory Principal Redemption on Outstanding
Notes. Accrued but unpaid interest and unpaid mandatory principal payments on
Outstanding Notes to the date on which New Senior Notes are issued in exchange
therefor will not be paid to holders of Outstanding Notes. The Prepackaged Plan
provides that if the sum of consideration being distributed in exchange for the
Outstanding Notes is less than the aggregate amount of the principal and
accrued but unpaid interest due on the Outstanding Notes, such distribution
will be applied first to principal and then to accrued but unpaid interest.
Corporate Governance Matters. Pursuant to the Prepackaged Plan, as of the
Effective Date, the Principal Holders and the New Major Holder have agreed
among themselves that the initial members of the Board of Trustees of the
reorganized Company will consist of seven members, including (a) the new
President and Chief Executive Officer of the reorganized Company, (b) one
member selected by the New Major Holder, and (c) five members selected by the
Principal Holders. At each election of the Board of Trustees subsequent to the
Effective Date, the Board of Trustees will be elected by vote of the Common
Shares. See "The Prepackaged Plan--Summary of Other Provisions of the
Prepackaged Plan--Officers and Trustees" and "Management" for information
regarding the new President and Chief Executive Officer and the new Board of
Trustees.
RECOMMENDATION OF THE BOARD OF TRUSTEES
On November 16, 1994, the Board of Trustees met to consider the proposed
Restructuring. In connection therewith, the Board of Trustees heard
presentations from the Company's management and the Company's
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<PAGE>
financial and legal advisors describing the discussions, negotiations and
alternative proposals leading to the Restructuring. At the request of the Board
of Trustees, the Company's management and financial advisors described the
feasibility of the Restructuring and its effect on the Company's capital
structure and cash flow problems. In addition, the Board of Trustees discussed
other restructuring alternatives available to the Company. After lengthy
consideration and discussion of these matters, the Board of Trustees voted
unanimously to approve in principle the terms of the Restructuring, subject to
approval by the Board of Trustees of the final documentation required to
implement the Restructuring and to confirm the Prepackaged Plan, and to
authorize management to proceed with the steps necessary to effect the
Restructuring.
The Board of Trustees has unanimously approved the Restructuring and the
transactions contemplated thereby and recommends that all Holders, including
holders of Outstanding Common Shares, vote in favor of the Restructuring and
the transactions contemplated thereby. The Board of Trustees approved
the Restructuring because it believes that the Restructuring is necessary to
make it possible for the Company to satisfy its outstanding obligations and
remain in business and provide the shareholders with the best opportunity to
receive any value or recovery, having determined that the Restructuring is fair
to the unaffiliated Holders of the Company's Outstanding Securities and other
Claims and Interests.
In considering the Restructuring, the Board of Trustees considered, among
other things, the factors set forth below.
. The Board of Trustees' familiarity with the Company's business,
operations and financial condition and its future prospects, including
the financial difficulties facing the Company and the inability of the
Company to secure adequate financing for its ongoing operations as long
as the Outstanding Notes remained outstanding.
. The fact that consummation of the Restructuring appeared to be the only
viable way for the Company to deal with its outstanding obligations and
continue to operate its business.
. The fact that the Company's range of enterprise going concern value and
liquidation value are in each case substantially less than the Company's
liabilities.
. The Board of Trustees' review of monthly reports on the status of the
Restructuring, as presented by the Company's financial and legal
advisors, as well as valuations of the Company reflected from time to
time in the various proposals of the Interested Groups, the Major Holder
and the Principal Holders.
. Presentations by the Company's management and its legal advisors, each
of whom reviewed various considerations with the Board of Trustees. In
particular, the Board of Trustees noted that based on the valuations of
the Company prepared by Houlihan Lokey, the special purpose valuations
prepared by Kenneth Leventhal and management's internal analyses,
foreclosure or a liquidation of the Company would yield a much smaller
return to the Holders and would leave nothing for the holders of the
Outstanding Common Shares.
. Presentations by Houlihan Lokey and the results of discussions with
other parties concerning proposals for the Restructuring and potential
alternatives to the Restructuring. In particular, the Board of Trustees
placed substantial weight on the tentative willingness of certain third
parties to invest in the Company upon consummation of the Restructuring
and the unwillingness of such investors to make a capital investment in
the Company absent successful completion of the Restructuring in the
form presented.
. The historical and current market prices of the Company's Outstanding
Common Shares, as well as the net book value of the Company's assets per
share, both before giving effect to the Restructuring and on a pro forma
basis after giving effect to the Restructuring, when compared to a
liquidation of the Company.
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<PAGE>
. The fact that the Major Holder and the Principal Holders had retained
separate financial and legal advisors, had negotiated at arm's-length
with the Company and its financial and legal advisors after a review of
the Company and its prospects and had agreed upon the terms of the
Restructuring in preference to a liquidation or other alternatives.
Based on the foregoing, the Board of Trustees determined that the
Restructuring was fair to the Holders and determined to recommend approval of
all elements of the Restructuring.
SPECIAL PURPOSE VALUATION REPORTS OF KENNETH LEVENTHAL
In June 1994, Kenneth Leventhal was engaged to prepare a special purpose
valuation of the Company and its investment portfolio in order to assist the
Company and its various interested creditor parties in determining an
appropriate basis for valuation of a potential restructuring transaction. The
Company selected Kenneth Leventhal to perform such special purpose valuation at
the request of the Principal Holders and because of Kenneth Leventhal's
qualifications, expertise and reputation in the area of financial restructuring
and real estate due diligence and valuation. Also, Kenneth Leventhal was
familiar with the Company's portfolio as a result of a comprehensive due
diligence investigation of all assets in the Company's portfolio undertaken in
early 1993 on behalf of a potential equity investor and for the use and benefit
of such potential investor.
On October 4, 1994, Kenneth Leventhal produced a report which placed the
Company's going concern value as of July 1, 1994, between $255 million and $275
million and its liquidation value between $210 million and $240 million. At the
Company's request, in April and May 1995, Kenneth Leventhal updated its
analysis using the same methodology as that used to prepare its October 1994
report. On May 31, 1995, Kenneth Leventhal provided the Company with updated
reports dated May 15, 1995 that placed the Company's going concern value as of
March 31, 1995 between $265 million and $285 million and its liquidation value
between $220 million and $260 million. Kenneth Leventhal's May 15, 1995 reports
are included in this Disclosure Statement as Annexes C and D. Kenneth Leventhal
has granted its consent to the use of its reports included as Annexes C and D
to this Disclosure Statement.
In preparing its valuations, the Company instructed Kenneth Leventhal to
determine the valuation of the Company's portfolio on a going concern basis.
The assumptions utilized by the Company and reviewed by Kenneth Leventhal
included normal collection of amounts due on mortgage loans and cash flow from
operating properties. To determine a going concern valuation, the assumptions
were predicated on the orderly collection and selected disposal of assets over
a period of several years. Moreover, Kenneth Leventhal's going concern
valuation was not reflective of values which would result from a distressed
sale, forced liquidation, or disposition of the portfolio in a bulk sale or any
other accelerated manner. In addition to these specific portfolio valuation
procedures, the Company further instructed Kenneth Leventhal to approximate a
range of valuation for the total enterprise as of July 1, 1994, and later as of
March 31, 1995, utilizing the Company's most recently available financial
statements.
In conducting its special purpose valuations, Kenneth Leventhal obtained
selected publicly-available financial information prepared by the Company as of
June 30, 1994, and later, as of March 31, 1995. Utilizing this information,
Kenneth Leventhal selected 26 assets representing mortgage loans, investments,
in-substance foreclosure assets and real estate equities owned. The selection
was divided between the west coast and east coast portfolios and generally
represented the highest dollar values in the portfolios. In addition, the
selection of assets included different asset classifications.
Utilizing the portfolio so selected, Kenneth Leventhal, among other things,
(i) obtained the most recent "Argus" (a property cashflow software package)
property cashflow projections for the properties selected,
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<PAGE>
(ii) obtained, where applicable, the most recent operating rent roll and other
financial information relative to the assets selected, (iii) obtained the most
recent appraisals, where applicable and available, (iv) obtained the previous
Kenneth Leventhal analyses performed as of March 1993 and July 1994, (v)
discussed the current status with the respective asset manager to determine
loan status, property characteristics, current occupancy, existing market
rental rates, new leases, current payoff discussions and asset sales, (vi)
reviewed limited market information for the properties, (vii) modified the
Company's assumptions, as necessary, to conform to certain known current market
conditions and Kenneth Leventhal's understanding of the assets, (viii) updated
the valuation model prepared by Kenneth Leventhal in 1993 and 1994 utilizing
current market and/or assumption modifications determined from the procedures
provided above, and (ix) calculated estimated asset values on both a going
concern and liquidation value basis.
For a more complete discussion of the Kenneth Leventhal reports, see "The
Prepackaged Plan--Special Purpose Valuation Reports of Kenneth Leventhal."
THE PLAN SOLICITATION
Solicitation of Acceptances of the Prepackaged Plan. The Company will not
hold a meeting to vote on the Prepackaged Plan. Rather, the Company is
soliciting acceptances of the Prepackaged Plan by means of Ballots and Master
Ballots. Any Holder who wishes to vote with respect to the Prepackaged Plan
should complete, sign and return the applicable Ballot or Master Ballot in
accordance with the instructions set forth in this Disclosure Statement. See
"The Plan Solicitation; Voting Procedures."
The Company is soliciting acceptances of the Prepackaged Plan from holders of
Claims or interests of any equity security holder, as defined in section
101(17) of the Bankruptcy Code, of the Company, whether or not asserted,
including an interest arising out of any Outstanding Stock Rights ("Interests")
in Class 2 (Outstanding Notes), Class 3 (Other Secured Claims), Class 4
(Unsecured Claims) and Class 5 (Outstanding Common Shares). A vote in favor of
the Prepackaged Plan may only be used by the Company for the Prepackaged Plan
as it may be amended in accordance with the Prepackaged Plan and approved by
the Bankruptcy Court.
If, by the Expiration Date, the Requisite Plan Acceptances have been received
from holders of Outstanding Notes, the Company currently intends to commence a
Reorganization Case by filing a voluntary petition for relief under Chapter 11
of the Bankruptcy Code and to use the Ballots and Master Ballots solicited
pursuant to this Disclosure Statement to seek confirmation of the Prepackaged
Plan under Chapter 11 of the Bankruptcy Code as promptly as possible. Under the
Agreement of Understanding, the Principal Holders (who hold in excess of 80% of
the Outstanding Notes) agreed to vote when solicited in favor of the
Prepackaged Plan. Plan Acceptances will be irrevocable upon filing of the
Prepackaged Plan unless permission of the Bankruptcy Court is received to
withdraw such acceptances.
The Ballots provide that a holder of a Claim or Interest may opt out of the
release otherwise effected by the Prepackaged Plan of (i) the Creditors'
Committee formed under the Prior Plan, each holder of a Claim or Interest, and
each of the officers, trustees, employees, members and professionals of such
committee or holder (collectively, the "Creditor Releasees") and (ii) the
Company, the Reorganized Debtor (as hereinafter defined), the Creditors'
Committee under the Prior Plan, the Principal Holders, the New Major Holder,
and their respective officers, directors, employees, members and professionals
(collectively, the "Debtor Releasees"). Pursuant to the Prepackaged Plan, the
Creditor Releasees, to the extent permitted by applicable law, would be
released from any Released Claims (as defined below) that the Company may have
against any of them and the Debtor Releasees would be released from any
Released Claims that any holder of a Claim or Interest may have against any of
the Debtor Releasees and from any and all actions, causes of action, claims
liabilities, demands and obligations of any kind or nature whatsoever that the
Company or any holder of a Claim or Interest may have against any of the Debtor
Releasees. Such Released Claims include, without limitation, Claims under the
federal securities laws. A holder of a Claim or Interest may elect not to grant
11
<PAGE>
such release and such release would not be enforceable against such holder, and
such holder would not be a Creditor Releasee and would not, therefore, be
released from Released Claims. "Released Claims" means any and all actions,
causes of action, claims, liabilities, demands, and obligations of any kind or
nature whatsoever that are based upon or that arise out of any act or omission
that is related to the Bankruptcy Case or that are made in connection with or
relate to negotiating, formulating, implementing, confirming, or consummating
the Prepackaged Plan or this Disclosure Statement; provided, however, that the
term "Released Claims" shall not include any Excluded Claim (as hereinafter
defined).
If the Prepackaged Plan is confirmed by the Bankruptcy Court, all holders of
Claims and Interests will receive or retain the same consideration as all other
holders of Claims and Interests, respectively, whether or not such holder voted
to accept the Prepackaged Plan. Upon confirmation, the Prepackaged Plan will be
binding upon all holders of Claims and Interests regardless of whether or not
such holders voted to accept the Prepackaged Plan.
Voting on the Prepackaged Plan. As disclosed above, the Prepackaged Plan
designates six separate classes of Claims and Interests. See "The Prepackaged
Plan--Classification and Treatment of Claims and Interests." Five classes are
impaired. The Company is soliciting the votes of four of those classes. The
other impaired class (Class 6 Outstanding Stock Rights) will not receive any
distribution under the Prepackaged Plan, is deemed to reject the Prepackaged
Plan and, therefore, is not being solicited to vote on the Prepackaged Plan. To
vote on the Prepackaged Plan, Holders must follow the procedures set forth
under "The Plan Solicitation; Voting Procedures--How to Vote."
For the Prepackaged Plan to be confirmed (unless "cramdown" procedures are
utilized as to a class of Holders entitled to vote on the Prepackaged Plan),
the Bankruptcy Code requires, among other things, that the Prepackaged Plan be
accepted by the (i) holders of two-thirds in principal amount and more than
one-half in number in each class of holders of Outstanding Notes, Other Secured
Claims and Unsecured Claims voting on the Prepackaged Plan, and (ii) holders of
at least two-thirds of the Outstanding Common Shares in such class who vote on
the Prepackaged Plan. Because only votes actually cast on the Prepackaged Plan
are counted, the Company may obtain the Requisite Plan Acceptances with the
acceptance of the Prepackaged Plan by substantially less than two-thirds of the
holders of Outstanding Common Shares, or by substantially less than one-half in
number and two-thirds in principal amount of the holders of Outstanding Notes,
Other Secured Claims and Unsecured Claims.
If a class of Holders entitled to vote on the Prepackaged Plan does not
accept the Prepackaged Plan, the Company may, with the consent of the Principal
Holders, nevertheless seek confirmation of the Prepackaged Plan from the
Bankruptcy Court by employing the "cramdown" procedures set forth in section
1129(b) of the Bankruptcy Code. Under the "cramdown" procedures, the
Prepackaged Plan may be confirmed despite the lack of sufficient acceptances
from one or more impaired classes voting on the Prepackaged Plan if the
Bankruptcy Court determines that the requirements of section 1129(b) of the
Bankruptcy Code are met. See "Special Factors and Certain Considerations--
Considerations Relating to the Prepackaged Plan--Nonconsensual Confirmation"
and "The Prepackaged Plan--Confirmation of the Prepackaged Plan--Nonconsensual
Confirmation."
Confirmation of the Prepackaged Plan. If the Requisite Plan Acceptances are
received from the holders of Outstanding Notes and the Company seeks to
implement the Prepackaged Plan by commencing a reorganization case under
Chapter 11 of the Bankruptcy Code, the Company will request that the Bankruptcy
Court hold a confirmation hearing as promptly as practicable, upon such notice
to the parties in interest as is required by the Bankruptcy Code, the Federal
Rules of Bankruptcy Procedure (the "Bankruptcy Rules") and the Bankruptcy
Court. Parties in interest will receive notice of the date and time fixed by
the Bankruptcy Court for the confirmation hearing. The Bankruptcy Court will
also establish procedures for the filing and service of objections to
confirmation of the Prepackaged Plan.
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In order to confirm the Prepackaged Plan, the Bankruptcy Code requires, among
other things, that the Bankruptcy Court find that confirmation of the
Prepackaged Plan is not likely to be followed by the need for further financial
reorganization of the Company. The Company believes that, with the substantial
reduction in outstanding debt, the conversion of a substantial amount of debt
to equity, the extended maturity, revised mandatory redemption schedule and the
reduction in interest payments, the Company will possess sufficient resources
and working capital to operate the Company's business and repay the New Senior
Notes. See "The Prepackaged Plan--Confirmation of the Prepackaged Plan--
Feasibility Test." In addition, the Bankruptcy Code requires that each holder
of a Claim or Interest in an impaired class must either (i) accept the
Prepackaged Plan, or (ii) receive or retain under the Prepackaged Plan cash or
property of a value, as of the date on which the Bankruptcy Court enters the
order confirming the Prepackaged Plan pursuant to section 1129 of the
Bankruptcy Code on its docket (the "Confirmation Date"), that is not less than
the value such Holder would receive or retain if the Company was liquidated
under Chapter 7 of the Bankruptcy Code on such date. As set forth in "The
Prepackaged Plan--Confirmation of the Prepackaged Plan--Best Interest of
Creditors Test; Liquidation Value" and "The Prepackaged Plan--Confirmation of
the Prepackaged Plan--Comparative Analysis," the Company believes that the
members of the classes of impaired Claims and impaired Interests (i.e., the
holders of Outstanding Notes, Outstanding Common Shares, Other Secured Claims
and Unsecured Claims) will receive or retain more pursuant to the Prepackaged
Plan than they would receive in a Chapter 7 liquidation.
SPECIAL FACTORS AND CERTAIN CONSIDERATIONS
Acceptance of the Prepackaged Plan and ownership of the Company's Common
Shares involves a high degree of risk. Prior to deciding whether and how to
vote in the Prepackaged Plan, each Holder should consider carefully all the
information contained in this Disclosure Statement, including the factors
mentioned below and more fully described in "Special Factors and Certain
Considerations."
. Financial Condition of the Company; Liquidity. As of May 31, 1995, the
Company is in default on principal and interest (including accrued but
unpaid interest) of approximately $322.9 million of the Outstanding
Notes. The Company has no standstill agreement in effect with the
holders of the Outstanding Notes, and the Outstanding Note Trustee could
at any time accelerate such notes and/or exercise other rights and
remedies available to such holders, including foreclosure on the
Company's assets. See "Special Factors and Certain Considerations--
Financial Condition of the Company; Liquidity."
. Continuing Leverage. The Company will continue to be highly leveraged
after the Restructuring, requiring significant cash for debt service,
and its ability to borrow additional funds will be limited by the New
Senior Note Indenture (as hereinafter defined). Moreover, the New Senior
Note Indenture requires the Company to maintain certain ratios and other
measures of financial performance. See "Special Factors and Certain
Considerations--Continuing Leverage."
. Foreclosure and Bankruptcy Alternatives. The Company believes that any
bankruptcy case other than the bankruptcy case contemplated pursuant to
the Prepackaged Plan would have a material adverse effect on the
Company, its creditors and its shareholders. Possible consequences of a
failure of the Company to consummate the Restructuring contemplated by
the Prepackaged Plan include (i) substantial diminution in the value of
the Company's assets, (ii) substantially higher costs for any
alternative restructuring transaction, (iii) uncertainty regarding the
amount of time needed to effectuate an alternative restructuring
transaction, if any, (iv) interference and delay of payments to holders
of the Outstanding Notes and other Claims, (v) disruption of the
Company's efforts to increase its liquidity, (vi) potential forced
liquidation of the Company's assets in distressed markets at
substantially reduced values, and (vii) the failure of the holders of
Outstanding Common Shares to receive anything. See "Special Factors and
Certain Considerations--Foreclosure and Bankruptcy Alternatives."
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<PAGE>
. Possible Further Decline of Real Estate Markets. Substantial declines in
real estate markets over the last few years have had a material adverse
impact on the Company. If the real estate markets decline further, the
Company may not be able to meet its payment obligations under the New
Senior Notes. See "Special Factors and Certain Considerations--Possible
Further Decline of Real Estate Markets."
. Disruption of the Company's Business. If the Restructuring is not
consummated, it may be necessary for the Company to dispose of a
material amount of assets in a depressed real estate market or to
liquidate. See "Special Factors and Certain Considerations--Disruption
of the Company's Business."
. Considerations Relating to the Prepackaged Plan. A failure by an
impaired class to accept the Prepackaged Plan may result in the
"cramdown" of such class. Even if the Prepackaged Plan is accepted,
there can be no assurances that it will be confirmed by the Bankruptcy
Court. Should the Prepackaged Plan not be accepted, it may be necessary for
the Company to file a case for reorganization under Chapter 11 or
liquidation under Chapter 7, which may result in reduced distributions (or
no distributions) to holders of Claims and Interests. See "Special Factors
and Certain Considerations--Considerations Relating to the Prepackaged
Plan."
. Certain Bankruptcy Considerations if the Prepackaged Plan is Not
Confirmed and the Restructuring is Not Otherwise Consummated. If the
Prepackaged Plan is not confirmed, it may be necessary for the Company
to be liquidated in a bankruptcy case, in which case the holders of
Claims and Interests would receive less than they would pursuant to the
Prepackaged Plan. Moreover, during the pendency of a bankruptcy case,
the Company may have insufficient operating cash. See "Special Factors
and Certain Considerations--Certain Bankruptcy Considerations if the
Prepackaged Plan Is Not Confirmed and the Restructuring is Not Otherwise
Consummated."
. Certain Consequences to Non-Voting Holders of Common Shares. If the
Prepackaged Plan is confirmed, pursuant to the Reverse Stock Split, each
33.33 Outstanding Common Shares will be converted into one New Common
Share or, if the class of holders of Outstanding Common Shares rejects
the Prepackaged Plan, the Outstanding Common Shares will be canceled, in
each case, regardless of whether any particular holder of Outstanding
Common Shares voted for the Prepackaged Plan. See "Special Factors and
Certain Considerations--Certain Consequences to Non-Voting Holders of
Common Shares."
. Material Dilution of Common Equity. Pursuant to the Prepackaged Plan, a
large number of New Common Shares will be issued to holders of
Outstanding Notes, resulting in a substantial dilution of the equity
ownership of the holders of Outstanding Common Shares. See "Special
Factors And Certain Considerations--Material Dilution of Common Equity."
. Risks Relating to the Projections. The Company has prepared projections
of the cash flows of its business following the Restructuring, and such
projections are inherently imprecise, based on numerous assumptions with
respect to industry performance, general business and economic
conditions and other matters. Holders are cautioned not to place undue
reliance on the projections. See "Special Factors And Certain
Considerations--Risks Relating to the Projections."
. Restricted Payments. The indenture governing the New Senior Notes will
limit the Company's ability to make any dividend payment or other
distribution of assets, properties, cash, rights, obligations or
securities on account of or in respect of any of its Common Shares. See
"Special Factors and Certain Considerations--Restricted Payments."
. Absence of Public Market. There can be no assurances that an active
trading market for the New Senior Notes will develop and no assurance
can be given as to the prices at which such securities may trade. In
addition, the NYSE has notified the Company that it may commence
delisting proceedings in respect of the Common Shares. If the Common
Shares are delisted, there can be no
14
<PAGE>
assurance that the Company would be able to make alternative listing
arrangements for the Common Shares, and the liquidity and price of the
Common Shares could be adversely affected. See "Special Factors and
Certain Considerations--Absence of Public Market."
. Delisting of the Common Shares from Trading on the NYSE. The NYSE
notified the Company that a review of the Company's annual financial
results for the fiscal year ended September 30, 1994 indicated that the
Company had fallen below several of the continued listing criteria of
the NYSE, and that consideration was being given to the appropriateness
of continued listing of the Company's Common Shares. If the Common
Shares are delisted from the NYSE, (i) there can be no assurance that a
public market will continue to exist for the Common Shares, (ii) the
Company may be unable to obtain news coverage, have greater difficulty
in obtaining financing, suffer a significant decline in the market value
of its Common Shares, and (iii) shareholders of the Company may
subsequently have difficulty in selling their Common Shares should they
desire to do so. See "Special Factors and Certain Considerations--
Delisting of the Common Shares from Trading on the NYSE."
. Releases. Pursuant to the Prepackaged Plan, holders of Claims and
Interests may elect to release certain Claims against the Company and
others. See "Special Factors and Certain Considerations--Releases."
. Federal Income Tax Considerations. There can be no assurances that the
Internal Revenue Service could not successfully take the position at
some future time that the Company no longer qualifies for taxation as a
REIT, in which case, the Company would be subject to federal income tax
on its income (including capital gains). See "Special Factors and
Certain Considerations--Federal Income Tax Considerations."
SUMMARY PROJECTED FINANCIAL INFORMATION
In connection with the preparation of the Prepackaged Plan, financial
projections were prepared in May 1995 by management of the Company in a manner
consistent with the special purpose valuation reports prepared by Kenneth
Leventhal and the valuations prepared by Houlihan Lokey, based on assumptions
considered reasonable by the management of the Company. These projections are
summarized below. The projections assume that the Prepackaged Plan will be
approved and implemented in accordance with its terms. The projections below
are based on a number of assumptions, including, without limitation,
assumptions relating to industry performance, general business and economic
conditions and the assumption that excess cash flow will be used to prepay debt
and not to pay dividends except to the extent required to retain REIT status,
but were not prepared with any other specific business plan in mind. After the
Effective Date, the reorganized Board of Trustees may adopt a different policy
and business plan, and there can be no assurance that any of these assumptions
will be met. The projections are only estimates, and actual results may vary
materially from the projections. In addition, uncertainties that are inherent
in the projections increase for later years in the projection period due to the
increased difficulty associated with forecasting levels of economic activity
and corporate performance at more distant points in the future. Holders are
cautioned not to place undue reliance on the projections.
The projections were not prepared with a view towards compliance with the
published guidelines of the American Institute of Certified Public Accountants
regarding financial projections, and have not been reviewed, examined or
compiled by the Company's independent auditors or any other independent
certified public accountants or by Houlihan Lokey or Kenneth Leventhal. The
Company does not, in the ordinary course of business, prepare multi-year
projections as to future revenues or earnings. Accordingly, the Company does
not plan to update or otherwise revise the projections.
For purposes of the projections below, the effective date of the Prepackaged
Plan is assumed to occur as of September 30, 1995. The summary projections
below are subject to the more detailed presentation set forth under "Financial
Projections," and should be read together with the information contained in
"Pro Forma Financial Information," "Accounting Treatment" and "Business" and
the Company's financial statements referred to under "Additional Information
Concerning the Company."
15
<PAGE>
UNAUDITED PROJECTED OPERATING INFORMATION
FISCAL YEARS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income
Interest and fee income on mortgage
loans.................................. $ 6,512 $6,517 $ 6,292 $ 5,860 $ 4,428
Net operating income from real estate
owned.................................. 21,856 23,252 24,113 24,376 25,816
Interest on short-term investments...... 703 626 611 564 622
------- ------ ------- ------- -------
Total Income.......................... 29,071 30,395 31,016 30,800 30,866
------- ------ ------- ------- -------
Expenses
Interest................................ 12,614 10,498 8,418 6,402 3,232
Depreciation and amortization on real
estate owned........................... 7,892 7,997 7,805 7,971 8,309
Provision for losses.................... 0 0 0 0 0
Other operating expenses................ 3,200 3,000 2,900 2,800 2,700
------- ------ ------- ------- -------
Total Expenses........................ 23,706 21,495 19,123 17,173 14,241
------- ------ ------- ------- -------
Net Income.............................. $ 5,365 $8,900 $11,893 $13,627 $16,625
======= ====== ======= ======= =======
Dividend distributions.................. $ 0 $ 0 $ 2,368 $ 4,098 $ 7,011
======= ====== ======= ======= =======
Earnings per share (based upon
11,226,215 shares outstanding)......... $ 0.48 $ 0.79 $ 1.06 $ 1.21 $ 1.48
</TABLE>
UNAUDITED PROJECTED BALANCE SHEET INFORMATION
AT SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total Assets....................... $225,086 $216,578 $207,643 $198,259 $175,892
Total Liabilities.................. 103,832 86,424 67,964 49,051 17,070
Total Shareholders' Equity......... 121,254 130,154 139,679 149,208 158,822
</TABLE>
16
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following summary unaudited pro forma operating information for the year
ended September 30, 1994, and the six months ended March 31, 1995, was prepared
as if consummation of the Prepackaged Plan occurred at October 1, 1993. The
summary unaudited pro forma balance sheet information as of March 31, 1995 was
prepared as if the consummation of the Prepackaged Plan occurred as of March
31, 1995. The adjustments set forth under the caption "Proposed Reorganization"
reflect the assumed effects of the Restructuring. The adjustments set forth
under the caption "Fresh Start" reflect the assumed effects of the adoption of
the "fresh start" accounting prescribed by SOP 90-7 (as hereinafter defined).
The summary unaudited pro forma information should be read in conjunction with
the financial statements of the Company and the related notes thereto referred
to under "Additional Information Concerning the Company" and management's
discussion thereof contained elsewhere in this Disclosure Statement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The summary unaudited pro forma information is not necessarily
indicative of what the actual financial position or results of operations would
have been at such times or for such periods, nor does it purport to represent
the future financial results of the Company. Amounts below are stated in
thousands of dollars.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1994 SIX MONTHS ENDED MARCH 31, 1995
------------------------------- ------------------------------------
PRO FORMA PRO PRO FORMA PRO
PRO FORMA OPERATING HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA
INFORMATION: ---------- ----------- ------- ----------- ------------ ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Total income............ $ 26,450 $ 494 $25,956 $ 14,304 ($ 1,253) $ 13,051
--------- ------- ------- ---------- ---------- ---------
Interest and operating
expense................ 37,840 (19,064) 18,776 22,030 (12,640) 9,390
Depreciation and
amortization........... 5,840 (731) 5,109 3,486 (681) 2,805
Provision for losses.... 2,000 (2,000) 0 3,000 (3,000) 0
Reorganization expenses,
net.................... 2,360 (2,360) 0 1,505 (1,505) 0
--------- ------- ------- ---------- ---------- ---------
Total expenses......... 48,040 (24,155) 23,885 30,021 (17,826) 12,195
--------- ------- ------- ---------- ---------- ---------
Net income (loss)....... ($ 21,590) $23,661 $ 2,071 ($15,717) $ 16,573 $ 856
========= ======= ======= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
AS AT MARCH 31, 1995
--------------------------------------------
PROPOSED FRESH PRO
PRO FORMA BALANCE SHEET HISTORICAL REORGANIZATION START FORMA
INFORMATION: ---------- -------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total assets..................... $366,948 ($ 61,873) ($68,908) $236,167
Total liabilities................ 362,632 (231,324) (315) 130,993
Shareholders' equity............. 4,316 169,451 (68,593) 105,174
</TABLE>
17
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary financial data for the five years ended September 30,
1994 are derived from the audited consolidated financial statements of the
Company. The financial data for the six month periods endedMarch 31, 1995 and
1994 are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of only normal recurring
accruals, which the Company considers necessary for fair presentation of the
financial position and the results of operations for these periods. Operating
results for the six months ended March 31, 1995 are not necessarily indicative
of the results that may be expected for the entire year ended September 30,
1995. The data should be read in conjunction with the consolidated financial
statements and the related notes referred to in "Additional Information
Concerning the Company" and the other financial information included herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------------ ------------------
1990 1991 1992 1993 1994 1995 1994
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Total income............ $ 68,233 $ 56,253 $ 42,009 $ 38,342 $ 36,277 $ 19,776 $ 17,266
Interest and operating
expenses............... 47,601 51,736 42,077 43,967 47,668 27,502 22,824
Depreciation and amorti-
zation................. 2,391 3,062 4,470 5,500 5,839 3,486 2,833
Income (loss) before
provision for losses,
reorganization expenses
and gain on sales
of real estate......... 18,241 1,455 (4,538) (11,125) (17,230) (11,212) (8,391)
Provision for losses.... 23,790 33,000 32,000 37,000 2,000 3,000 --
Reorganization expenses,
net.................... 5,051 4,352 934 5,844 2,360 1,505 1,417
Gain on sales of real
estate................. 244 244 -- -- -- -- --
Net income (loss)....... (10,356) (35,653) (37,472) (53,969) (21,590) (15,717) (9,808)
PER SHARE DATA
Net loss................ ($ .94) ($ 3.22) ($ 3.38) ($ 4.87) ($ 1.92) ($ 1.40) ($ .87)
Dividends declared (1).. .45 -0- -0- -0- -0- -0- -0-
Book value.............. 15.23 12.01 8.63 3.71 1.79 .38 2.83
BALANCE SHEET DATA
Total assets............ $595,640 $514,754 $427,268 $353,874 $364,244 $366,948 $359,465
Invested assets......... 547,480 505,600 424,394 347,526 309,477 298,449 327,546
Allowance for losses.... 10,792 14,707 19,353 11,808 13,430 11,031 11,050
Creditor Obligations.... 403,884 374,000 312,000 290,000 290,000 290,000 290,000
Loans on equity invest-
ment................... -- -- 15,515 17,572 17,593 17,593 17,593
Shareholders' equity.... 168,717 133,064 95,592 41,623 20,033 4,316 31,815
</TABLE>
- --------
(1)Dividends shown are those attributable to earnings for the period indicated.
18
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Tax Consequences to Creditors. Creditors whose Claims are not classified as a
security for federal income tax purposes (a "Tax Security") will recognize
taxable gain or loss on the exchange of such a Claim for cash or property. The
Company expects the Prepackaged Plan to qualify as a "tax-free
recapitalization," in which case holders of Tax Securities who receive New
Common Shares, New Senior Notes, or both, will generally not recognize taxable
gain or loss, subject to certain exceptions. Gain or loss recognized by a
holder of a Claim may be capital or ordinary in character, depending on various
factors, including each holder's individual circumstances. Payments made to
qualifying creditors may be subject to backup withholding and such creditors
may be required to provide general tax information to the Company. See "Certain
Federal Income Tax Consequences--Tax Consequences to Creditors."
REIT Status and Company Taxation. The Company will continue to elect to be
taxed as a REIT under the Internal Revenue Code, and the Company intends to
continue to operate in such a manner as to continue to qualify for taxation as
a REIT under the relevant sections of the Internal Revenue Code. As long as the
Company continues to qualify to be taxed as a REIT, it generally will not be
subject to federal corporate income taxes on the portion of its ordinary income
or capital gain that is distributed on a current basis to its shareholders. See
"Certain Federal Income Tax Consequences--REIT Status and Taxation of Company
Under the Prepackaged Plan."
Additional Tax Consequences to the Company from the Prepackaged Plan. The
Company's federal income tax returns reflect significant net operating loss
carryovers. The Company's future use of those net operating loss carryovers
will be limited by the application of Internal Revenue Code section 382,
because the Prepackaged Plan will cause the Company to undergo an "ownership
change." Subject to the above described limitations, the Company may generally
elect to use its net operating loss carryover to reduce its REIT taxable
income. The Company's use of its net operating loss carryovers to shelter its
alternative minimum taxable income may be subject to separate limitations.
As a result of the Prepackaged Plan, the Company's aggregate outstanding
indebtedness will be reduced, causing the Company to realize cancellation of
indebtedness ("COD") income. The Company will be required to reduce its tax
attributes, including its net operating loss carryovers, by the amount of the
COD income, although it will not be required to include such income in its
taxable income. See "Certain Federal Income Tax Consequences--Additional Tax
Consequences to the Company from the Prepackaged Plan."
For a more complete discussion of certain United States federal income tax
consequences of consummation of the transactions contemplated by the
Prepackaged Plan to holders and the Company, see "Certain Federal Income Tax
Consequences."
19
<PAGE>
SPECIAL FACTORS AND CERTAIN CONSIDERATIONS
Holders should consider the factors set forth below, as well as the other
information set forth in this Disclosure Statement, prior to determining
whether to accept or reject the Prepackaged Plan.
FINANCIAL CONDITION OF THE COMPANY; LIQUIDITY
The aggregate amount, including accrued but unpaid interest, owing on the
Outstanding Notes as of May 31, 1995 is $322.9 million. Notwithstanding the
uncured events of default under the Outstanding Note Indenture (as hereinafter
defined), see "The Prepackaged Plan--Background of the Restructuring--Current
Defaults," the Outstanding Notes have not been accelerated. As of May 31, 1995,
the available cash of the Company was approximately $46.5 million.
Consequently, the Company cannot pay amounts outstanding on the Outstanding
Notes and anticipates that it will not receive sufficient cash from its
operations or from the dispositions of assets to make the interest and
principal payments scheduled for fiscal 1995 under the Outstanding Notes.
Pursuant to the Restructuring, the Company does not anticipate making such
principal or interest payments. Although the Outstanding Notes have not been
accelerated, the holders of such notes or the Outstanding Note Trustee (as
hereinafter defined) may determine at any time to accelerate such notes and
exercise their rights and remedies, including the right to foreclose on the
collateral, consisting of substantially all of the assets of the Company,
granted to them under the Outstanding Note Indenture (as hereinafter defined)
and the Outstanding Collateral Agreement (as hereinafter defined), based upon
the existing events of default or otherwise. See "--Foreclosure and Bankruptcy
Alternatives" and "--Possible Further Decline of Real Estate Markets" below.
CONTINUING LEVERAGE
The Company is now highly leveraged and, although completion of the
Restructuring will significantly reduce the Company's debt obligations, the
Company will still have a substantial amount of debt after the Restructuring.
See "Pro Forma Financial Information--Pro Forma Balance Sheet."
The Company believes that, after giving effect to the Restructuring, the
Company's cash flow from operations and cash on hand will be adequate to make
the required payments of principal and interest on its debt, to make
anticipated capital expenditures and to fund working capital requirements. See
"Financial Projections." If the Company is unable, however, to generate
sufficient cash flow from operations in the future, or if it fails to satisfy
the financial tests under the New Senior Note Indenture (as hereinafter
defined), it could face default on its restructured obligations.
The leveraged nature of the Company's capital structure will have several
important effects on the Company and its operations, including the following:
(i) the Company will continue to have significant cash requirements for debt
service; (ii) the covenants and other restrictions contained in the New Senior
Note Indenture governing the New Senior Notes will limit the Company's ability
to borrow additional funds; (iii) as a result of the Company's debt service
requirements and restrictions on the incurrence of indebtedness imposed under
the terms of the New Senior Note Indenture (as hereinafter defined), funds
available for capital expenditures may be limited; and (iv) the Company's
ability to meet its debt service obligations and to reduce its total debt will
be dependent upon its future performance, which, in turn, will be subject to
general economic conditions and to financial, business and other factors
affecting its operations and the real estate market, including many factors
beyond its control.
FORECLOSURE AND BANKRUPTCY ALTERNATIVES
As stated above, if the Restructuring is not effected, the Company will
continue to be in default under the Outstanding Note Indenture (as hereinafter
defined). The Company does not anticipate that it will be able to address such
default other than as contemplated by the Restructuring or through a
nonconsensual bankruptcy filing. The holders of Outstanding Notes have certain
rights and remedies, including the right to
20
<PAGE>
foreclose on the collateral granted in connection with the Prior Plan (as
hereinafter defined) and the Outstanding Collateral Agreement (as hereinafter
defined). This collateral constitutes substantially all of the Company's
assets. If the Company does not receive the Requisite Plan Acceptances, it is
likely that the Company will nonetheless be forced to file for reorganization
under Chapter 11 of the Bankruptcy Code for the second time to avoid such
foreclosure. The Company's range of enterprise going concern value and range of
liquidation value are substantially less than the Company's current
liabilities. As a result, there may be no way to avoid liquidation of some or
all of the Company's assets and it is unlikely that the holders of Outstanding
Notes and other Claims would receive payment in full on their obligations. In
any case, it is unlikely that holders of Outstanding Common Shares would
receive or retain anything in a foreclosure or non-prepackaged bankruptcy. The
Company believes that any bankruptcy case, other than the bankruptcy case
contemplated pursuant to the Prepackaged Plan, would have a material adverse
effect on the Company, its creditors and its shareholders. Possible
consequences of a failure of the Company to consummate the Restructuring
contemplated by the Prepackaged Plan include (i) substantial diminution in the
value of the Company's assets, (ii) substantially higher costs of any
alternative restructuring transaction, (iii) uncertainty regarding the amount
of time needed to effectuate an alternative restructuring transaction, if any,
(iv) interference and delay of payments to holders of the Outstanding Notes and
other Claims, (v) disruption of the Company's efforts to increase its
liquidity, and (vi) potential forced liquidation of the Company's assets in
distressed markets at substantially reduced values, with a resulting loss to
creditors and others. In such a case, the Company believes that holders of
Outstanding Common Shares are unlikely to receive anything from the Company or
its assets.
POSSIBLE FURTHER DECLINE OF REAL ESTATE MARKETS
Recent volatility in the United States and foreign financial markets, as well
as financial distress encountered by numerous real estate companies, has had an
adverse effect on the value of real estate, including that owned by the
Company. In addition, volatility in the market for "high yield" debt
securities, continued focus by financial institution regulators on "highly
leveraged transactions" and a general reduction in the availability of other
sources of funding have negatively impacted real estate values. Notwithstanding
management's efforts to reduce the Company's non-performing assets and to
generate cash from dispositions of selected assets at favorable prices since
the effective date of the 1991 Plan, the real estate markets have unexpectedly
continued to decline and the current liquidation value of the Company's
portfolio has continued to decrease. This situation is exacerbated as other
participants in the commercial real estate market experience financial
difficulty, increasing the prospect of additional excess supply of real estate
for sale, often through "fire-sale" liquidations. For example, the following
shows, as of the dates indicated, the amount (in thousands) at book value of
non-earning loans (including in-substance foreclosures) and non-earning
properties acquired through foreclosure and held for sale, and the non-earning
loans and non-earning properties as a percentage of the Company's invested
assets:
<TABLE>
<CAPTION>
NON-EARNING LOANS AND PROPERTY
AS A PERCENT OF INVESTED
PERIOD ENDED AMOUNT ASSETS
- ------------ -------------- ------------------------------
(IN THOUSANDS)
<S> <C> <C>
March 31, 1995.................... $52,460 17.6%
December 31, 1994................. 47,008 15.2
September 30, 1994................ 42,480 13.7
June 30, 1994..................... 40,539 13.1
March 31, 1994.................... 44,909 13.7
December 31, 1993................. 41,822 12.3
September 30, 1993................ 58,804 16.9
June 30, 1993..................... 32,180 8.5
March 31, 1993.................... 29,562 7.5
December 31, 1992................. 30,278 7.5
September 30, 1992................ 58,348 13.8
June 30, 1992..................... 50,218 11.2
</TABLE>
21
<PAGE>
The Company's current projections assume that the overcapacity and
illiquidity in the real estate markets will continue through 1995 with gradual
improvements in 1996 and thereafter. See "Financial Projections."
Notwithstanding the conclusion that the Restructuring as effected through the
Prepackaged Plan is feasible, there can be no assurance that, even if the
Restructuring is successful, payments in respect of the New Senior Notes can be
made if the deterioration in the real estate market accelerates or continues
longer than expected. ALTHOUGH THE COMPANY HAS ATTEMPTED TO PROJECT ACCURATELY
ITS FUTURE CASH FLOWS (SUBJECT TO THE LIMITATIONS SET FORTH UNDER "FINANCIAL
PROJECTIONS"), THERE IS A RISK THAT THE COMPANY MAY NOT BE ABLE TO MEET THE
REPAYMENT TERMS OF THE NEW SENIOR NOTES OR PAY ANY DIVIDENDS ON THE COMMON
SHARES. ADVERSE CONDITIONS, SUCH AS A FURTHER DOWNTURN IN THE REAL ESTATE
MARKETS OR A "CREDIT CRUNCH" IN THE COMMERCIAL REAL ESTATE INDUSTRY OR
OTHERWISE, ARE BEYOND THE ABILITY OF THE COMPANY, OR ANY OTHER ENTITY, TO
PREDICT WITH ANY CERTAINTY AND MAY IMPACT THE COMPANY'S ABILITY TO REPAY THE
NEW SENIOR NOTES AND TO PAY DIVIDENDS ON THE COMMON SHARES.
DISRUPTION OF THE COMPANY'S BUSINESS
If the Restructuring is not consummated, it may be necessary for the Company
to dispose of a material amount of assets. There can be no assurance that the
Company can complete asset dispositions that will generate sufficient cash to
repay the Outstanding Notes. The Company's ability to realize acceptable values
on a short-term basis is severely limited by current market conditions,
including the lack of available capital to prospective purchasers. More likely,
if the Restructuring is not consummated, the Company would be liquidated and
consequently, holders of Claims may not receive cash or securities of the same
value and having as favorable terms as under the Prepackaged Plan, and holders
of Outstanding Common Shares most likely would not receive or retain anything.
CONSIDERATIONS RELATING TO THE PREPACKAGED PLAN
Risks Associated with Rejection of the Prepackaged Plan. Should the Company
not receive sufficient acceptances to seek confirmation of the Prepackaged Plan
by the Bankruptcy Court, the Company would be forced to seek alternative means
of restructuring. The Company may be required to file a voluntary Chapter 11
petition for which a new plan of reorganization would need to be negotiated. As
compared to the Prepackaged Plan, a non-prepackaged Chapter 11 case would
likely be lengthier and result in significantly increased administrative
expenses, a negative impact on cash flow and a corresponding reduction in the
consideration received by holders of Claims and Interests.
If a new plan of reorganization could not be confirmed within a reasonable
amount of time, the Company might be forced into a liquidation under Chapter 7
of the Bankruptcy Code. In a Chapter 7 liquidation, based upon Kenneth
Leventhal's estimate of liquidation value, the Company believes that (i)
holders of Outstanding Notes would receive approximately 66.5%-75.8% of the
value such holders would receive under the Prepackaged Plan and (ii) holders of
Outstanding Common Shares would likely not receive any distribution. See "The
Prepackaged Plan--Confirmation of the Prepackaged Plan--Chapter 7 Liquidation
Analysis."
Disruption of the Company's Business. The Company presently intends to
commence the Reorganization Case in connection with the Prepackaged Plan.
Although the Company anticipates that the Prepackaged Plan will shorten the
period during which the Company must operate under Chapter 11, the Prepackaged
Plan will still necessitate a bankruptcy filing and may not permit the Company
to avoid some of the disruptions to the Company's business specified above. See
"--Foreclosure and Bankruptcy Alternatives" above.
Risk of Non-Confirmation of the Prepackaged Plan. Even if all classes of
Claims and Interests accept or are deemed to have accepted the Prepackaged
Plan, the Prepackaged Plan may not be confirmed by the Bankruptcy Court.
Section 1129 of the Bankruptcy Code requires, among other things, that
confirmation of the Prepackaged Plan not be followed by a need for liquidation
or further financial reorganization of the debtor (the "Feasibility Test").
Furthermore, the value of distributions to dissenting creditors and equity
22
<PAGE>
security holders may not be less than the value of distributions such creditors
and shareholders would receive if the Company were liquidated under Chapter 7
of the Bankruptcy Code (the "Best Interests Test"). See "The Prepackaged Plan--
Confirmation of the Prepackaged Plan." Although the Company believes that the
Prepackaged Plan will meet such tests, there can be no assurance that the
Bankruptcy Court will reach the same conclusion.
Additionally, this Solicitation for acceptances of the Prepackaged Plan must
comply with the requirements of section 1126(b) of the Bankruptcy Code. In
order to confirm the Prepackaged Plan, the Bankruptcy Court must determine that
it was solicited in compliance with applicable non-bankruptcy law governing the
adequacy of disclosure in connection with such Solicitation, including
compliance with the federal securities laws. If the Bankruptcy Court were to
find that this Solicitation was not in such compliance, acceptances received
under the Solicitation could be invalidated. In such an event, the Company may
be required to resolicit acceptances, and confirmation of the Prepackaged Plan
could be delayed and possibly jeopardized. The Company believes that its
Solicitation of acceptances of the Prepackaged Plan complies with the
requirements of section 1126(b) of the Bankruptcy Code, that duly executed
Ballots and Master Ballots will be in compliance with applicable provisions of
the Bankruptcy Code, and that the Prepackaged Plan should be confirmed by the
Bankruptcy Court if the Requisite Plan Acceptances are received.
There can be no assurance, however, that the Requisite Plan Acceptances will
be received or that the Prepackaged Plan will ever be filed. Additionally, if
the Prepackaged Plan is filed, there can be no assurance that modifications
thereof will not be required for confirmation, or that such modifications would
not result in a resolicitation of acceptances. Subject to the consent of the
Principal Holders, the Prepackaged Plan may be modified without resolicitation
if the Bankruptcy Court finds, after proper notice to affected creditors or
other affected entities and a hearing, that such modifications do not adversely
affect the treatment of any Holder who has not accepted the modification in
writing.
Nonconsensual Confirmation. If an impaired class does not vote to accept the
Prepackaged Plan, the Bankruptcy Court may nonetheless confirm the Prepackaged
Plan under the "cramdown" provisions of section 1129(b) of the Bankruptcy Code.
In order to confirm the Prepackaged Plan using "cramdown" procedures, the
Bankruptcy Court must determine that, in addition to satisfying all other
requirements for confirmation, the Prepackaged Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to each impaired class that
has not accepted the Prepackaged Plan and with respect to Class 6. If
necessary, the Company intends to use "cramdown" procedures with respect to all
non-accepting impaired classes, other than holders of Outstanding Notes. See
"The Prepackaged Plan--Confirmation of the Prepackaged Plan--Nonconsensual
Confirmation." The Company reserves the right to request nonconsensual
confirmation of the Prepackaged Plan in the event any impaired class, other
than the class of holders of Outstanding Notes, fails to vote to accept the
Prepackaged Plan.
CERTAIN BANKRUPTCY CONSIDERATIONS IF THE PREPACKAGED PLAN IS NOT CONFIRMED AND
THE RESTRUCTURING IS NOT OTHERWISE CONSUMMATED
In addition to the material risks associated with any bankruptcy case and as
discussed above in connection with the Prepackaged Plan, there may be
additional risks to the Company and the holders of Claims and Interests if the
Prepackaged Plan is not confirmed.
Possible Liquidation. If the Prepackaged Plan is not confirmed and the
Restructuring is not otherwise consummated, it is unclear what distributions
the holders of Claims and Interests would receive in respect of their Claims or
Interests. If an alternative reorganization could not be agreed to or confirmed
through the use of "cramdown" procedures, it is possible that the Company would
have to liquidate its assets under either Chapter 11 or Chapter 7 of the
Bankruptcy Code, or that the holders of the Outstanding Notes may be allowed to
foreclose their liens, in which cases the Company believes that holders of
Claims and Interests would receive less than they would pursuant to the
Prepackaged Plan. See "The Prepackaged Plan--Confirmation of the Prepackaged
Plan--Best Interest of Creditors Test; Liquidation Value."
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Lack of Operating Cash. All assets, including all cash (other than cash
contained in the Company's termination pay plan), of the Company are subject to
the liens granted to the holders of Outstanding Notes. There can be no
assurance that if the Company were to commence a bankruptcy case it would be
able to use such cash or cash proceeds of other assets of the Company to
operate during the pendency of such bankruptcy case. The Company would only be
able to use cash if it obtains a cash collateral stipulation from the holders
of the Outstanding Notes or if the Company obtains an order of the Bankruptcy
Court. The Company does not currently have any arrangement with the holders of
the Outstanding Notes regarding the use of cash collateral in any bankruptcy
case, other than a case commenced in connection with the Prepackaged Plan, and
there can be no assurance that the Company would be able to obtain such a
stipulation or court order. If the Company is forced to seek a Bankruptcy Court
order authorizing the use of cash collateral, it would require, among other
things, litigation regarding valuation of the Company's assets and the
provision for adequate protection for the Outstanding Notes holders' interest
in the collateral securing the Outstanding Notes. Failure to obtain a cash
collateral agreement or court order permitting the use of cash collateral may
result in a liquidation of the Company.
CERTAIN CONSEQUENCES TO NON-VOTING HOLDERS OF COMMON SHARES
If the Prepackaged Plan is confirmed, pursuant to the Reverse Stock Split,
each 33.33 Outstanding Common Shares will be converted into one Common Share
or, if the class of holders of Outstanding Common Shares rejects the
Prepackaged Plan, the Outstanding Common Shares will be canceled, in each case,
regardless of whether any particular holder of Outstanding Common Shares voted
for the Prepackaged Plan. The effectiveness of the Reverse Stock Split will be
conditioned, among other things, upon effectiveness of the Prepackaged Plan. On
the Effective Date, the Company will file the Amended and Restated Declaration
of Trust effecting certain changes to the Company's current Declaration of
Trust of the Company as amended through February 17, 1993 (the "Declaration of
Trust"), including the Reverse Stock Split, with the State Department of
Assessments and Taxation of Maryland.
MATERIAL DILUTION OF COMMON EQUITY
Pursuant to the Prepackaged Plan, a large number of New Common Shares will be
issued to holders of Outstanding Notes. Such issuance will result in a
substantial dilution of the equity ownership of the holders of Outstanding
Common Shares. Assuming the class of holders of Outstanding Common Shares votes
to accept the Prepackaged Plan, the equity ownership of such holders will be
reduced from 100% to 3% after the Restructuring. If the class of holders of
Outstanding Common Shares does not vote to accept the Prepackaged Plan, all
Outstanding Common Shares will be canceled and holders of Outstanding Common
Shares will not receive or retain anything.
RISKS RELATING TO THE PROJECTIONS
The Company has prepared projections of the cash flows of its business
following the Restructuring. The Projections (as hereinafter defined) were
based on numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, such as interest rates,
building occupancy and overall real estate prices and conditions, that are
beyond the Company's control. The Projections are only estimates, and actual
results may vary materially from the Projections. In addition, uncertainties
that are inherent in the Projections increase for later years in the projection
period due to the increased difficulty associated with forecasting levels of
economic activity and corporate performance at more distant points in the
future. Holders are cautioned not to place undue reliance on the projections.
See "Financial Projections."
RESTRICTED PAYMENTS
The indenture governing the New Senior Notes will limit the Company's ability
to declare or make any dividend payment or other distribution of assets,
properties, cash, rights, obligations or securities on account of or in respect
of any of its Common Shares or any preferred stock which may be issued by the
Company,
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other than such declaration and making of dividend payments that the Company
deems necessary to preserve its status as a REIT, unless the Consolidated Net
Worth (as defined in the New Senior Note Indenture) of the Company at the time
of such payment and after giving effect thereto is at least $50 million;
provided, however, that the Company shall in no event declare or make any such
dividend payment or other distribution if a Default or Event of Default
(collectively, as defined in the New Senior Note Indenture) has occurred and is
continuing under the New Senior Note Indenture or purchase, redeem or otherwise
acquire for value its Common Shares or any preferred stock of the Company,
whether outstanding on the Effective Date or thereafter issued and outstanding,
unless the Consolidated Net Worth of the Company at the time of such purchase,
redemption or other acquisition and after giving effect thereto is at least $50
million; provided, however, that the Company shall in no event make any such
purchase, redemption or other acquisition if a Default or Event of Default has
occurred and is continuing. See "Description of New Senior Notes." To maintain
the Company's REIT status under the Internal Revenue Code, the Company is
required to distribute at least 95% of the Company's REIT taxable income, and
certain other categories of income. However, the Company currently has
substantial net operating loss carryforwards that will reduce the amount of
distributions required under the Internal Revenue Code, to the extent available
after giving effect to the limitations of section 382 of the Internal Revenue
Code and the other effects of the Restructuring. See "Certain Federal Income
Tax Consequences--REIT Status and Taxation of Company Under the Prepackaged
Plan--Annual REIT Distribution Requirements."
ABSENCE OF PUBLIC MARKET
There is no existing market for the New Senior Notes and the Company cannot
determine the value of these securities. The New Senior Notes will not be
listed on any national or regional exchange. No appraisal or independent
valuation of such securities has been sought. Consequently, there can be no
assurance that an active trading market for these securities will develop and
no assurance can be given as to the prices at which such securities might
trade. In particular, there can be no assurance that the market price for the
New Senior Notes will be at or near the face amount of the New Senior Notes.
The market for "high yield" securities, such as the New Senior Notes, has been
volatile and unpredictable, which has had an adverse effect on the liquidity
and prices for such securities.
The Outstanding Common Shares are currently listed and traded on the NYSE and
the PSE. In a letter dated November 29, 1994, the NYSE notified the Company
that in light of the Company's present financial condition as well as its
intention to file a prepackaged plan of reorganization under Chapter 11 of the
Bankruptcy Code, the NYSE is reviewing the continued listing of the Company.
Although the Company is working with representatives of the NYSE to allow the
Company to continue to be listed, there can be no assurance that the NYSE will
not determine to commence a formal delisting action. If the Common Shares are
delisted, the liquidity of the Common Shares and the price at which they may be
resold would be adversely affected and there can be no assurance that the
Common Shares will be eligible for listing on any other national or regional
exchange or quotation on any market system.
DELISTING OF THE COMMON SHARES FROM TRADING ON THE NYSE
The Company has been informed by the NYSE that the Company's Common Shares no
longer qualify for listing on the NYSE. In order for the Company to maintain
the listing of its Common Shares on the NYSE, the Company must meet certain
continued listing criteria, including without limitation, minimum levels with
respect to (i) the number of shareholders and shareholdings (1,200 holders each
owning 100 shares or more), (ii) the number of publicly-held shares (600,000),
(iii) the aggregate market value of publicly-held shares ($5,000,000) and of
all outstanding shares ($8,000,000), and (iv) minimum annual earnings (average
of $600,000 per year for prior three years). On September 16, 1993, the NYSE
notified the Company in writing that a review of the Company's annual financial
results for the fiscal year ended September 30, 1992 and for the nine months
ended June 30, 1993 indicated that the Company had fallen below the continued
listing criteria for the aggregate market value of outstanding shares (less
than $8,000,000) and average
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earnings for the prior three years (less than $600,000 per year). On November
29, 1994, the NYSE notified the Company in writing that a review of the
Company's annual financial results for the fiscal year ended September 30, 1994
indicated that the Company still fell below the continued listing criteria for
the aggregate market value of outstanding shares (less than $8,000,000) and
average earnings for the prior three years (less than $600,000 per year), and
that the Company had fallen below the continued listing criteria for the
aggregate market value of publicly-held shares ($5,000,000). Also, the NYSE
advised the Company that it would normally give consideration to delisting the
securities of a company when an intent to file under any of the sections of the
bankruptcy law has been announced. The NYSE indicated in its letter of November
29, 1994 that consideration is being given to the appropriateness of continued
listing of the Common Shares. Management of the Company provided the NYSE with
information to support a recommendation for the continued listing of the Common
Shares on the NYSE and is awaiting a response from the NYSE. To date, to the
Company's knowledge, the NYSE has taken no affirmative action to delist the
Common Shares, but has reserved the right to do so in the future. If the Common
Shares are delisted from the NYSE, (i) there can be no assurances that a public
market will continue to exist for the Common Shares, (ii) the Company may be
unable to obtain news coverage, have greater difficulty in obtaining financing,
suffer a significant decline in the market value of its Common Shares, and
(iii) shareholders of the Company may subsequently have difficulty in selling
their Common Shares should they desire to do so.
RELEASES
In consideration for the distributions to be made under the Prepackaged Plan
and the releases provided for therein, and in order to protect the Reorganized
Debtor from Claims for contribution or indemnity relating to pre-Effective Date
acts or omissions, as of the Effective Date, (i) the Creditors' Committee, each
holder of a Claim or Interest, and each of the officers, directors, employees,
members and professionals of such committee or holder, shall be released to the
extent permitted by applicable law from any Released Claims that the Company
may have against any of them (the "Debtor Release"), (ii) the Company, the
Reorganized Debtor, the Creditors' Committee, the Principal Holders and their
respective officers, directors, employees, members and professionals
(collectively, the "Debtor Releasees") shall be released to the extent
permitted by applicable law from any Released Claims that any holder of a Claim
or Interest may have against any of the Debtor Releasees, and (iii) the Debtor
Releasees shall be released to the extent permitted by applicable law from any
and all actions, causes of action, claims, liabilities, demands and obligations
of any kind or nature whatsoever that the Company, the Reorganized Debtor, the
Company's Estate or any holder of a Claim or Interest may have against any of
the Debtor Releasees that is based upon or that arises out of any alleged act
or omission by any of the Debtor Releasees that is related to the Company,
including, without limitation, the Reorganization Case, the Outstanding Notes,
the Outstanding Collateral Agreement, the Prior Plan, the Outstanding Common
Shares, the Outstanding Stock Rights or any of the Claims or Interests in the
Reorganization Case and any Claims under the federal securities laws, provided,
however, such release shall not apply to Excluded Claims (as defined below)
against the Company (the release described in subparagraphs (ii) and (iii)
above is hereinafter referred to as the "Creditor/Shareholder Release") and no
holder of a Claim shall be released until such Claim is allowed.
FEDERAL INCOME TAX CONSIDERATIONS
The Company will continue to elect to be taxed as a REIT under the Internal
Revenue Code, and the Company intends to continue to operate in such a manner
as to continue to qualify for taxation as a REIT under the relevant sections of
the Internal Revenue Code following the consummation of the Prepackaged Plan.
There can be no assurance, however, that the Internal Revenue Service could not
successfully take the position at some future time that the Company no longer
qualifies for taxation as a REIT. As long as the Company continues to qualify
to be taxed as a REIT, it generally will not be subject to federal corporate
income taxes on the portion of its ordinary income or capital gains that is
currently distributed to its shareholders. In the event the Company were to no
longer qualify for REIT taxation, it would be subject to federal income tax on
its income (including capital gains).
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As a result of the Prepackaged Plan, the Company's aggregate outstanding
indebtedness will be reduced, causing the Company to realize COD income. The
Company will not be required to include such COD income in its taxable income
because the COD income will be realized pursuant to the Prepackaged Plan.
Instead, the Company will be required to reduce its tax attributes, including
its net operating loss carryovers, by the amount of the COD income realized
pursuant to the Prepackaged Plan. The Company's federal income tax returns
reflect significant net operating loss carryovers; those net operating loss
carryovers will be reduced, as discussed above, by the Company's COD income.
The Company's future use of its remaining net operating loss carryovers also
will be limited by the application of Internal Revenue Code section 382 because
the Prepackaged Plan will cause the Company to undergo an "ownership change."
Subject to the Internal Revenue Code section 382 limitations, the Company may
generally elect to use its net operating loss carryovers to reduce its REIT
taxable income, thereby reducing the amount of its required dividend
distributions to the Company's shareholders.
See "Certain Federal Income Tax Consequences" for a more complete discussion
of certain federal income tax consequences pursuant to the Prepackaged Plan.
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THE PREPACKAGED PLAN
A copy of the Prepackaged Plan is included in this Disclosure Statement as
Annex A. The following summary of the material provisions of the Prepackaged
Plan is qualified in its entirety by reference to all of the provisions of the
Prepackaged Plan, including the definitions therein of certain terms used
below.
BACKGROUND OF THE RESTRUCTURING
Previous Chapter 11 Reorganization. On April 12, 1990, the Company filed a
voluntary petition for reorganization under Chapter 11 in the Bankruptcy Court.
Following the Chapter 11 filing, the United States Trustee appointed the
Creditors' Committee and the Equity Committee. On November 21, 1990, the 1991
Plan proposed by the Company, the Creditors' Committee and the Equity Committee
was filed with the Bankruptcy Court. On February 27, 1991, the Bankruptcy Court
confirmed the 1991 Plan.
The 1991 Plan provided that the holders of the Company's outstanding debt
would receive installment payments through June 30, 1995, subject to the right
of the Company to defer payment of certain amounts for up to 24 months or until
December 31, 1995, when all deferred payments would be due. Interest was
payable initially at the reference rate of Bank of America plus one percent,
increasing by 0.25% every six months (the "Adjusted Rate"), with interest on
deferred amounts accruing at the Adjusted Rate plus two percent. The 1991 Plan
also included certain financial, affirmative and negative covenants.
The forecast on which the 1991 Plan was based assumed that real estate
markets would begin to improve in fiscal 1992. However, the markets continued
to deteriorate significantly and the Company was in danger of imminent default.
Despite these conditions, the Company was able to make all required interest
payments and to exceed the required amortization payments, reducing its debt to
$329 million by January 3, 1992, primarily by liquidating Company assets at
substantial discounts from their acquisition cost. Due to the continued
deterioration of real estate markets, however, the Company could not meet a
required amortization payment on June 30, 1992, which required the Company to
reduce its debt to $291,250,000, taking into account deferrals permitted under
the 1991 Plan. The Company was also unable to meet the financial covenants of
the 1991 Plan.
By 1992, the Company had redirected its focus to adjust its operations to
then-prevailing market conditions. Management focused efforts on generating
sufficient liquidity through active, asset-specific management of the Company's
asset portfolio to meet payments required by the 1991 Plan, while at the same
time attempting to maximize shareholder value. The Company also attempted to
raise cash through structured financings such as asset securitizations, but was
unable to complete any financing transaction. Despite such efforts, in light of
the impending June 30, 1992 interest and principal payments, which aggregated,
approximately $44.4 million under the 1991 Plan, and the continued stagnation
in the real estate market in late 1991 and early 1992, the Company elected to
defer a portion of the principal payment and limit future interest payments in
the hope that United States real estate markets would improve sufficiently to
enable the Company to meet its debt service requirements. This was accomplished
by the 1992 Restructuring. See "--The 1992 Restructuring" below.
The 1992 Restructuring. Commencing in the first quarter of fiscal 1992, the
Company and the Creditors' Committee discussed a rescheduling of the Company's
debt obligations under the 1991 Plan. Through the third quarter of fiscal 1992,
the Company negotiated with the Creditors' Committee to develop a prudent
rescheduling of such debt. On June 15, 1992, the Company commenced a
Solicitation of acceptances to certain modifications (the "1992 Modifications")
to the debt obligations of the Company. On July 15, 1992, the Company completed
the 1992 Restructuring.
Pursuant to the 1992 Restructuring, the outstanding debt was restructured
through the issuance of the Outstanding Notes. The 1992 Restructuring, among
other things, (i) increased the amount of principal that could be deferred
(while retaining the final payment date due for deferred payments at December
31, 1995),
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(ii) extended the permitted repayment period of such deferred amounts from 24
months to 30 months from the date a deferral is utilized, (iii) established a
limit on the maximum rate of interest to be paid in cash on a current basis at
9% through June 30, 1994, with any excess interest being accrued and paid at
December 31, 1995, (iv) changed certain required financial covenants to reflect
the then-existing financial condition of the Company and then-existing real
estate market conditions, (v) provided for the release of collateral for
certain financings by the Company upon approval of the holders of 66 2/3% of
the Outstanding Notes, and (vi) provided for the payment of additional
consideration to the holders of the Outstanding Notes equal to one percent of
the principal amount of the Outstanding Notes, payable in four semi-annual
installments commencing on the date the 1992 Restructuring became effective.
Pursuant to the 1992 Restructuring, the Company (i) entered into an indenture
providing for the issuance of the Outstanding Notes (the "Outstanding Note
Indenture") with Wilmington Trust Company, as trustee (the "Outstanding Note
Trustee"), (ii) entered into a second amendment to the Collateral and Security
Agreement dated as of February 21, 1991 (as amended, the "Outstanding
Collateral Agreement"), and (iii) amended the 1991 Plan (as amended pursuant to
the 1992 Restructuring, the "Prior Plan").
The Outstanding Notes. The aggregate principal amount of the Outstanding
Notes is $290 million. The Outstanding Notes provide for semi-annual payments
of principal on June 30 and December 31 of each year until June 30, 1995, when
all undeferred principal is due. The Company has the right to defer certain
principal payments for up to 30 months, until December 31, 1995, at which time
all deferred amounts are due. The Outstanding Notes provide for interest
payments on March 31, June 30, September 30 and December 31 of each year. The
interest rate on the Outstanding Notes is determined on the same basis as under
the 1991 Plan. The interest rate on the Outstanding Notes as of January 1, 1995
was the Adjusted Rate (13.0%) with the next six-month increase occurring on
July 1, 1995. Interest on deferred principal is payable at the Adjusted Rate
plus two percent. The Outstanding Note Indenture also contains certain
financial, affirmative and negative covenants. For a more detailed description
of the Outstanding Notes, see "Description of Outstanding Notes."
Current Defaults. The financial projections on which the 1992 Restructuring
was based assumed that the real estate markets would stop or slow their decline
by 1993 and show some improvement in 1994. Instead, since the effective date of
the 1992 Restructuring, the real estate markets have failed to improve in any
significant way. The Company's business operations, including its ongoing
efforts to refinance and sell property, have not generated cash flow sufficient
to service the Outstanding Notes during the fiscal years ended September 30,
1993 and 1994. Because its operating income had declined due to the continued
deterioration of the real estate markets, the Company was not able to make a
required $20 million principal payment on June 30, 1993. The Company's failure
to make that payment constituted an event of default under the Outstanding Note
Indenture. In addition, the Company failed to meet certain ratios set forth in
the financial covenants in the Outstanding Note Indenture as of March 31, June
30 and September 30, 1993, which constituted additional events of default.
Beginning with the payments due on December 31, 1993, the Company suspended
all payments due in respect of the Outstanding Notes. By March 31, 1995, the
Company had defaulted in the payment of $152.6 million of principal and $51.3
million in interest. The Company currently has no agreement with any holders of
Outstanding Notes that suspends its obligations to pay interest, principal or
other amounts due in respect of the Outstanding Notes. Because the Company did
not make the required payments during the period from June 30, 1993 through
March 31, 1995, as of March 31, 1995, the Company held approximately $70.7
million in available cash. Pursuant to the Agreement of Understanding, on April
11, 1995, the Company paid $25.0 million in accrued interest on the Outstanding
Notes, with such payment to be credited against the cash payment of at least
$50.0 million to be made to the holders of the Outstanding Notes pursuant to
the Prepackaged Plan. The Company does not currently plan to make any further
principal or interest payments in respect of the Outstanding Notes prior to the
Effective Date.
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Notwithstanding the uncured events of default under the Outstanding Note
Indenture, the Outstanding Notes have not been accelerated. On July 2, 1993,
holders of approximately 81% of the Outstanding Notes agreed not to accelerate
the Outstanding Notes during a defined standstill period (the "Standstill
Period") initially expiring July 31, 1993. The Standstill Period was extended on
August 3, August 20, September 23, October 5 and November 23, 1993. On December
3, 1993, the Standstill Period expired. On or about December 8, 1993, the
Outstanding Note Trustee and the collateral agent under the Outstanding
Collateral Agreement (the "Outstanding Collateral Agent") notified the Company's
bank of the existence of the Outstanding Note Trustee's security interest in the
Company's deposit accounts and instructed the bank to freeze the Company's cash
until otherwise instructed by the Outstanding Note Trustee. Since that date, the
Company has administered its cash on an ad hoc basis, with all use of cash
subject to review and approval by the Outstanding Note Trustee. On or about
February 3, 1994, the Company, the Outstanding Note Trustee and the Outstanding
Collateral Agent reached a further understanding regarding the Company's use of
cash and administration of its assets in the absence of a new or extended
Standstill Period. Pursuant to the understanding, which is terminable at will by
the Outstanding Note Trustee or the Outstanding Collateral Agent without the
consent of the holders of the Outstanding Notes, the Company has been permitted
to continue to use its cash on an ad hoc basis, subject to Outstanding Note
Trustee and Outstanding Collateral Agent approval, and to administer its assets
as if no default had occurred and was continuing.
In May 1994, the Company's bank notified the Company that it intended to
close all of the Company's operating accounts with the bank on May 31, 1994.
Consequently, the Company established new operating accounts at Wilmington
Trust Company and transferred all of its bank balances to such accounts.
Concurrently, the Company and the Outstanding Note Trustee entered into a First
Supplemental Indenture, dated as of May 25, 1994, amending the Outstanding Note
Indenture to provide for the new accounts. The Company also entered into a
Deposit Account Security Agreement relating to such accounts and supplemented
the February operating arrangement with the Outstanding Note Trustee and the
Outstanding Collateral Agent to provide for the new accounts. Although the
Company has entered into the First Supplemental Indenture and amended its
operating arrangement with the Outstanding Note Trustee and the Outstanding
Collateral Agent, there can be no assurance that the Outstanding Note Trustee
or Outstanding Collateral Agent will not terminate the amended operating
arrangement or take further or other remedial or enforcement action with
respect to the Company's bank accounts or other properties, including
acceleration of the Outstanding Notes and foreclosure. In the event of such an
acceleration and foreclosure, holders of Outstanding Notes might not receive
cash or securities of the same value or having as favorable terms as under the
Prepackaged Plan, and holders of Outstanding Common Shares might not receive or
retain anything.
Development of the Current Restructuring. During December 1992, it became
apparent to the Company that the Company's projected cash flow would not be
adequate to meet its debt obligations in the future. Thus, the Company began to
consider possible restructuring options for its debt obligations. In considering
possible restructuring options, the Company's goals were (i) to survive as a
going concern and preserve the Company as a real estate investment vehicle so
that the Company's shareholders could enjoy the benefits of an improved or
stabilized real estate market, and (ii) to substantially deleverage the capital
structure of the Company.
In January 1993, the Company began the process of selecting a financial
advisor to assist the Company in formulating the Restructuring. In late January
and early February of 1993, the Company's management interviewed several
potential financial advisors. On February 11, 1993, the Company retained
Houlihan Lokey to act as the Company's financial advisor in connection with the
Restructuring.
In February 1993, the Company contacted the Creditors' Committee to apprise
it and the Creditors' Committee Advisors of the Company's forecasted
difficulties. During that same month, the Company and Houlihan Lokey met with
the Creditors' Committee and the Creditors' Committee Advisors to discuss the
Company's condition and prospects. Thereafter, commencing in March 1993 and
continuing through August 1993, the Company and the Creditors' Committee and
the Creditors' Committee Advisors negotiated
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regarding a restructuring of the Company. During that same time period, from
time to time the Company and its counsel apprised the Equity Committee and its
advisors of the status of negotiations regarding the restructuring efforts.
While the Company was negotiating with the Creditors' Committee, the Company
and Houlihan Lokey also met with several prospective investors and acquirors to
discuss possible third-party investment in or sale of the Company. Although
several potential third-party investors and acquirors were offered an
opportunity to propose restructuring alternatives, only three Interested Groups
made proposals to the Company and the Creditors' Committee.
On April 8, 1993, the first Interested Group met with the Company's
management and Houlihan Lokey to discuss a restructuring proposal that valued
the Company at approximately $190 million. The Company believed this value to
be too low to pursue.
On May 20, 1993, the second Interested Group submitted a proposal to
recapitalize the Company wherein the group would contribute cash and equity in
exchange for a 20% ownership interest in the Company and an 80% ownership
interest in a new partnership in which the second Interested Group would hold a
1% general partner interest and a 79% limited partner interest, while the
Company would hold a 20% limited partner interest. On July 12, 1993, the second
Interested Group submitted a second proposal that valued the Company at $220
million. This proposal contemplated the exchange of the Outstanding Notes for
$120 million of new senior secured notes and new common stock of the
reorganized Company in an amount to be negotiated with the Company's
shareholders.
On the following day, the third Interested Group submitted a proposal that
valued the Company at $220 million. This proposal contemplated the purchase by
the third Investor Group of 6 million newly issued shares of the reorganized
Company's common stock for an aggregate purchase price of $60 million, subject
to, among other things, the following conditions: (i) the obligations
represented by the Outstanding Notes would be reduced to $100 million, such new
debt to be represented by a new debenture with a market value of $100 million;
(ii) the balance of the Company's creditor obligations and all outstanding
shares of common stock would be exchanged for an aggregate of 12 million shares
of the reorganized Company's common stock; (iii) the issuance of five-year
options to purchase common stock of the reorganized Company sufficient to allow
the third Interested Group's aggregate ownership to equal 51% of the
reorganized Company's fully diluted equity; and (iv) the consummation of the
foregoing transactions through a prepackaged plan of reorganization.
After reviewing the terms of these proposals, the Creditors' Committee
advised the Company that the offers were not acceptable because the Creditors'
Committee did not believe that it was in the best interests of the Company's
creditors to pursue such third-party participation. The Creditors' Committee's
belief was based on its opinion that the proposals reflected valuations of the
Company that were lower than the value placed on the Company by the Creditors'
Committee and were substantially below the amount of the Outstanding Notes. As
a result, the Company suspended the solicitation of potential third-party
investors or acquirors.
During April, May and June 1993, Houlihan Lokey made numerous presentations
to the Creditors' Committee designed to focus the Creditors' Committee on
restructuring proposals that would be consistent with the Company's
restructuring goals. After each presentation, however, the Creditors'
Committee, a majority in interest of which was comprised of institutional
lenders, indicated only that it would review and analyze the materials
presented by Houlihan Lokey in determining its negotiating position regarding a
restructuring.
On April 8, 1993, Houlihan Lokey made a presentation to the Creditors'
Committee that included (i) an overview of the REIT industry that set forth a
performance survey of secondary offerings, dividend yields for predominantly
mortgage and equity REITs during the period between February 14, 1992 and April
2, 1993,
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the historic average annual total returns for equity, mortgage and hybrid
REITs, and a comparison of leverage within the REIT industry, (ii) an overview
of the Company that included a description of the Company's investment
portfolio and summaries of the Company's loan collateral and equity properties
by type, and (iii) an overview of the Company's investment portfolio sorted by
investment number, loan and book balance, state and investment type.
On May 13, 1993, Houlihan Lokey made a presentation to the Creditors'
Committee that included (i) a discussion regarding the Company's objective to
effect a consensual financial restructuring of the Company that maximizes value
for all constituents and the alternative general financing and monetization
structures available to achieve the Company's objective, (ii) a financial
overview of the Company that set forth a consolidated cash flow projection and
reviews of the Company's portfolio by property type, asset classification, and
geographic location, (iii) a preliminary portfolio and enterprise valuation by
asset grade, (iv) an overview of capital markets for REITs that set forth
performance surveys for initial public offerings and secondary offerings, (v) a
REIT industry analysis that set forth an overview of dividend yields, and (vi)
an overview of two possible internal restructuring scenarios where the
Outstanding Notes would be exchanged for either common stock or common stock
and new notes.
On June 14, 1993, Houlihan Lokey made a presentation to the Creditors'
Committee that included (i) the status of discussions with potential third-
party investors and acquirors, (ii) an analysis of the second Interested
Group's proposal, (iii) a discussion regarding whether the capital markets
would embrace the Company's equity, (iv) a discussion regarding general issues
related to creditors' "desired" debt load, and (v) an internal restructuring
term sheet proposed by the Company that contemplated an exchange of the
Outstanding Notes for $100 million in new senior secured notes, $35 million in
new subordinated notes and 80% of the common stock of the reorganized Company.
On June 24, 1993, Houlihan Lokey made a presentation to the Creditors'
Committee that included (i) an occupancy analysis that set forth the current
and projected occupancy levels for all loan and equity properties for the years
1993 through 1997, (ii) an internal restructuring summary term sheet proposed
by the Company pursuant to which the Outstanding Notes would be exchanged for
$100 million of new senior secured notes, up to $100 million in 4% perpetual
preferred stock, and 75% to 87.5% of the common stock of the reorganized
Company, and (iii) a cash flow model for the internal restructuring summary
term sheet that included a financial restructuring summary, a summary balance
sheet, a summary income statement and a summary cash flow statement.
In early August 1993, the Equity Committee's financial advisor, Price
Waterhouse LLP (the "Equity Committee's Advisor"), commenced a preliminary
review of the valuation analysis performed by Houlihan Lokey. In connection
therewith, beginning in August 1993 and continuing throughout the course of
negotiations, the Company and Houlihan Lokey provided the Equity Committee's
Advisor with, among other things, (i) a financial overview of the Company and
its investment portfolio, (ii) an overview and analysis of the REIT industry
and the capital markets for REITs, (iii) overviews of possible internal
restructuring proposals, (iv) summaries and analyses of restructuring proposals
submitted by third-party investors, (v) due diligence books, prepared by
Houlihan Lokey, that were provided to prospective third-party investors which
included property and collateral descriptions, cash flow forecasts, lease
summaries, photographs of property, historical operating statements and
consolidated Company cash flow forecasts, (vi) narrative written summaries for
each asset that reviewed the initial funding date, current book value, interest
rate terms (if applicable), description and location of collateral or equity
investment, leasing and property management information, latest available
leasing summaries, five-year cash flow projections, latest appraisals (if
conducted), summary and actual operating statements of collateral or equity
investment and photographs of property, and (vii) other analyses as requested
by the Equity Committee's Advisor.
On or about August 10, 1993, after extensive negotiations, the Company and
the Creditors' Committee agreed to the broad outlines of a proposed
restructuring, subject to approval by the Board of Trustees. Pursuant to the
terms of the restructuring proposal, the Outstanding Notes would be exchanged
for
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approximately $195 million of new senior secured notes and common stock
representing approximately 85% of the equity of the reorganized Company. The
restructuring proposal anticipated that the new notes would be issued in two
series: $120 million of 7% notes maturing in 2003 with scheduled annual
principal amortization, and approximately $75 million in additional notes
payable principally from available cash flow. In addition, the restructuring
proposal provided for the payment by the Company on September 30, 1993, of all
outstanding restructuring fees relating to the 1992 Restructuring and the
interest due on the Outstanding Notes, with interest to accrue thereafter on
the Outstanding Notes at 7%. Interest accruing through March 31, 1994, would be
added to the principal of the new cash flow notes and any interest accruing
after March 31, 1994, would be paid at closing. Although existing holders of
the Company's Outstanding Common Shares would have retained 15% of the equity
of the restructured Company under this restructuring proposal, the Company's
remaining debt level under this proposal would have been greater than the debt
levels thought desirable by the Company. Moreover, the amortization schedule,
required cash sweeps and restrictions on dividends and other payments to
shareholders would have essentially required an orderly liquidation of the
Company.
At a meeting of the Board of Trustees held on August 18, 1993, the Board of
Trustees unanimously agreed to pursue the 1993 Agreement in Principle set forth
in the August Term Sheet, subject to a number of conditions including, among
other things, the receipt by the Company of written indications of support from
members of the Creditors' Committee and additional holders of sufficient
Outstanding Notes to effect the restructuring through either a prepackaged or
prearranged plan of reorganization under Chapter 11.
Upon the approval of the terms of the 1993 Agreement in Principle, on August
19, 1993, the Company announced that it had reached a non-binding conditional
agreement in principle with the Creditors' Committee to restructure the
indebtedness represented by the Outstanding Notes. The Company also announced
that the standstill arrangement with its creditors (which had expired on August
16, 1993) had been extended conditionally to September 16, 1993.
After the terms of the 1993 Agreement in Principle were announced, trading in
the Outstanding Notes increased substantially. By December 1993, in excess of
50% of the principal amount of the Outstanding Notes had traded. Included in
the Outstanding Notes initially traded were all of the Outstanding Notes held
by two members of the Creditors' Committee who had not been in favor of the
1993 Agreement in Principle. Consequently, these two members no longer held any
claims against the Company and resigned from the Creditors' Committee.
In early September 1993, the Principal Holders requested to be named to the
Creditors' Committee and receive financial and operating information relating
to the Company. On September 21, 1993, the Creditors' Committee met with the
Principal Holders to discuss the restructuring of the Company and the Principal
Holders' request to become members of the Creditors' Committee. As a result of
that meeting, the three then-remaining members of the Creditors' Committee did
not grant committee membership to the Principal Holders but acquiesced in the
Company's delivery of confidential information to the Principal Holders. Thus,
on September 21, 1993, the Principal Holders signed confidentiality agreements
with the Company and commenced a due diligence review of financial and other
information regarding the Company.
By October 22, 1993, the Equity Committee's Advisors had completed their
preliminary review of Houlihan Lokey's valuation analysis. As a result of its
review, the Equity Committee decided a more detailed analysis of Houlihan
Lokey's valuation was required. The Equity Committee's Advisor believed that
Houlihan Lokey's valuation may have undervalued the Company's assets because
(i) Houlihan Lokey used discount and capitalization rates that allegedly were
higher than industry norms, and (ii) its discounted consolidated cash flow
analysis allegedly underestimated the time value of potential cash flows to
investors in years one through five. Thus, at the Equity Committee's request,
the Equity Committee's Advisor commenced its own valuation of the Company based
upon a limited review of ten of the Company's larger properties. In connection
therewith, the Company agreed to pay certain fees and costs of the Equity
Committee's Advisor's valuation.
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In November 1993, the Principal Holders retained the Principal Holders'
Advisor to evaluate the alternatives available to the Company's creditors,
analyze the cash flows and values of the Company's portfolio, participate in
talks with the Company and its creditors and evaluate the proposals submitted
by the Interested Groups. In connection with such engagement, the Company
agreed to pay the Principal Holders' Advisor's fees, which were expected to be
at least $300,000. On November 3, 1993, the Principal Holders' Advisor signed a
confidentiality agreement with the Company and commenced a review of the
Company's assets.
By November 1993, one of the three remaining members of the Creditors'
Committee had sold all of its Outstanding Notes, part to one of the other
Creditors' Committee members and the balance to other persons. These sales left
the Creditors' Committee with two members, one of whom was the Major Holder who
held in excess of 33 1/3% of the Outstanding Notes.
By the end of November 1993, the Company had still not received written
indications of support for the 1993 Agreement in Principle from any holders of
Outstanding Notes. Thereafter, the Company suspended all actions to implement
the terms of the 1993 Agreement in Principle and resumed responding to
inquiries from third parties regarding participation in a restructuring of the
Company.
In early December 1993, the Principal Holders' Advisor presented an oral
analysis that included a valuation of the Company at approximately $230
million, an amount below the values thought reasonable at the time by the
Company and the two remaining members of the Creditors' Committee. The Company
was not provided with any written report or analysis by the Principal Holders'
Advisors. Throughout December of 1993 and January of 1994, the Company
attempted to bridge the gap in valuations placed on the Company by the various
creditor groups, but was ultimately unsuccessful.
On December 3, 1993, representatives from the Principal Holders, the
Principal Holders' Advisor, the Major Holder and legal counsel for the
Creditors' Committee met to discuss the possible options for the restructuring
of the Company's debt obligations. The Major Holder favored a restructuring
under which the Company would maintain a substantial amount of debt. The
Principal Holders, on the other hand, favored a restructuring under which the
Company would be substantially deleveraged. The meeting ended without resolving
the differences in the respective restructuring approaches favored by the Major
Holder and the Principal Holders.
Subsequent to that meeting, the Major Holder decided that it wanted the
Company to file a voluntary petition for bankruptcy by the end of the year in
order to prevent an alleged loss of tax benefits arising from the Company's net
operating losses (the "NOLs"). The Company disagreed with the Major Holder and
rejected the Major Holder's demand that it file a voluntary bankruptcy
petition. Thus, the Major Holder attempted to force a Chapter 11 filing by,
among other things, demanding that the Outstanding Collateral Agent take action
to preserve and protect the collateral securing the Company's debt, and
suggesting that the Outstanding Collateral Agent freeze the Company's bank
accounts. Consequently, on or about December 8, 1993, the Outstanding Note
Trustee and the Outstanding Collateral Agent took action to freeze the
Company's accounts at the Company's bank by notifying the Company's bank of the
existence of the Outstanding Note Trustee's security interest in the Company's
deposit accounts at the bank and instructed the bank to freeze the Company's
cash until otherwise instructed by the Outstanding Note Trustee. Since that
date, the Company has administered its cash on an ad hoc basis, with all use of
cash subject to review and approval by the Outstanding Note Trustee. On or
about February 3, 1994, the Company, the Outstanding Note Trustee and the
Outstanding Collateral Agent reached a further understanding regarding the
Company's use of cash and administration of its assets in the absence of a new
or extended Standstill Period. Pursuant to the understanding, which is
terminable at will by the Outstanding Note Trustee or the Outstanding
Collateral Agent without the consent of the holders of the Outstanding Notes,
the Company has been permitted to continue to use its cash on an ad hoc basis,
subject to Outstanding Note Trustee and Outstanding Collateral Agent approval,
and to administer its assets as if no default had occurred and was continuing.
See "The Prepackaged Plan--Background of the Restructuring--Current Defaults."
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At a special meeting of the Board of Trustees held on December 9, 1993,
Houlihan Lokey reported that the Major Holder and the Principal Holders
currently had many irreconcilable differences as to how the restructuring of
the Company should be handled. Houlihan Lokey then outlined the different
positions being taken by the Major Holder and the Principal Holders.
Furthermore, Mr. Strong, the Company's Chief Executive Officer, reported that
the restructuring efforts were in turmoil and that a meeting had been scheduled
for December 13, 1993, to get things "back on track." He further stated that at
the meeting, it was the Company's intent to try to convince the Major Holder
and the Principal Holders to agree to some kind of compromise so that the
Company could continue to operate its business while a consensual restructuring
was being pursued.
At the meeting on December 13, 1993, the Major Holder submitted a
restructuring proposal that, among other things, provided that the Outstanding
Notes would be exchanged for more than $140 million in new senior secured notes
and 100% of the common stock of the reorganized Company, and the Company's
existing shareholders would receive warrants to purchase common stock of the
reorganized Company.
At a meeting of the Board of Trustees held on December 15, 1993, Houlihan
Lokey and the Company's legal counsel, Milbank, Tweed, Hadley & McCloy
("Milbank") reported on the results of the meeting with the creditors and other
interested parties held on December 13, 1993, and reviewed the provisions of a
draft term sheet, dated December 14, 1993, prepared by the Company based on the
terms and conditions of the Major Holder's December 13, 1993 proposal. A
lengthy discussion ensued as to the negotiating stance the Company might assume
in connection with the various provisions of the term sheet in order to
preserve those concepts in the Major Holder's proposal that the Company
considered to be most important to the Company and its shareholders, such as
reducing the Company's debt level and the participation by the existing
shareholders in the equity of the reorganized Company. The trustees also noted
that their approval would be required on any agreement reached as a result of
any negotiations regarding the draft term sheet.
During this time period while the Company was attempting to restructure its
obligations, the Company continued to operate, even though it was in default,
due to the lack of foreclosure action by the Outstanding Note Trustee. The
Outstanding Note Trustee failed to foreclose because it was receiving
conflicting orders from the Major Holder and the Principal Holders, who could
not agree on the capital structure of the Company to be attained by a
restructuring.
At a meeting of the Board of Trustees held on January 10, 1994, Milbank
reported that the creditors were still split primarily into two camps: the
Principal Holders, who preferred a substantially deleveraged Company, and the
Major Holder, who preferred substantial levels of senior debt. At a meeting of
the Board of Trustees held on February 9, 1994, Mr. Strong reported that
nothing had changed regarding the impasse between the Major Holder and the
Principal Holders with respect to the financial restructuring, and that the
only progress made was that the two groups had met on several occasions.
Throughout the second and third quarters of fiscal 1994, the Company's
management and advisors continued discussions with the Major Holder and the
Principal Holders (who, as of March 31, 1994, held 32.9% of the Outstanding
Notes) and their representatives to explore various alternatives for
restructuring the Outstanding Notes that would resolve the impasse between the
Major Holder and the Principal Holders.
In March 1994, the Principal Holders requested that the Company agree to pay
certain fees and expenses of legal counsel to the Principal Holders. The
Company agreed and, on or about March 17, 1994, the Principal Holders retained
O'Melveny & Myers to act as their legal counsel in connection with any proposed
restructuring.
At a meeting of the Board of Trustees held on April 20, 1994, the Board of
Trustees considered (i) the April 1994 Proposal, which was based on a court-
approved valuation of the Company (assumed to be $230 million) and provided
that (a) the Bankruptcy Court would determine the value of the Company, (b)
holders of the Outstanding Notes would receive new senior secured notes
convertible to common stock of the reorganized Company in an aggregate
principal amount equal to the court-approved value of the Company,
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(c) the remaining principal amount of the Outstanding Notes would become
unsecured claims, (d) the holders of unsecured claims would receive nothing,
(e) the existing Common Shares would be cancelled, and (f) the Principal
Holders would enter into a sharing agreement with the existing shareholders
pursuant to which the Principal Holders would convert their new senior secured
notes into shares representing 100% of the common stock and give 4% of such
stock to the existing shareholders, (ii) a restructuring term sheet, dated
April 11, 1994, proposed by the Major Holder, under which the Major Holder's
Outstanding Notes would be exchanged for approximately $99.4 million of new
senior secured notes (which would enjoy the benefit of restricted covenants
that would prevent the distribution of cash to shareholders until such notes
have been repaid) and all other holders' Outstanding Notes would be exchanged
for 100% of the common stock of the reorganized Company, and the existing
shareholders would receive warrants to purchase new common shares representing,
in the aggregate, 6% of the fully diluted common stock of the reorganized
Company, (iii) an analysis of the two term sheets, dated April 19, 1994,
prepared by Houlihan Lokey, that set forth, among other things, a summary of
the terms of each proposal, a description of the assumptions used, and the
potential recoveries and the value of the rights offered to participants under
each proposal, and (iv) an updated asset valuation summary for the Company,
dated March 2, 1994, prepared by Houlihan Lokey which valued the Company as of
December 31, 1993 at $261 million to $317 million. Milbank then reported in
considerable detail all of the events regarding the restructuring that had
transpired since the last meeting on March 16, 1994. Thereafter, the Board of
Trustees determined that Milbank and Houlihan Lokey should continue to
negotiate with the creditors and attempt to reach an agreement on a
restructuring based on the April 1994 Proposal proposed by the Principal
Holders.
On April 25, 1994, based upon a limited review of ten of the Company's
properties by the Equity Committee's Advisor, the Equity Committee informed the
Company that it believed that the Company's going concern value was no less
than $312 million. In order to verify its preliminary conclusions, the Equity
Committee sought authorization from the Company to have the Equity Committee's
Advisor complete its analysis. The Equity Committee's Advisor, however, never
provided the Company with a written valuation. The Equity Committee, however,
did inform the Company that it believed that the Company's going concern value
was approximately $330 million to $340 million. Neither the Equity Committee
nor the Equity Committee's Advisor ever provided a written valuation or any
supporting documentation or basis for its assertions regarding the value of the
Company.
On April 26, 1994, representatives of the Company, Houlihan Lokey, Milbank,
the Major Holder, legal counsel for the Creditors' Committee, O'Melveny & Myers
and the Principal Holders met to attempt to resolve the differences in the
respective restructuring approaches of the Major Holder and the Principal
Holders. During this meeting, the Principal Holders presented the April 1994
Proposal to the Major Holder. The Major Holder, however, would not agree to the
Principal Holders' April 1994 Proposal because, among other things, the
reorganized Company would not retain debt levels satisfactory to the Major
Holder.
At a meeting of the Board of Trustees held on May 18, 1994, Milbank and
Houlihan Lokey reported on the status of the restructuring since the April 20,
1994 meeting. The Board of Trustees learned that the meeting of all concerned
parties in late April produced no agreement whatsoever between the two creditor
factions. The Board of Trustees then reviewed various scenarios which might be
expected to evolve in light of this impasse and their associated risks, and
reviewed the different valuations being placed on the Company by the various
entities involved in the restructuring efforts. The Board of Trustees
determined that the Company's advisers should continue their negotiations with
the concerned parties to the restructuring and attempt to reach an agreement on
a restructuring based on the April 1994 Proposal proposed by the Principal
Holders.
In May and June 1994, the Creditors' Committee, the Principal Holders and the
Company had several contacts with the Equity Committee to attempt to reach
agreement on a consensual plan to restructure the Company. Such attempts,
however, proved unsuccessful because of the inability to agree upon the terms
of a mutually acceptable restructuring.
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In June 1994, the Principal Holders requested that the Company retain an
additional valuation firm to perform a special purpose valuation of the
Company. At a meeting of the Board of Trustees held on June 15, 1994, the Board
of Trustees considered this request. The Board of Trustees agreed that if such
an additional special purpose valuation might lead to the negotiation of a
consensual agreement among the creditors and also result in fair treatment of
the shareholders, it would be worth the additional expense. After further
discussions with the Major Holder, the Principal Holders and their advisors,
the Company agreed to retain Kenneth Leventhal, the firm specified by the
Principal Holders, to perform an additional valuation analysis of the Company
and to provide such valuation analysis to the Creditors' Committee, the
Principal Holders and the Equity Committee. The Company agreed to retain
Kenneth Leventhal because Kenneth Leventhal was familiar with the Company's
portfolio as a result of a due diligence investigation undertaken in early 1993
on behalf of a potential equity investor, and also because of Kenneth
Leventhal's expertise in the area of financial restructuring and real estate
due diligence and valuation. Thus, on June 24, 1994, the Company retained
Kenneth Leventhal to perform a special purpose valuation of the Company. See
"Special Purpose Valuation Reports of Kenneth Leventhal" below.
On or about August 5, 1994, the Creditors' Committee member that was not the
Major Holder sold all of its Outstanding Notes to the Principal Holders and
certain other persons. With this sale, the only remaining member of the
Creditors' Committee was the Major Holder. On or about September 9, 1994,
Milbank received telephonic notice from the Creditors' Committee's counsel that
the Creditors' Committee had ceased to operate.
On or about September 14, 1994, the Company's advisors, the Equity
Committee's advisors and counsel to the Principal Holders met in a final
attempt to negotiate the treatment of equity holders in the context of a
prepackaged plan of reorganization based on the April 1994 Proposal. At this
meeting, the Company and the Principal Holders outlined the terms of the April
1994 Proposal to the Equity Committee's advisors in order to determine whether
the Equity Committee would accept 4% of the common stock of the reorganized
Company. At the conclusion of the meeting, the Equity Committee's advisors
agreed to recommend to the Equity Committee that it accept one of the following
two proposals: (i) 5% of the common stock of the reorganized Company and 4-year
warrants to purchase new common shares representing 7 1/2% of the common stock
of the reorganized Company at a strike price per share reflecting a market
capitalization of $190 million; or (ii) 4% of the common stock of the
reorganized Company and 5.5-year warrants to purchase new common shares
representing 10% of the common stock of the reorganized Company at a strike
price per share reflecting a market capitalization of $160 million. In return,
the Principal Holders' legal advisor agreed to discuss incorporating these
proposals into the April 1994 Proposal with the Principal Holders.
On October 4, 1994, Kenneth Leventhal produced its special purpose valuation
report, which placed the Company's approximate going concern value as of July
1, 1994, between $255 million and $275 million. Because Kenneth Leventhal's
report placed the Company's value higher than the $230 million value assumed by
the April 1994 Proposal, the Principal Holders decided to abandon the April
1994 Proposal. Thus, the Company renewed its efforts to negotiate a deal with
the Principal Holders that was acceptable to the Equity Committee. The Company,
the Principal Holders and the Equity Committee, however, were unable to reach
agreement on the terms of a restructuring because the Equity Committee wanted
existing shareholders to receive more than 3% of the common stock of the
reorganized Company, and the Principal Holders were unwilling to give a greater
percentage because, under Kenneth Leventhal's special purpose valuation, the
Company was insolvent and the existing equity was valueless.
On or about October 27, 1994, the Major Holder and the Principal Holders
submitted a proposal for a prepackaged restructuring of the Company. Pursuant
to the proposal, the Company would retain all of its assets and have between
$10 million and $15 million of cash following the restructuring. The
Outstanding Notes would be exchanged for $110 million of new senior secured
notes and 98% of the common stock of the reorganized Company. Common stock
retained by the existing shareholders would represent 2% of the reorganized
Company's common stock. Thereafter, the Company and Houlihan Lokey spent
several weeks
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negotiating with such holders regarding the proposed equity split between the
holders of Outstanding Notes and the existing shareholders.
The Company was extremely concerned that the holders of Outstanding Notes
would attempt to and succeed in eliminating the interests of the existing
shareholders. As a result, the Company believed that it was their duty to
protect the existing shareholders from losing their entire economic stake.
Thus, the Company immediately commenced negotiations with the Major Holder and
the Principal Holders to provide a greater recovery to the existing
shareholders than that offered under the October 27, 1994 proposal. The Equity
Committee was not involved in these negotiations because the Major Holder and
the Principal Holders believed that the Equity Committee's involvement at this
point would have been futile based on the parties' prior inability to reach an
agreement on the treatment of the existing shareholders in a restructuring.
In November 1994, the Company reached the 1994 Agreement in Principle with
the Major Holder and the Principal Holders. Pursuant to the 1994 Agreement in
Principle, upon shareholder approval, pursuant to a prepackaged Chapter 11
reorganization, holders of the Outstanding Notes would receive (i) $110 million
of new senior secured notes due 2002, (ii) approximately $50 million in cash,
and (iii) common stock representing 97% of the common stock of the reorganized
Company (or, if the Company's existing shareholders did not vote to accept the
Prepackaged Plan, substantially all of the common stock of the reorganized
Company). The existing shareholders would retain their shares, which would
represent the remaining 3% of the reorganized Company's common stock, provided
that they voted to accept the Prepackaged Plan. The holders of unsecured claims
would receive cash in the allowed amount of their respective claims.
At a meeting of the Board of Trustees held on November 16, 1994, the Board of
Trustees, the Company's management, Milbank and Houlihan Lokey discussed (i)
the terms and conditions of the proposed Restructuring, (ii) the discussions,
negotiations and alternative proposals leading to the Restructuring proposal,
(iii) the feasibility of the proposed Restructuring and its effect on the
Company's cash flow, (iv) the other restructuring alternatives available to the
Company, and (v) the fairness of the proposed Restructuring to the Company's
shareholders and creditors. The Board of Trustees also considered management's
internal analyses of the proposed Restructuring, which included a discussion of
management's views regarding (i) the advantages and disadvantages of the
proposed Restructuring and the alternative proposals leading to the proposed
Restructuring, and (ii) the effect of both the proposed Restructuring and the
prior alternative proposals on the Company, its creditors and its shareholders.
After lengthy consideration and discussion of these matters, the Board of
Trustees unanimously approved the Restructuring, subject to approval by it of
the final documentation necessary to effect the Restructuring. See
"Recommendation of the Board of Trustees" below. The Board of Trustees then
authorized the Company's management to proceed with the steps necessary to
effect the proposed Restructuring.
On November 17, 1994, the Company announced that it had reached the 1994
Agreement in Principle with the Major Holder and the Principal Holders to
restructure the indebtedness represented by the Outstanding Notes. In
connection therewith, the Company issued a press release describing the
material terms of the Restructuring.
On the following day, representatives of the Equity Committee advised the
Company that the Equity Committee could not make a recommendation to the
Company's shareholders with respect to the proposed Restructuring until the
Company supplied the Equity Committee with the Company's cash flow projections,
assumptions and current financial information. On November 21, 1994, the
Company supplied the Equity Committee with the requested information. On
November 22, 1994, the Equity Committee filed a "Notice of Dissolution of
Equity Committee" (the "Notice") in the Bankruptcy Court wherein the Equity
Committee stated that it had dissolved, effective as of the close of business
on November 22, 1994. The Notice stated that the Equity Committee had dissolved
because, among other things, (i) the Company had allegedly reached its
agreement in principle without any discussion or input from the Equity
Committee or its advisors, (ii) the Company had allegedly refused to supply
adequate information to the Equity Committee and its advisors, including, but
not limited to, cash flow projections, assumptions and financial information
with respect to the
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Company and each of its specific project holdings, (iii) the Company and its
advisors had allegedly refused to discuss the Company's cash flow projections,
assumptions and financial information with the Equity Committee, and (iv) the
Equity Committee, due to its alleged lack of information, was unable to
conclude that the proposed Restructuring was fair or equitable to the Company's
shareholders. On November 29, 1994, the Company informed the Equity Committee
that the Company disagreed with many of the purported factual statements
contained in the Notice and that the Company believed that the Notice was
misleading.
Subsequent Developments. On March 15, 1995, the Major Holder sold all of its
Outstanding Notes to the New Major Holder. This change in holdings of
Outstanding Notes had no material effect on the terms of the previously
negotiated 1994 Agreement in Principle among the Company, the Major Holder and
the Principal Holders. In April 1995, the Company and the Principal Holders
entered into the Agreement of Understanding pursuant to which the Company
agreed to distribute to the holders of Outstanding Notes $25.0 million in cash
prior to the Petition Date. Under this agreement, the Principal Holders (who
hold in excess of 80% of the Outstanding Notes), among other things, agreed to
vote when solicited in favor of the Prepackaged Plan. On April 11, 1995, the
Company paid $25.0 million pursuant to the Agreement of Understanding, with
such payment to be credited against the cash payment of at least $50.0 million
to be made to the holders of the Outstanding Notes pursuant to the Prepackaged
Plan.
RECOMMENDATION OF THE BOARD OF TRUSTEES
On November 16, 1994, the Company's Board of Trustees met to consider the
proposed Restructuring. In connection therewith, the Board of Trustees heard
presentations from the Company's management and the Company's financial and
legal advisors describing the discussions, negotiations and alternative
proposals leading to the Restructuring as described above. See also "--Reports
of Houlihan Lokey as Financial Advisor to the Company" below. At the request of
the Board of Trustees, the Company's management and financial advisors
described the feasibility of the Restructuring and its effect on the Company's
capital structure and its cash flow problems described above. In addition, the
Board of Trustees discussed other restructuring alternatives available to the
Company. After lengthy consideration and discussion of these matters, the Board
of Trustees voted unanimously to approve in principle the terms of the
Restructuring, subject to approval by the Board of Trustees of the final
documentation required to implement the Restructuring and to confirm the
Prepackaged Plan, and to authorize management to proceed with the steps
necessary to effect the Restructuring.
The Board of Trustees believes that the Restructuring is necessary to make it
possible for the Company to satisfy its outstanding obligations, remain in
business and provide the shareholders with the best opportunity to receive any
value or recovery, having determined that the Restructuring is fair to the
unaffiliated Holders of the Company's Outstanding Securities and other Claims
and Interests. See "--Purposes of the Restructuring" below.
THE COMPANY'S BOARD OF TRUSTEES HAS UNANIMOUSLY APPROVED THE RESTRUCTURING
AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT ALL HOLDERS,
INCLUDING HOLDERS OF OUTSTANDING COMMON SHARES, VOTE IN FAVOR OF THE
RESTRUCTURING AND THE TRANSACTIONS CONTEMPLATED THEREBY.
In evaluating the recommendation of the Board of Trustees, all Holders should
consider carefully the factors described under "Special Factors and Certain
Considerations," which include discussions regarding (i) the financial
condition of the Company, including liquidity, (ii) the Company's continuing
leverage, (iii) foreclosure and bankruptcy alternatives, (iv) the possible
further decline of real estate markets, (v) disruption of the Company's
business, (vi) considerations relating to the Prepackaged Plan, (vii) certain
bankruptcy considerations if the Prepackaged Plan is not confirmed and the
Restructuring is not otherwise consummated, (viii) certain consequences to non-
voting holders of Common Shares, (ix) risks relating to the projections, (x)
restrictions on payments, (xi) the absence of a public market, (xii) the risk
of the NYSE delisting the Common Shares from trading, (xiii) the releases
provided for by the Restructuring, and (xiv) certain federal income tax
consequences of the Prepackaged Plan.
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Approval by the Board of Trustees. In considering the Restructuring, the
Board of Trustees considered, and have considered since November 1994, among
other things, the factors set forth below.
. The Board of Trustees' familiarity with the Company's business,
operations and financial condition and its future prospects, including
the financial difficulties facing the Company as a result of the
shortfall in operating cash flow in fiscal 1993 and fiscal 1994 and
forecasted shortfall for fiscal 1995 and beyond, and the inability of
the Company to secure adequate financing for its ongoing operations as
long as the Outstanding Notes remained outstanding. The Board of
Trustees noted that without the Restructuring, the Company would be
unable to service its outstanding obligations and could be forced to
liquidate.
. The fact that consummation of the Restructuring appeared to be the only
viable way for the Company to deal with its outstanding obligations and
continue to operate its business.
. The Company's range of enterprise going concern value of $265 million to
$285 million and range of liquidation value of $220 million to $260
million, based on the special purpose valuation reports of Kenneth
Leventhal, are in each case substantially less than the Company's
liabilities, which include, among other things, approximately $323
million of liabilities with respect to principal and accrued interest in
respect of the Outstanding Notes.
. The Board of Trustees' review of monthly reports on the status of the
Restructuring, as presented by the Company's financial and legal
advisors, as well as valuations of the Company reflected from time to
time in the various proposals of the Interested Groups, the Major Holder
and the Principal Holders.
. Presentations by the Company's management and its legal advisors, each
of whom reviewed various considerations with the Board of Trustees. In
particular, the Board of Trustees noted that based on the valuations of
the Company prepared by Houlihan Lokey, the special purpose valuations
prepared by Kenneth Leventhal and management's internal analyses,
foreclosure or a liquidation of the Company would yield a much smaller
return to the holders of Claims and would leave nothing for the holders
of the Outstanding Common Shares. Thus, a restructuring that resulted in
a potential return to the holders of the Company's equity securities was
determined to be superior to the real possibility that they would
receive nothing in a foreclosure or liquidation.
. Presentations by Houlihan Lokey and the results of discussions with
other parties concerning proposals for the Restructuring and potential
alternatives to the Restructuring. In particular, the Board of Trustees
placed substantial weight on the tentative willingness of certain third
parties to invest in the Company upon consummation of the Restructuring
and the unwillingness of such investors to make a capital investment in
the Company absent successful completion of the Restructuring in the
form presented.
. The historical and current market prices of the Company's Outstanding
Common Shares, as well as the net book value of the Company's assets per
share, both before giving effect to the Restructuring and on a pro forma
basis after giving effect to the Restructuring, and when compared to a
liquidation of the Company.
. The fact that the Major Holder and the Principal Holders had retained
separate financial and legal advisors, had negotiated at arm's-length
with the Company and its financial and legal advisors after a review of
the Company and its prospects, and had agreed upon the terms of the
Restructuring in preference to a liquidation or other alternatives.
Based on the foregoing, the Board of Trustees determined that the
Restructuring was fair to the Holders and to recommend approval of all elements
of the Restructuring.
In view of the wide variety of factors considered by the Board of Trustees in
connection with its evaluation of the Restructuring, the Board of Trustees did
not find it practicable to quantify or otherwise
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attempt to assign relative weights to the specific factors considered in making
its determination, nor did it evaluate whether such factors were of equal
weight. As a general matter, the Board of Trustees believes that the factors
discussed above supported its decision to approve the Restructuring.
SPECIAL PURPOSE VALUATION REPORTS OF KENNETH LEVENTHAL
Engagement. In June 1994, Kenneth Leventhal was engaged to prepare a special
purpose valuation of the Company and its investment portfolio in order to
assist the Company and its various interested creditor parties in determining
an appropriate basis for valuation of a potential restructuring transaction.
Kenneth Leventhal is a nationally recognized firm of certified public
accountants which has subsequently merged with Ernst & Young LLP. The Company
selected Kenneth Leventhal to perform such special purpose valuation at the
request of the Principal Holders and because of Kenneth Leventhal's
qualifications, expertise and reputation in the area of financial restructuring
and real estate due diligence and valuation. Also, Kenneth Leventhal was
familiar with the Company's portfolio as a result of a comprehensive due
diligence investigation of all assets in the Company's portfolio undertaken in
early 1993 on behalf of a potential equity investor and for the use and benefit
of such potential investor.
As compensation for its services, the Company agreed to pay Kenneth Leventhal
a fee of $2,000 per asset for which Kenneth Leventhal would perform a special
purpose valuation or updated special purpose valuation, plus applicable out-of-
pocket expenses and fees incurred by Kenneth Leventhal in connection with its
engagement.
Valuations of Company. On October 4, 1994, Kenneth Leventhal produced a
report which placed the Company's going concern value as of July 1, 1994,
between $255 million and $275 million and its liquidation value of between $210
million and $240 million. At the Company's request, in April and May 1995,
Kenneth Leventhal updated its analysis using the same methodology it used to
prepare its October 1994 report. On May 31, 1995, Kenneth Leventhal provided
the Company with updated reports dated May 15, 1995 that placed the Company's
going concern value as of March 31, 1995 between $265 million and $285 million
and its liquidation value between $220 million and $260 million. Kenneth
Leventhal's May 15, 1995 reports (the "Kenneth Leventhal Reports"), which set
forth assumptions made, matters considered and limits on the review undertaken,
are included as Annexes C and D to this Disclosure Statement. Kenneth Leventhal
has granted its consent to the use of its reports included as Annexes C and D
to this Disclosure Statement. The summary of the Kenneth Leventhal Reports
herein is qualified in its entirety by reference to the full text of such
reports and their respective exhibits. The special purpose valuations set forth
in the Kenneth Leventhal Reports do not reflect the $25 million payment made on
April 11, 1995 pursuant to the Agreement of Understanding.
To assist Kenneth Leventhal, the Company provided it with certain data and
information relative to the portfolio maintained by the Company. In preparing
its valuations, Kenneth Leventhal relied upon the accuracy and completeness of
the data and information provided to it by the Company and did not assume any
responsibility for any independent verification of such information. The
services provided by Kenneth Leventhal did not constitute independent asset
appraisals. In relying on the data and information provided to it by the
Company, Kenneth Leventhal assumed that such information was reasonably
prepared based on assumptions reflecting the best currently available estimates
and judgments by the Company's management as to the expected future results of
operations and financial condition of the Company to which such analyses or
forecasts relate. Kenneth Leventhal further relied upon the assurances of the
Company's management that it is unaware of any facts that would make the
information provided to Kenneth Leventhal incomplete or misleading. The Kenneth
Leventhal reports were based on economic, monetary, market and other conditions
as they existed and could be evaluated as of the respective dates of the
Kenneth Leventhal reports. ALL HOLDERS, INCLUDING HOLDERS OF OUTSTANDING COMMON
SHARES, ARE ENCOURAGED TO READ THE KENNETH LEVENTHAL REPORTS IN THEIR ENTIRETY.
In preparing its reports, the Company instructed Kenneth Leventhal to
determine the valuation of the Company's portfolio on a going concern basis.
The assumptions utilized by the Company and reviewed by
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Kenneth Leventhal included normal collection of amounts due on mortgage loans
and cash flow from operating properties. To determine a going concern
valuation, the assumptions were predicated on the orderly collection and
selected disposal of assets over a period of several years. Moreover, Kenneth
Leventhal's going concern valuation was not reflective of values which would
result from a distressed sale, forced liquidation, or disposition of the
portfolio in a bulk sale or any other accelerated manner. In addition to these
specific portfolio valuation procedures, the Company further instructed Kenneth
Leventhal to approximate a range of valuation for the total enterprise as of
July 1, 1994, and later as of March 31, 1995, utilizing the Company's then-most
recently available financial statements.
In conducting its valuations, Kenneth Leventhal obtained selected publicly-
available financial information prepared by the Company as of June 30, 1994,
and later as of March 31, 1995. Utilizing this information, Kenneth Leventhal
selected 26 assets representing mortgage loans, investments, in-substance
foreclosure assets and real estate equities owned. The selection was divided
between the west coast and east coast portfolios and generally represented the
highest dollar values in the portfolios. In addition, the selection of assets
included different asset classifications.
Utilizing the portfolio so selected, Kenneth Leventhal, among other things,
(i) obtained the most recent "Argus" (a property cashflow software package)
property cashflow projections for the properties selected, (ii) obtained, where
applicable, the most recent operating rent roll and other financial information
relative to the assets selected, (iii) obtained the most recent appraisals,
where applicable and available, (iv) obtained the previous Kenneth Leventhal
analyses performed as of March 1993 and July 1994, (v) discussed the current
status with the respective asset manager to determine loan status, property
characteristics, current occupancy, existing market rental rates, new leases,
current payoff discussions and asset sales, (vi) reviewed limited market
information for the properties, including selected submarket information, if
available, (vii) modified the Company's assumptions, as necessary, to conform
to certain known current market conditions and Kenneth Leventhal's
understanding of the assets, (viii) updated the valuation model prepared by
Kenneth Leventhal in 1993 and 1994 utilizing current market and/or assumption
modifications determined from the procedures provided above, and (ix)
calculated estimated asset values on both a going concern and liquidation value
basis.
Copies of Kenneth Leventhal's reports will be made available for inspection
and copying at the principal executive offices of the Company during regular
business hours by any holder of Outstanding Notes, Outstanding Common Shares
and Other Secured Claims and Unsecured Claims of the Company, or the
representative of such holder who has been designated in writing as such by
such holder.
REPORTS OF HOULIHAN LOKEY AS FINANCIAL ADVISOR TO THE COMPANY
Houlihan Lokey was engaged to act as the Company's financial advisor and to
render its opinion in connection with the Restructuring and a possible sale of,
or investment in, the Company pursuant to an engagement letter executed on
February 11, 1993. In connection therewith, Houlihan Lokey performed a due
diligence investigation on a majority of the Company's assets and prepared
sales material to be presented to prospective investors in or purchasers of the
Company. In addition, Houlihan Lokey performed valuations of the Company and
explored several alternative restructuring possibilities for the Company
including, but not limited to, a merger or sale of the Company, a refinancing
coupled with a debt for equity exchange offer and a liquidation of the Company.
In connection therewith, Houlihan Lokey made numerous presentations to the
Board of Trustees and the Creditors' Committee. See "--Presentations to the
Company's Board of Trustees" and "--Presentations to the Creditors' Committee"
below.
Engagement. Houlihan Lokey is a nationally recognized investment banking firm
which regularly engages in the valuation of businesses and their securities in
connection with restructurings both in and out of bankruptcy. Houlihan Lokey
provides financial advisory services and execution capabilities in the areas of
financial restructuring, investment banking, business and securities valuation
and investment management. In the area of financial restructuring, Houlihan
Lokey has provided financial advice, valuation analyses and investment banking
services to debtors, secured and unsecured creditors, acquirors, employee stock
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ownership plans, equity holders and other parties-in-interest involved with
financially troubled companies both in and out of bankruptcy. The Houlihan
Lokey Financial Restructuring Group is headed by four managing directors
overseeing a staff of over 25 professionals dedicated to financial
restructuring engagements. The Company selected Houlihan Lokey as its financial
advisor because of Houlihan Lokey's qualifications, expertise and reputation in
the area of financial restructuring. Prior to its engagement, Houlihan Lokey
did not have any material relationship with the Company.
As compensation for its services as financial advisor to the Company in
connection with the Restructuring, the Company initially agreed to pay Houlihan
Lokey a fee of $75,000 per month (the "Monthly Fee"), plus reimbursement for
reasonable and actual out-of-pocket expenses incurred by Houlihan Lokey in
connection with the Restructuring. In addition, if the Restructuring is
consummated, Houlihan Lokey will receive a fee equal to 0.5% of the face amount
of debt restructured, modified, converted or forgiven payable upon closing of
the Restructuring (the "Completion Fee"). The Company also agreed to indemnify
Houlihan Lokey for certain liabilities arising from its participation as the
Company's advisor. Pursuant to a letter agreement that memorialized certain
prior verbal modifications to the terms of Houlihan Lokey's engagement dated
March 16, 1995, effective January 1, 1994, Houlihan Lokey had reduced its
Monthly Fee to $50,000 and effective June 1, 1994, Houlihan Lokey had reduced
its Monthly Fee to $10,000. Effective November 1, 1994, the Company had agreed
to resume paying Houlihan Lokey a monthly fee of $75,000 (the "New Monthly
Fee"), provided that the New Monthly Fees (beginning November 1, 1994, and
continuing through the closing of the Restructuring) would be fully credited
against the Completion Fee. Furthermore, Houlihan Lokey's aggregate Completion
Fee was set at $1,450,000 less the New Monthly Fees paid to, and received by,
Houlihan Lokey (the "Completion Fee Balance") and pursuant to a letter
agreement dated April 7, 1995, the Completion Fee Balance was further reduced
by $112,500. The Completion Fee Balance is payable in cash only. As of the date
of this Disclosure Statement, Houlihan Lokey has been paid $450,000 in New
Monthly Fees, reducing the Completion Fee Balance to $887,500 to be paid 2 days
prior to the filing of a Chapter 11 petition by the Company.
Presentations to the Company's Board of Trustees. During the period from
February 11, 1993 through the date of this Disclosure Statement, Houlihan Lokey
prepared and presented monthly overviews, both written and oral, on the status
of the Restructuring. Such reports included updates on the progress of Houlihan
Lokey's due diligence, the status of potential third-party investors and/or
purchasers, the status of negotiations with the Creditors' Committee, the
status of the valuation of the Company's restructure value, summaries and
analyses of restructuring proposals submitted by third-party investors and
possible Company counter-proposals and summary analyses of various internal
restructuring scenarios. See "--Background of the Restructuring--Development of
the Current Restructuring" above.
While the Company was negotiating with the Creditors' Committee, the Company
and Houlihan Lokey met with several prospective investors to discuss possible
third-party investment in or purchase of the Company. Although all potential
third-party investors were offered an opportunity to propose restructuring
alternatives, only three prospective investors made formal proposals to the
Company and the Creditors' Committee. In connection therewith, Houlihan Lokey
prepared summary descriptions and analyses of each such proposal as well as
possible counter-proposals. In analyzing each proposal, Houlihan Lokey also
prepared summaries of equity ownership, noteholder recoveries and shareholder
recoveries.
Presentations to the Creditors' Committee. Houlihan Lokey also made several
presentations to the Creditors' Committee during the period from April 8, 1993
through June 24, 1993. Such presentations included an overview of the REIT
industry and the capital markets for REITs, a financial overview of the Company
and its investment portfolio, overviews of possible internal restructuring
proposals, the status of potential third-party investors and/or purchasers, and
summaries and analyses of restructuring proposals submitted by third-party
investors.
Valuation Reports. At the Company's request, Houlihan Lokey performed several
valuations of the Company on a going concern basis utilizing a variety of
generally accepted valuation methods. See
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"--Valuation Methodologies" below. Houlihan Lokey's most recent valuation
report presented to the Board of Trustees, the Equity Committee and the
Creditors' Committee, prepared as of December 31, 1993, valued the Company's
Restructure Value between $261 million and $317 million. "Restructure Value"
means the fair market value of the Company available for those noteholders,
unsecured creditors and shareholders in a restructuring. Because the valuation
analyses for these reports were performed as of dates more than one year ago,
the Company's actual going concern value may have changed significantly due to
changes in the various factors on which such an analysis depends. Thus,
investors are cautioned not to place undue reliance on the range of values set
forth in Houlihan Lokey's valuation reports.
Valuation Methodologies. In connection with the preparation of its valuations
and the various written and oral presentations it made to the Company and
Creditors' Committee (the "Houlihan Lokey Materials") from time to time,
Houlihan Lokey utilized a variety of generally accepted valuation methods. Set
forth below is a brief summary of the valuation methods employed by Houlihan
Lokey in connection with the preparation of its valuations and the Houlihan
Lokey Materials. The summary set forth below does not purport to be a complete
description of the analyses or data presented by Houlihan Lokey. The
preparation of a valuation opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. In arriving at its opinion, Houlihan
Lokey did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, notwithstanding the
separate factors summarized below, Houlihan Lokey believes that its analyses
must be considered as a whole and that selecting portions of its analyses or
certain of the factors considered by it, without considering all analyses and
factors, could create a misleading or incomplete view of the process underlying
such analyses and its opinion.
In preparing its valuations and the Houlihan Lokey Materials, Houlihan Lokey
relied upon the accuracy and completeness of the financial and other
information provided to it by the Company and did not assume any responsibility
for any independent verification of such information. In relying on the
financial and other information provided to it by the Company, Houlihan Lokey
assumed that such information was reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by the
Company's management as to the expected future results of operations and
financial condition of the Company to which such analyses or forecasts relate.
Houlihan Lokey further relied upon the assurances of the Company's management
that it is unaware of any facts that would make the information provided to
Houlihan Lokey incomplete or misleading. No limitations were imposed by the
Company upon Houlihan Lokey with respect to the investigations made or
procedures followed by Houlihan Lokey in rendering its analyses and opinions,
and the Company's management cooperated fully with Houlihan Lokey in connection
therewith. The Houlihan Lokey Materials and Houlihan Lokey's valuations were
based on economic, monetary, market and other conditions as they existed and
could be evaluated as of the respective dates of the Houlihan Lokey Materials
and Houlihan Lokey's valuations.
In preparing its valuations and conducting its analyses and preparing its
numerous presentations, Houlihan Lokey, among other things, (i) reviewed
summary documentation on all of the Company's material assets including the
Company's loan collateral, (ii) interviewed all asset managers, (iii) reviewed
and provided input to the formulation of individual asset disposition and
business plans, (iv) assisted in the formulation of the Company's prepared
asset cash flow forecasts, (v) performed on-site visits of selected
Philadelphia and Los Angeles assets (collateral and ownership interests), (vi)
prepared due diligence books to provide to prospective investors, which
included property/collateral descriptions, cash flow forecasts, lease
summaries, photographs of property, historical operating statements and
consolidated Company cash flow forecasts, (vii) compiled a due diligence
library for prospective investors, which included narrative written summaries
for each asset reviewing the initial funding date, current book value, specific
valuation reserves, charge-off amounts, interest rate terms (if applicable),
description and location of collateral or equity investment, summary market
area analysis, leasing and property management information, latest available
leasing summaries, five-year cash flow projections, the latest appraisals (if
conducted within the past 18 months), environmental reports, summary and actual
operating statements of collateral or equity investment, and
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photographs of property, (viii) reviewed and analyzed certain historical
business and financial information relating to the Company, including the
Company's Annual Reports to Stockholders and Annual Reports on Form 10-K for
the fiscal years ended September 30, 1990 through September 30, 1994, and the
Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 1990
through March 31, 1995, (ix) reviewed certain operating and financial
information, including internal projections and forecasts, and other data
provided to it by the Company's management relating to the Company's business
and prospects, (x) held discussions with the Company's management regarding the
Company's business, prospects and strategic objectives, and (xi) conducted such
other financial studies, analyses, inquiries and investigations as it deemed
appropriate.
In connection with its valuations of the Company, Houlihan Lokey utilized the
following methodologies: (i) asset valuation analysis; (ii) analysis based upon
capitalization of 1993 net operating cash flow; and (iii) consolidated
discounted cash flow analysis.
. Asset Valuation. First, instead of valuing each asset on an individual
basis, Houlihan Lokey classified the Company's assets according to a
general risk-based classification (i.e., stable, long-term equity
investment or high risk loan in foreclosure proceedings, etc.). The risk
levels were not quantifiably defined, and the risk classifications
determined were largely based on issues unique to a distressed
commercial loan portfolio. Then, with respect to each class of assets,
Houlihan Lokey applied selected discount rates and terminal
capitalization rates to the projected cash flows. Thus, the projected
cash flows of all assets within a particular classification were
present-valued using the same discount and capitalization rates. The
discount and capitalization rates were based solely on risk
classification and were not adjusted for property type, location or
other characteristic. The discount and capitalization rates were
determined by researching such rates as announced in various
publications, and compiling information off of Houlihan Lokey's
databases, queries with third-party real estate professionals and
analysis of interest rates, public company market capitalization
multiples and other indications of rates of return on investments.
Finally, the third-party secured debt and capitalized 1993 corporate
administrative expenses were subtracted from the sum of the discounted
cash flows of each risk class.
. Capitalization of 1993 Net Operating Cash Flow. In this analysis,
Houlihan Lokey valued the Company's Restructure Value by applying a
range of capitalization rates to the 1993 net operating cash flow (net
of corporate administrative expenses). The capitalization rates applied
in this analysis were determined by researching such rates as announced
in various publications, and compiling information off of Houlihan
Lokey's databases, queries with third-party real estate professionals
and analysis of interest rates, public company market capitalization
multiples and other indications of rates of return on investments. This
analysis used a single capitalization rate on the Company's overall net
operating cash flow and therefore, by definition, that rate could not be
adjusted by property type or location. An analysis was not performed to
determine capitalization rates for individual properties or risk
classification except as discussed above.
. Consolidated Discounted Cash Flow Analysis. Houlihan Lokey prepared a
consolidated discounted cash flow analysis utilizing the following
assumptions: (i) 100% deleveraging; (ii) no external capital infusion;
(iii) minimum required dividend payments; and (iv) reinvestment of
available cash (all cash in excess of $5 million) into new real estate
equities, assuming marginal acquisition leverage at 50%, a net operating
income hurdle rate of 10%, a 3% capital expenditure reserve of net
operating income and a net operating income annual growth rate of 4%.
Using the valuation methods set forth above, Houlihan Lokey determined the
range of value of the Company on a going concern basis using the asset
valuation analysis, the analysis based upon capitalization of 1993 net
operating cash flow and the consolidated discounted cash flow analysis. Using
these ranges of value developed from these analyses of the Company on a going
concern basis as well as other quantitative and qualitative factors discussed
above, Houlihan Lokey arrived at the Company's Restructure Value as set forth
above. See "--Valuation Reports."
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BRIEF EXPLANATION OF CHAPTER 11 REORGANIZATION
Chapter 11 of the Bankruptcy Code is the principal reorganization chapter of
the Bankruptcy Code. Under Chapter 11, a debtor is authorized to reorganize its
business for the benefit of itself and its creditors and shareholders.
Confirmation of a plan of reorganization is the principal objective of a
Chapter 11 case.
In general, a Chapter 11 plan of reorganization (i) divides claims and equity
interests into separate classes, (ii) specifies the property that each class is
to receive under the plan, and (iii) contains other provisions necessary for
the reorganization of the debtor.
A Chapter 11 plan may specify that certain classes of claims or equity
interests are either reinstated or their legal, equitable and contractual
rights are to remain unchanged by the reorganization effectuated by the plan.
Such classes are referred to under the Bankruptcy Code as "unimpaired" and,
because of such treatment, are deemed to accept the plan. Accordingly, it is
not necessary to solicit votes from the holders of claims or equity interests
in such classes.
All other classes of claims and equity interests are "impaired" claims and
equity interests that are entitled to vote on the plan. As a condition to
confirmation, the Bankruptcy Code generally requires that each impaired class
of claims or equity interests that will receive or retain property under a plan
of reorganization vote to accept the plan of reorganization. In order for a
class to accept a plan, acceptances must be received from (i) the holders of
claims constituting at least two-thirds in dollar amount and more than one-half
in number of the allowed claims in each impaired class of claims that have
voted to accept or reject the plan, and (ii) the holders of at least two-thirds
in amount of the allowed equity interests in each impaired class of equity
interests that have voted to accept or reject the plan.
A Chapter 11 plan also may specify that certain classes will not receive any
distribution of property. While such classes are impaired, such classes are
deemed to reject the plan and, therefore, need not be solicited to vote to
accept or reject the plan.
If any class or classes of claims or equity interests entitled to vote
rejects the plan, upon request of the plan proponents, the Bankruptcy Court may
nevertheless confirm the plan if, among other things, certain minimum treatment
standards are met with respect to such class or classes. See "--Confirmation of
the Prepackaged Plan--Nonconsensual Confirmation" below.
Chapter 11 of the Bankruptcy Code does not require each holder of a claim or
equity interest to vote in favor of a plan of reorganization in order for the
Bankruptcy Court to confirm the plan. However, the Bankruptcy Court must find
that the plan of reorganization meets a number of statutory tests (other than
the voting requirements described in this section) before it may confirm, or
approve, the plan of reorganization. Many of these tests are designed to
protect the interests of holders of claims or equity interests who do not vote
to accept the plan of reorganization but who will nonetheless be bound by the
plan's provisions if it is confirmed by the Bankruptcy Court. See "--
Confirmation of the Prepackaged Plan--Feasibility Test" and "--Confirmation of
the Prepackaged Plan--Best Interests of Creditors Test; Liquidation Value"
below.
CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS
Section 1123 of the Bankruptcy Code provides that a plan of reorganization
must classify claims against and equity interests in a debtor. Under section
1122 of the Bankruptcy Code, a plan must classify claims and equity interests
into classes that contain substantially similar claims or interests. The
Prepackaged Plan divides the Claims of known entities that hold a Claim against
the Company on the Effective Date that arose or is deemed to have arisen before
the Petition Date, including a Claim against the Company of a kind specified in
sections 502(g), 502(h) or 502(i) of the Bankruptcy Code and known holders of
Interests into classes and sets forth the treatment offered each class. The
Company believes it has classified all Claims and Interests in compliance with
the provisions of section 1122, but once a Chapter 11 case has been commenced,
it is possible that a holder of a Claim or Interest may challenge the Company's
classification of Claims and Interests and that the Bankruptcy Court may find
that a different classification is required for the Prepackaged Plan to be
confirmed. In such event, it is the present intention of the Company, to the
extent
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permitted by the Bankruptcy Code and the provisions of the Prepackaged Plan, to
amend or revoke such plan and file an amended or different plan that would
modify the classification of Claims or Interests as is required by the
Bankruptcy Court for confirmation.
Only classes that are impaired under the Prepackaged Plan are entitled to
vote to accept or reject the Prepackaged Plan. See "The Plan Solicitation;
Voting Procedures."
Claims and Interests are classified for all purposes including voting,
confirmation and distribution pursuant to the Prepackaged Plan, as follows:
Class 1--Priority Claims
Class 2--Claims of Holders of Outstanding Notes (Impaired)
Class 3--Other Secured Claims (Impaired)
Class 4--Unsecured Claims (Impaired)
Class 5--Interests of Holders of Outstanding Common Shares
(Impaired)
Class 6--Interests of Holders of Outstanding Stock Rights
Only Claims and Interests that are not in dispute, are not contingent, are
not unliquidated in amount and are not subject to a pending objection or
estimation proceeding (respectively, "Allowed Claims" and "Allowed Interests")
are entitled to receive distributions under the Prepackaged Plan. The following
describes the Prepackaged Plan's classification of Claims against and Interests
in the Company and the treatment that holders of Allowed Claims and Allowed
Interests will receive for such Allowed Claims and Allowed Interests under the
Prepackaged Plan if it is confirmed, unless such holders were to agree to
accept less favorable treatment by settlement or otherwise.
Such treatment will be in full satisfaction, release and discharge of such
holder's respective Claims against or Interests in the Company, except as
provided in the Prepackaged Plan. The following summary of proposed
distributions under the Prepackaged Plan does not purport to be complete and is
subject to and qualified in its entirety by, the Prepackaged Plan.
(1) Administrative Claims. "Administrative Claims" are Claims for costs and
expenses of administration allowed under section 503(b) of the Bankruptcy Code
and referred to in section 507(a)(1) of the Bankruptcy Code, including, without
limitation, (a) the actual and necessary costs and expenses incurred after the
Petition Date of preserving the estate created by the commencement of the
Reorganization Case under section 541 of the Bankruptcy Code (the "Estate") and
operating the business of the Company (such as wages, salaries or commissions
for services and payments for goods), (b) compensation for legal, financial
advisory, accounting and other services and reimbursement of expenses awarded
or allowed under section 330 of the Bankruptcy Code, and (c) all fees and
charges assessed against the Estate under 28 U.S.C. (S) 1930.
In general, subject to the bar date provisions contained in the Prepackaged
Plan, the Company or any successor thereto by merger, consolidation or
otherwise, from and after the Effective Date (the "Reorganized Debtor") will
pay to each holder of an Administrative Claim, on account of the Administrative
Claim and in full satisfaction thereof, cash equal to the amount of such
Administrative Claim, unless the holder agrees or will have agreed to other
less favorable treatment of such Claim. Except as otherwise provided in the
Prepackaged Plan, payment on an Administrative Claim will be made on the later
of (a) the Effective Date, and (b) the date such payment would have become due
under the terms of such Claim in the absence of the Reorganization Case.
All payments to professionals for compensation and reimbursement of expenses
and all payments to reimburse expenses of members of any official committee
appointed in the Reorganization Case will be made in accordance with the
procedures established by the Bankruptcy Code and the Bankruptcy Rules relating
to the payment of interim and final compensation and expenses and in accordance
with any order of the Bankruptcy Court. The Bankruptcy Court will review and
determine all requests for compensation and reimbursement of expenses.
Assuming that there is no significant litigation initiated or objection filed
with respect to the Prepackaged Plan, the Company estimates that its
Administrative Claims payable to professional persons and service providers
will, in the aggregate, not exceed $250,000.00.
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In addition to the foregoing, section 503(b) of the Bankruptcy Code provides
for the payment of compensation to creditors, indenture trustees and other
persons making a "substantial contribution" to a Chapter 11 case and to
attorneys for, and other professional advisors to, such persons. Certain
entities may file applications with the Bankruptcy Court for allowances of
compensation and reimbursement of expenses for substantial contribution. The
amounts that such entities may seek for such compensation cannot be estimated
by the Company at this time. The Company is presently unaware of any entities
that may seek compensation under the substantial contribution doctrine.
Requests for compensation and reimbursement of expenses under this substantial
contribution doctrine must be approved by the Bankruptcy Court after a hearing
on notice at which the Company and other parties in interest may participate,
and, if appropriate, object to the allowance of any compensation and
reimbursement of expenses.
(2) Class 1: Priority Claims. (a) Section 507(a)(8) Priority Claims. Certain
Claims for unpaid taxes are entitled to priority in right of payment under
section 507(a)(8) of the Bankruptcy Code ("Priority Tax Claims"). Pursuant to
the Prepackaged Plan, unless the applicable taxing agency agrees to less
favorable treatment, the Reorganized Debtor will pay to each holder of a
Priority Tax Claim that is also an Allowed Claim deferred cash payments, over a
period not exceeding six years from the date of assessment of such Claim, in an
aggregate amount equal to the amount of such Allowed Claim, plus interest from
the Effective Date on the unpaid portion of such Allowed Claim (without penalty
of any kind) at the rate prescribed below. The payment of the amount of each
such Allowed Claim will be made in equal semi-annual installments due on the
latest of (i) the Effective Date, (ii) 30 calendar days after the date on which
an order allowing such Claim becomes a Final Order (as defined below), and
(iii) such other time or times as may be agreed to by the holder of such Claim
and the Reorganized Debtor. Each installment will include simple interest on
the unpaid portion of such Allowed Claim, without penalty of any kind, at the
statutory rate of interest provided for such taxes under applicable non-
bankruptcy law; provided, however, that the Reorganized Debtor will have the
right to pay any Priority Tax Claim that is also an Allowed Claim, or any
remaining balance of such Claim, in full, at any time on or after the Effective
Date, without premium or penalty of any kind. The Company estimates that there
will be no Priority Tax Claims that are also Allowed Claims. "Final Order"
means an order or judgment of the Bankruptcy Court or other court of competent
jurisdiction as to which the time to appeal, seek leave to appeal, petition for
certiorari or move for reargument or rehearing has expired and as to which no
appeal, petition for certiorari or other proceedings for reargument, rehearing
or leave to appeal shall have been waived in writing in form and substance
satisfactory to the Company or the Reorganized Debtor or, in the event that an
appeal, writ of certiorari, or reargument or rehearing thereof or leave to
appeal has been motioned for or sought, such order of the court shall have been
affirmed by the highest court to which such order was appealed, or certiorari
has been denied or from which reargument or rehearing or leave to appeal was
motioned for or sought, and the time to take any further appeal, petition for
certiorari, move for reargument or rehearing or seek leave to appeal shall have
expired.
(b) Other Priority Claims. Certain Claims are entitled to a priority in right
of payment pursuant to sections 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of
the Bankruptcy Code ("Other Priority Claims"). Examples of Claims of this type
include, without limitation, (i) unsecured Claims for accrued employee
compensation, including vacation, severance and sick-leave pay payable in
accordance with the Company's existing compensation procedures, earned within
90 days prior to the commencement of the Reorganization Case, to the extent of
$4,000 per employee, and (ii) contributions to employee benefit plans arising
from services rendered within the 180 days prior to the commencement of the
Reorganization Case, but only to the extent of (A) the number of employees
covered by such plans multiplied by $4,000, less (B) the aggregate amount paid
to such employees for accrued employee compensation. The Company intends to ask
the Bankruptcy Court for authorization to pay all pre-petition employee
compensation and benefits on a current basis. To the extent not previously
paid, each holder of a Priority Claim (as defined below) that is also an
Allowed Claim will be paid the full amount of such Priority Claim in cash on
the Effective Date (or as soon as practicable after the date on which any such
Claim is allowed if the date of allowance is later than the Effective Date).
The Company estimates that there will be no Priority Claims that are also
Allowed Claims. "Priorty Claim" means any Claim, other than an Administrative
Claim, of a Creditor to the extent such Claim is entitled to priority under
section 507(a) of the Bankruptcy Code.
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(3) Class 2: Outstanding Notes. Class 2 consists of all Claims under or
evidenced by the Outstanding Notes, the Outstanding Note Indenture, the
Outstanding Collateral Agreement, or any document, instrument or agreement
delivered in connection therewith. The holders of a majority of the Outstanding
Notes have elected, pursuant to section 1111(b)(2) of the Bankruptcy Code, to
treat their entire Claim as secured by the collateral under the Outstanding
Collateral Agreement. Pursuant to the Prepackaged Plan, the Reorganized Debtor
will distribute to each holder of Class 2 Claims that are also Allowed Claims
(other than the Class 2 Expense Claims (as hereinafter defined), which will be
treated as described below) its pro rata share of (i) $110,000,000 in principal
amount of New Senior Notes, (ii) cash in an amount not less than $50,000,000
(minus any amounts paid to the holders of the Outstanding Notes between March
1, 1995, and the Petition Date pursuant to the Agreement of Understanding),
held by the Reorganized Debtor on the Effective Date, in excess of cash in an
amount not to exceed $10,000,000, for use by the Reorganized Debtor in its
business operations (the "Initial Cash Reserve Fund"), and (iii) approximately
10,890,180 New Common Shares (which will represent 97% of the Common Shares
outstanding on the Effective Date if the Prepackaged Plan is accepted by
holders of Outstanding Common Shares)(Class 5)). By way of example, the holders
of Class 2 Claims that are also Allowed Claims will receive their pro rata
portion of the foregoing consideration for each $10,000 in principal amount of
Outstanding Notes (subject to rounding for fractional interests):
New Senior Notes $3,793 in principal amount
Cash $1,725 (assuming $50 million is distributed
in the aggregate)
New Common Shares 375.5 shares
If holders of Outstanding Common Shares do not vote to accept the Prepackaged
Plan, then all Outstanding Common Shares will be cancelled, and holders of
Outstanding Notes will receive New Common Shares which will represent 99.5% of
the Common Shares outstanding on the Effective Date with 0.5% of the New Common
Shares to be distributed to charities designated by the Principal Holders.
The Company estimates that Class 2 Claims that are also Allowed Claims will
not exceed $355 million.
On the Effective Date or as soon thereafter as is practicable, each holder of
a Class 2 Claim that is also an Allowed Claim receiving 5% or more of the New
Common Shares or New Senior Notes will be entitled to enter into the
Registration Rights Agreement between the Company and each such holder relating
to the New Securities (the "Registration Rights Agreement").
The Reorganized Debtor will pay to the applicable party entitled to payment
an amount equal to the amount of any unpaid fees and reasonable unpaid out-of-
pocket costs or expenses earned or incurred through the Effective Date by the
Outstanding Indenture Trustee (as hereinafter defined) or the Principal
Holders, including, without limitation, reasonable out-of-pocket costs and
expenses and reasonable fees of legal counsel to the Outstanding Indenture
Trustee and the attorneys for the Principal Holders (the "Class 2 Expense
Claims"). Payment of such Class 2 Expense Claims will constitute distributions
on account of Allowed Claims in Class 2, in addition to the distributions
provided for such Class as described above and distributions otherwise provided
under the Prepackaged Plan to holders of Class 2 Claims that are also Allowed
Claims will not be reduced on account of such payment of Class 2 Expense
Claims. Notwithstanding anything to the contrary, the Reorganized Debtor's
obligation to pay Class 2 Expense Claims will be subject to the same bar date
and procedural provisions set forth in the Prepackaged Plan for Administrative
Claims and the procedures regarding resolution of contested Claims and
Interests set forth in the Prepackaged Plan. Amounts payable to the Outstanding
Indenture Trustee are subject to approval of the Bankruptcy Court pursuant to
section 1129(a)(4). The Company estimates that Class 2 Expense Claims will not
exceed $100,000, of which not more than $10,000 is estimated to represent fees
payable to the Outstanding Indenture Trustee.
The terms and conditions of the New Senior Notes, including terms and
conditions governing payment of principal and interest, covenants of the
Company and rights and remedies of the holders, are set forth in, and will be
governed by, an Amended and Restated Indenture (the "New Senior Note
Indenture"). See
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"Description of New Senior Notes." The terms and conditions of the New Common
Shares, including terms and conditions governing payment of dividends and
voting, will be governed by the Amended and Restated Declaration of Trust as
effected pursuant to the Prepackaged Plan. See "Description of Capital Stock."
(4) Class 3: Other Secured Claims. This class consists of all Claims, other
than Claims of a holder of Outstanding Notes or any Class 2 Expense Claims, of
a Creditor secured by a lien on property of the Estate, to the extent of the
value, as determined by the Bankruptcy Court pursuant to section 506(a) of the
Bankruptcy Code, of such Creditor's interest in such property of the Estate. To
the extent not previously paid, all Other Secured Claims that are also Allowed
Claims will be (at the option of the Reorganized Debtor and with the consent of
the Principal Holders) (a) paid in full, in cash, on the Effective Date (or as
soon as practicable after the date on which any such Claim is allowed), (b)
paid upon such other less favorable terms as may be mutually agreed upon by the
Reorganized Debtor and the holders of such Claims, or (c) reinstated and paid
or performed by the Reorganized Debtor in accordance with section 1124 of the
Bankruptcy Code, or the legal, equitable and contractual rights to which such
Claim entitles the holder of such Claim will be left unaltered. The Company
estimates that there will be no Class 3 Claims that are also Allowed Claims.
(5) Class 4: Unsecured Claims. This class consists of any Claim that is not
an Administrative Claim, a Priority Claim, a Claim under or evidenced by the
Outstanding Notes, the Outstanding Note Indenture, the Outstanding Collateral
Agreement, the Prior Plan, an Other Secured Claim, or a Claim based upon the
Outstanding Common Shares or Outstanding Stock Rights (as hereinafter defined).
Each holder of a Class 4 Claim will receive as of the Effective Date, or as
soon thereafter as the Claim becomes an Allowed Claim, whichever is later, cash
equal to the amount of such Allowed Claim unless the holder of such Claim
agrees to less favorable treatment. The Company may ask the Bankruptcy Court
for authorization to pay some or all Unsecured Claims that are also Allowed
Claims on a current basis. The Company estimates that Class 4 Claims that are
also Allowed Claims will not exceed $25,000.
(6) Class 5: Outstanding Common Shares. This class consists of all Interests
of holders of Outstanding Common Shares. If holders of Class 5 Interests that
are also Allowed Interests vote to accept the Prepackaged Plan, holders of
Outstanding Common Shares will retain their existing Common Shares, subject to
the Reverse Stock Split and the issuance of New Common Shares to holders of
Class 2 Claims that are also Allowed Claims after which such holders will hold
shares representing 3% of the aggregate of the Common Shares outstanding on the
Effective Date. If holders of Outstanding Common Shares do not vote to accept
the Prepackaged Plan, all Outstanding Common Shares will be cancelled and all
holders of Interests in Class 5 will receive or retain no property under the
Prepackaged Plan on account of such Interests.
(7) Class 6: Outstanding Stock Rights. This class consists of any right to
purchase or otherwise acquire Common Shares of the Company, and any stock
appreciation or similar rights relating to Common Shares of the Company,
existing prior to the Effective Date ("Outstanding Stock Rights"). Outstanding
Stock Rights do not include any rights arising solely out of the ownership of
the Outstanding Common Shares. The Outstanding Stock Rights will be cancelled
under the Prepackaged Plan. No distributions will be made to holders of
Outstanding Stock Rights under the Prepackaged Plan. All Claims or Interests in
Class 6 will not receive or retain any property under the Prepackaged Plan on
account of such Claims or Interests.
SUMMARY OF OTHER PROVISIONS OF THE PREPACKAGED PLAN
Officers and Trustees. As of the Effective Date, the Principal Holders and
the New Major Holder have agreed among themselves that the initial members of
the Board of Trustees of the Reorganized Debtor will consist of seven members,
including (a) the new President and Chief Executive Officer of the Reorganized
Debtor, (b) one member selected by the New Major Holder, and (c) five members
selected by the Principal Holders. See "Management" for information regarding
the new President and Chief Executive Officer and new Board of Trustees. Such
persons will be deemed elected to the Board of Trustees, and such elections
will
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be deemed effective as of the Effective Date, without any requirement of
further action by shareholders or the Board of Trustees of the Company or the
Reorganized Debtor. The persons identified as officers of the Reorganized
Debtor under the caption "Management" will serve as the initial officers of the
Reorganized Debtor as of the Effective Date, however it is anticipated that the
new Board of Trustees may replace one or more officers in addition to its
selection of the new President and Chief Executive Officer. Subject to any
requirement of Bankruptcy Court approval under section 1129(a)(5) of the
Bankruptcy Code, those persons designated as trustees and officers of the
Reorganized Debtor will assume their offices as of the Effective Date and will
continue to serve in such capacities thereafter, pending further action of the
Board of Trustees or shareholders of the Reorganized Debtor in accordance with
the Amended and Restated Declaration of Trust, the Reorganized Debtor's bylaws
and applicable state law.
Prior to the confirmation of the Prepackaged Plan, in accordance with section
1129(a)(5) of the Bankruptcy Code, the Company will disclose the identity of
any other insider that will be employed or retained by the Company and the
nature of any compensation for such insider.
Executory Contracts and Leases. Unless previously assumed or rejected by
order of the Bankruptcy Court pursuant to section 365 of the Bankruptcy Code,
as of the Effective Date, the Reorganized Debtor will assume each of the
executory contracts and leases of the Company that are not rejected as set
forth in the second succeeding paragraph and each of the executory contracts
and unexpired leases which are identified in the Schedule of Assumed Executory
Contracts and Unexpired Leases which is Exhibit E to the Prepackaged Plan. The
Company reserves the right at any time prior to the hearing on confirmation,
with the consent of the Principal Holders, to amend Exhibit E either to (a)
delete any executory contract or lease listed therein and provide for its
rejection pursuant to the Prepackaged Plan or (b) add any executory contract or
lease to Exhibit E, thus providing for its assumption (or assumption and
assignment) pursuant to the Prepackaged Plan. The Company will provide notice
of any amendment to Exhibit E to the parties to the executory contract or lease
affected thereby. The order of the Bankruptcy Court confirming the Prepackaged
Plan pursuant to section 1129 of the Bankruptcy Code (the "Confirmation Order")
will constitute an order of the Bankruptcy Court approving all such assumptions
described in the Prepackaged Plan, pursuant to section 365 of the Bankruptcy
Code, as of the Effective Date.
Any monetary defaults under an executory contract or lease to be assumed
under the Prepackaged Plan will be satisfied, pursuant to section 365(b)(1) of
the Bankruptcy Code in either of the following ways: (1) by payment of the
default amount in cash on the Effective Date, or (2) by payment of the default
amount on such other terms as agreed to by the Reorganized Debtor and the other
parties to such executory contract or lease. In the event of a dispute
regarding (i) the amount of any cure payments, (ii) the ability of the
Reorganized Debtor to provide adequate assurance of future performance under
the contract or lease to be assumed, or (iii) any other matter pertaining to
assumption (or assumption and assignment) of the contract or lease to be
assumed, the cure payments required by section 365(b)(1) of the Bankruptcy Code
will be made following the entry of a Final Order by the Bankruptcy Court
resolving the dispute and approving assumption.
Unless previously assumed or rejected by order of the Bankruptcy Court
pursuant to section 365 of the Bankruptcy Code, on the Effective Date, all
documents, agreements, contracts and leases listed on the Schedule of Rejected
Executory Contracts and Unexpired Leases, which is Exhibit F to the Prepackaged
Plan, will be rejected, to the extent, if any, that any of the foregoing
constitute executory contracts or unexpired leases, and without conceding or
admitting that they constitute executory contracts or unexpired leases or that
the Company has any liability thereunder. The Company reserves the right at any
time prior to the Confirmation Date with the consent of the Principal Holders,
to amend Exhibit F either to (a) delete any contract or lease listed therein
and provide for its assumption pursuant the Prepackaged Plan, or (b) add any
contract or lease to Exhibit F, thus providing for its rejection pursuant to
the Prepackaged Plan. The Company will provide notice of any amendment of
Exhibit F to the parties to the contract or lease affected thereby.
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The Confirmation Order will constitute an order of the Bankruptcy Court
approving all such rejections, pursuant to section 365 of the Bankruptcy Code,
as of the Effective Date. Any Claim for damages arising from the rejection
under the Prepackaged Plan of an executory contract or unexpired lease must be
filed within 30 days after the mailing of notice of confirmation or be forever
barred and unenforceable against the Company, its Estate, the Reorganized
Debtor and its properties and barred from receiving any distribution under the
Prepackaged Plan on account of such Claim.
Releases. In consideration for the distributions to be made under the
Prepackaged Plan and the releases provided for therein, and in order to protect
the Reorganized Debtor from Claims for contribution or indemnity relating to
pre-Effective Date acts or omissions, as of the Effective Date, (i) the
Creditors' Committee, each holder of a Claim or Interest, and each of the
officers, directors, employees, members and professionals of such committee or
holder, shall be released to the extent permitted by applicable law from any
Released Claims that the Company may have against any of them (the "Debtor
Release"), (ii) the Company, the Reorganized Debtor, the Creditors' Committee,
the Principal Holders and their respective officers, directors, employees,
members and professionals (collectively, the "Debtor Releasees") shall be
released to the extent permitted by applicable law from any Released Claims
that any holder of a Claim or Interest may have against any of the Debtor
Releasees, and (iii) the Debtor Releasees shall be released to the extent
permitted by applicable law from any and all actions, causes of action, claims,
liabilities, demands and obligations of any kind or nature whatsoever that the
Company, the Reorganized Debtor, the Company's Estate or any holder of a Claim
or Interest may have against any of the Debtor Releasees that is based upon or
that arises out of any alleged act or omission by any of the Debtor Releasees
that is related to the Company, including, without limitation, the
Reorganization Case, the Outstanding Notes, the Outstanding Collateral
Agreement, the Prior Plan, the Outstanding Common Shares, the Outstanding Stock
Rights or any of the Claims or Interests in the Reorganization Case and any
Claims under the federal securities laws, provided, however, such release shall
not apply to Excluded Claims (as defined below) against the Company (the
release described in subparagraphs (ii) and (iii) above is hereinafter referred
to as the "Creditor/Shareholder Release") and no holder of a Claim shall be
released until such Claim is allowed.
Notwithstanding the foregoing, to the extent that a holder of a Claim or
Interest elects not to grant a Creditor/Shareholder Release and receive a
Debtor Release, such holder may make such election by indicating its election
to opt out of such releases in the space provided for such election on the
Ballot for accepting or rejecting the Prepackaged Plan. If a holder makes such
election, the Creditor/Shareholder Release will not be enforceable against such
holder, and such holder will not be released under the Debtor Release.
"Excluded Claims" mean any obligation that arises under the Prepackaged Plan or
any document, instrument or agreement to be executed, delivered or assumed
under the Prepackaged Plan, including without limitation, the obligations of
the Reorganized Debtor under the New Senior Notes, the New Senior Note
Indenture, the New Collateral Documents (as defined in the New Senior Note
Indenture) and all documents, instruments and agreements delivered or to be
delivered in connection therewith.
Conditions to Effectiveness. The following are conditions to the
effectiveness of the Prepackaged Plan: (i) the Prepackaged Plan has been
accepted by the requisite holders of Claims in Class 2 pursuant to section 1126
of the Bankruptcy Code; (ii) the clerk of the Bankruptcy Court has entered the
Confirmation Order, in form and substance satisfactory to the Company and to
the Principal Holders and (unless otherwise agreed to by the Principal Holders)
such order has become a Final Order; (iii) no court will have entered an order
modifying or staying the enforcement of the Confirmation Order or such order
shall have been vacated; (iv) the New Senior Note Indenture will have been
qualified under the Trust Indenture Act of 1939, as amended, and no stop order
shall have been issued with respect thereto; (v) the New Senior Note Indenture
and the New Collateral Documents will have been executed and delivered by the
Reorganized Debtor and each of its subsidiaries, and the New Indenture Trustee;
and (vi) all other material documents, instruments or agreements including,
including without limitation, the Amended and Restated Declaration of Trust
shall have been executed and delivered by the parties thereto and shall have
become effective.
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MEANS FOR IMPLEMENTATION OF THE PREPACKAGED PLAN
The Effective Date of the Prepackaged Plan shall be a business day selected
by the Debtor (i) that is at least 11 calendar days after the Confirmation Date
or, with the consent of the Principal Holders, at least one business day after
the Confirmation Date if the Bankruptcy Court enters an order making Bankruptcy
Rule 7062 inapplicable to the proceedings respecting the Confirmation Order or
otherwise determining that the Effective Date may occur immediately following
the Confirmation Date, and (ii) on which (a) no stay of the Confirmation Order
is in effect, and (b) all conditions to the Effective Date set forth in the
Prepackaged Plan have been satisfied or waived pursuant to the Prepackaged
Plan. On the Effective Date, the Prepackaged Plan will be implemented by the
Company as described below.
Objections to Claims or Interests and Prosecution of Disputed Claims. Except
as otherwise provided, applications of professionals for compensation and
reimbursement of expenses under the Prepackaged Plan, and except as otherwise
ordered by the Bankruptcy Court after notice and a hearing, objections to
Claims or Interests, including Administrative Claims, or to requests for
payment of Class 2 Expense Claims, shall be filed and served upon the holder of
such Claim or upon the Wilmington Trust Company, as trustee under the
Outstanding Note Indenture or any predecessor or successor trustee (the
"Outstanding Indenture Trustee"), or other relevant party as applicable, not
later than the later of (i) 90 days after the Effective Date, and (ii) 90 days
after a proof of Claim or Interest or request for payment of such Claim,
Interest, Administrative Claim or Class 2 Expense Claims is filed, unless this
period is extended by the Bankruptcy Court. After the Effective Date, the
Reorganized Debtor shall have the exclusive right to object to Claims,
Interests or Class 2 Expense Claims.
Notwithstanding any other provisions in the Prepackaged Plan, no payments or
distributions, if any, will be made on account of a Claim or Interest until
such Claim or Interest becomes an Allowed Claim or Allowed Interest. With
respect to any Disputed Claim (as hereinafter defined) or Disputed Interest (as
hereinafter defined) that becomes an Allowed Claim or Allowed Interest, all
payments due or distributions on account of such Claim or Interest that becomes
an Allowed Claim or Allowed Interest shall be made pursuant to the Prepackaged
Plan as soon as practicable after the date on which such Claim or Interest
becomes an Allowed Claim or Allowed Interest. See "--Distributions" below.
Distributions. Subject to the provisions of the Prepackaged Plan described
below, and except as otherwise provided in the Prepackaged Plan, property to be
distributed under the Prepackaged Plan to an impaired class (i) will be
distributed on or as soon as practicable after the Effective Date to each
holder of an Allowed Claim or an Allowed Interest of that class that is an
Allowed Claim or Allowed Interest as of the Effective Date, and (ii) will be
distributed to each holder of an Allowed Claim or an Allowed Interest of that
class that is allowed after the Effective Date, to the extent allowed, as soon
as practicable after such Claim or Interest becomes an Allowed Claim or Allowed
Interest. Property to be distributed under the Prepackaged Plan to a class that
is not impaired or on account of a Claim of a kind described in Bankruptcy Code
section 507(a)(1) or Class 2 Expense Claims will be distributed on the later of
(i) the later of the two dates specified in the preceding sentence, and (ii)
the date on which the distribution to the holder of the Allowed Claim would
have been due and payable under the terms of the Allowed Claim in the absence
of the Reorganization Case.
Holders of Outstanding Securities Entitled to Receive Distribution. Any
distribution under the Prepackaged Plan on account of an Allowed Claim under or
evidenced by Outstanding Notes will be made to the holders of record of such
Outstanding Notes as of the Effective Date. At the close of business on the
Effective Date, the transfer ledgers for the Outstanding Securities will be
closed, and there will be no further changes in the record holders of the
Outstanding Notes. The Company, the Reorganized Debtor and the Outstanding
Indenture Trustee will have no obligation to recognize any transfer of the
Outstanding Notes occurring on or after the Effective Date. The Company, the
Reorganized Debtor and the Outstanding Indenture Trustee will be entitled
instead to recognize and deal for all purposes hereunder with only those record
holders stated on the transfer ledgers for the Outstanding Notes, as of the
close of business on the Effective Date.
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Cancellation of Outstanding Securities and Related Agreements. Except as
expressly provided in the Prepackaged Plan or in the Confirmation Order, on the
Effective Date, the Outstanding Notes, the Outstanding Note Indenture, the
Outstanding Collateral Agreement, those certain pledge agreements executed in
connection with the Outstanding Note Indenture (the "Outstanding Pledge
Agreement"), the Prior Plan, the Outstanding Stock Rights, and all obligations
of the Company under any of the foregoing will be terminated and cancelled.
New Securities and Indenture. On or before the Effective Date, the
Reorganized Debtor, the New Indenture Trustee and Wilmington Trust Company and
William J. Wade, as collateral agent under the New Collateral Documents (the
"New Collateral Agent") will have executed the New Senior Note Indenture and
the New Collateral Documents, as applicable. On the Effective Date or as soon
as practicable thereafter, the Reorganized Debtor and each holder of Allowed
Class 2 Claims receiving 5% or more of the New Common Shares or of the New
Senior Notes will be entitled to execute and deliver the Registration Rights
Agreement. All of the documents described in this paragraph will become
effective and binding on the Reorganized Debtor on and as of the Effective
Date. On and after the Effective Date, the Reorganized Debtor will issue the
New Securities in accordance with the Prepackaged Plan.
Amended and Restated Declaration of Trust; Reverse Stock Split and
Indemnification. To effect the Reverse Stock Split and certain other changes to
the Company's Declaration of Trust, on the Effective Date, the Amended and
Restated Declaration of Trust (which is attached hereto as Annex B) will be
filed with the State Department of Assessments and Taxation of Maryland.
Pursuant to the Amended and Restated Declaration of Trust, each 33.33
Outstanding Common Shares will be automatically converted into one Common Share
and the authorized number of Common Shares will be 20,000,000. See "Description
of Capital Stock." No fractional shares of Common Shares shall be issued upon
such conversion, but in lieu thereof, fractions of 1/2 or greater shall be
rounded to the next greater whole number and fractions of less than 1/2 shall
be rounded to the next lower whole number. No consideration will be paid in
respect of such fractional interests that are rounded down. The Amended and
Restated Declaration of Trust will continue to prohibit the issuance of
nonvoting equity securities to the extent required by section 1123(a)(6) of the
Bankruptcy Code. In addition, certain restrictions on transfer will be included
in the Amended and Restated Declaration of Trust. See "Description of Capital
Stock." Pursuant to the Amended and Restated Declaration of Trust and other
relevant agreements, and notwithstanding any other term or provision of the
Prepackaged Plan to the contrary, the Company will indemnify and hold harmless
its current and former officers, trustees and employees to the fullest extent
permitted by applicable law with respect to any such officer's, trustee's or
employee's acts, conduct and omissions whether arising before or after the
Petition Date. The Amended and Restated Declaration of Trust will become
effective upon (i) confirmation of the Prepackaged Plan, (ii) the occurrence of
the Effective Date and (iii) the filing with the State Department of
Assessments and Taxation of Maryland of the Amended and Restated Declaration of
Trust.
Disbursing Agent. The Reorganized Debtor, or such other entity or entities as
the Reorganized Debtor may employ (the "Disbursing Agents"), subject to the
reasonable consent of the Principal Holders, will make all distributions
required under the Prepackaged Plan. Any Disbursing Agent may employ or
contract with other entities to assist in or perform the distribution of
property under the Prepackaged Plan. Unless otherwise determined by the
Reorganized Debtor, each Disbursing Agent will serve without bond. Each third-
party Disbursing Agent will receive, without further Bankruptcy Court approval,
reasonable compensation for distribution services rendered pursuant to the
Prepackaged Plan and reimbursement of reasonable out-of-pocket expenses
incurred in connection with such services from the Reorganized Debtor on terms
agreed to with the Reorganized Debtor.
Disputed Claims or Interests. Notwithstanding any other provisions of the
Prepackaged Plan, no payments or distributions will be made on account of any
Disputed Claim (as defined below) or Disputed Interest (as defined below) until
such Claim or Interest becomes an Allowed Claim or Allowed Interest, and then
only to the extent that it becomes an Allowed Claim or Allowed Interest.
"Disputed Claim" or "Disputed Interest" means a Claim or Interest as to which a
proof of Claim or Interest, as applicable, (i) has
54
<PAGE>
been filed or deemed filed under applicable law, or by reason of an order of
the Bankruptcy Court, but as to which an objection has been or may be timely
filed and which objection, if timely filed, has not been withdrawn on or before
any date fixed for filing such objections by the Prepackaged Plan or order of
the Bankruptcy Court and has not been overruled or denied by a final order, or
(ii) has not been timely filed, if such proof of Claim or Interest was required
to be filed. Prior to the time that an objection has been or may be deemed
timely filed, a Claim or Interest shall be considered a Disputed Claim or
Disputed Interest, as applicable, in its entirety if (i) the amount of the
Claim or Interest specified in the proof of Claim or Interest exceeds the
amount of any corresponding Claim or Interest scheduled by the Company in its
schedules or its list of equity security holders, as applicable, (ii) any
corresponding Claim or Interest scheduled by the Company in its schedules or
its list of equity security holders, as applicable, has been scheduled as
disputed, contingent or unliquidated, irrespective of the amount scheduled, or
(iii) no corresponding Claim or Interest has been scheduled by the Company in
its schedules or its list of equity security holders, as applicable.
Manner of Payment Under the Prepackaged Plan. Cash payments made pursuant to
the Prepackaged Plan will be in U.S. dollars by checks drawn on a domestic bank
selected by the Reorganized Debtor, or by wire transfer from a domestic bank,
at the Reorganized Debtor's option, except that payments made to foreign trade
creditors holding Allowed Claims may be paid, at the option of the Reorganized
Debtor in such funds and by such means as are necessary or customary in a
particular foreign jurisdiction. Distributions of cash pursuant to the
Prepackaged Plan will be made by mail as set forth above or, upon request of a
holder of a Class 2 Claim that is also an Allowed Claim, by wire transfer in
accordance with written instructions received therefrom.
Surrender of Instruments. As a condition to the receipt of any distribution
under the Prepackaged Plan, (i) each holder of an Outstanding Note will deliver
to the Outstanding Indenture Trustee or its designee such transaction
instructions or other documents of transfer or exchange as the Outstanding
Indenture Trustee requests, and (ii) each holder of a document or instrument of
the Company other than an Outstanding Note will surrender the document or
instrument to the Disbursing Agent or its designee. However, holders of
Outstanding Common Shares are not required to surrender such document or
instrument. Prior to the Effective Date, each holder of a document or
instrument will receive specific instructions regarding the time and manner in
which the document or instrument is to be surrendered or delivered. Immediately
upon the Effective Date and until such surrender or delivery, such document or
instrument will be deemed cancelled and represent only the right to receive the
distributions to which the holder is entitled under the Prepackaged Plan.
Any bond, debenture, share of stock, other security or note, whether or not a
security (collectively, the "Instruments"), or transaction instruction, that is
lost, stolen, mutilated or destroyed will be deemed surrendered when the holder
of a Claim or Interest based thereon delivers to the Outstanding Indenture
Trustee, or Disbursing Agent or their respective designee, (i) evidence
satisfactory to the Outstanding Indenture Trustee, Disbursing Agent or its
designee of the loss, theft, mutilation or destruction of such Instrument, or
(ii) such security or indemnity as may be required by the Outstanding Indenture
Trustee, Disbursing Agent or its designee to hold each of them harmless with
respect thereto.
Any holder of an Instrument of the Company that fails to surrender or deliver
or be deemed to have surrendered or delivered the Instrument or relevant
transaction instruction or other document within two years after the Effective
Date will be forever barred from receiving any distribution under the
Prepackaged Plan. In such cases, any property held for distribution on account
of a Claim or Interest based on such Instrument will become property of the
Reorganized Debtor, in the manner provided in the Prepackaged Plan for
unclaimed distributions. To the extent that any such property is held by a
Disbursing Agent other than the Reorganized Debtor, such Disbursing Agent will
return such property to the Reorganized Debtor.
Delivery of Distributions and Undeliverable or Unclaimed Distributions.
Except as provided below for undeliverable distributions, distributions to
holders of Allowed Claims and Allowed Interests will be distributed by mail as
follows: (a) except in the case of the holder of an Instrument for which there
is an
55
<PAGE>
indenture trustee, security registrar or stock transfer agent, (1) to the
addresses set forth on the respective proofs of claim or proofs of interest
filed by such holders, (2) to the addresses set forth in any written notices of
address changes delivered to the Disbursing Agent(s) after the date of any
related proof of claim, or (3) to the address reflected on the Schedule of
Assets and Liabilities filed with the clerk of the Bankruptcy Court in the
Reorganization Case by the Company if no proof of Claim or proof of Interest is
filed and the Disbursing Agent(s) have not received a written notice of a
change of address; and (b) in the case of the holder of an Instrument for which
there is an indenture trustee, security registrar or stock transfer agent, to
the latest mailing address maintained of record by the pertinent indenture
trustee, security registrar or stock transfer agent, or, if no mailing address
is maintained of record, to the pertinent indenture trustee, security registrar
or stock transfer agent. Distribution of cash pursuant to section 3.3(a) of the
Prepackaged Plan will be made by mail as set forth above or, upon request of a
holder of a Class 2 Claim that is also an Allowed Claim, by wire transfer in
accordance with written instructions received therefrom.
If the distribution to the holder of a Claim or Interest is returned to a
Disbursing Agent as undeliverable, no further distribution will be made to such
holder unless and until the Reorganized Debtor or the applicable Disbursing
Agent is notified in writing of such holder's then current address. Except as
provided below, undeliverable distributions will remain in the possession of
the applicable Disbursing Agent until such times as a distribution becomes
deliverable.
Unclaimed cash (including interest, dividends and other consideration, if
any, distributed on or received for undeliverable New Securities) will be held
in trust in a segregated bank account in the name of the applicable Disbursing
Agent, for the benefit of the potential claimants of such funds, and will be
accounted for separately. Such funds will be held in interest-bearing accounts
to the extent practicable and the parties entitled to such funds will be
entitled to any interest earned on such funds. Undeliverable New Securities
will be held in trust for the benefit of the potential claimants of such
securities by the applicable Disbursing Agent in principal amount of notes and
number of shares sufficient to fund the unclaimed amounts of such securities,
and will be accounted for separately.
Within 30 days after the end of each calendar quarter following the Effective
Date, the applicable Disbursing Agents will make distributions of all property
that has become deliverable during the preceding quarter. Each such
distribution will include any dividends, interest payments or other
distributions made on account of the distributed property.
Any holder of an Allowed Claim or an Allowed Interest who does not assert a
claim for an undeliverable distribution held by a Disbursing Agent within one
year after the Effective Date will no longer have any claim to or interest in
such undeliverable distribution, and will be forever barred from receiving any
distributions under the Prepackaged Plan. In such cases, any property held for
distribution on account of such Allowed Claims or Allowed Interests will be
returned to and/or retained by the Reorganized Debtor, as follows: (1) any cash
will be the property of the Reorganized Debtor, free from any restrictions
thereon; (2) any New Senior Notes will be canceled; and (3) any New Common
Shares reserved for issuance will be held by the Reorganized Debtor as
unrestricted treasury shares. Nothing contained in the Prepackaged Plan will
require the Company, the Reorganized Debtor or any Disbursing Agent to attempt
to locate any holder of an Allowed Claim or an Allowed Interest.
Compliance With Tax Requirements. In connection with the Prepackaged Plan, to
the extent applicable, each Disbursing Agent will comply with all withholding
and reporting requirements imposed on it by any governmental unit, and all
distributions pursuant to the Prepackaged Plan will be subject to such
withholding and reporting requirements.
Setoffs. The Reorganized Debtor may, but will not be required to, set off
against any Allowed Claim and the distributions to be made pursuant to the
Prepackaged Plan on account of such Allowed Claim, claims of any nature that
the Company or the Reorganized Debtor may have against the holder of such
Allowed Claim; provided, however, that neither the failure to effect such a
setoff nor the allowance of any Claim against the
56
<PAGE>
Company or the Reorganized Debtor will constitute a waiver or release by the
Company or the Reorganized Debtor of any claim that the Company or the
Reorganized Debtor may possess against such holder.
MODIFICATION OF THE PREPACKAGED PLAN
Subject to the restrictions on plan of reorganization modifications set forth
in section 1127 of the Bankruptcy Code or as otherwise permitted by law without
additional disclosure pursuant to section 1125 of the Bankruptcy Code, except
as the Bankruptcy Court may otherwise order, the Company, subject to the
approval of the Principal Holders, reserves the right to alter, amend or modify
the Prepackaged Plan before its substantial consummation. The potential impact
of any such amendment, modification or supplement on the holders of Claims and
Interests cannot presently be foreseen, but may include a change in the
economic impact of the Prepackaged Plan on some or all of the classes of Claims
and Interests. If any of the terms of the Prepackaged Plan are amended,
modified or supplemented in a manner determined to constitute a material
adverse change, the Company will promptly disclose any such amendment,
modification or supplement in a manner reasonably calculated to inform the
holders adversely affected thereby, and the Company will extend the Plan
Solicitation period for Ballots and Master Ballots for an appropriate period,
depending upon the significance of the amendment, modification or supplement
and the manner of disclosure to holders of Claims and Interests if the Plan
Solicitation period would otherwise expire during such period.
REVOCATION OF THE PREPACKAGED PLAN
Subject to certain limitations contained in the Prepackaged Plan, the Company
reserves the right to revoke and withdraw the Prepackaged Plan at any time and
solely within its discretion prior to the Confirmation Date, with the consent
of the Principal Holders. If the Company revokes or withdraws the Prepackaged
Plan, or if confirmation of the Prepackaged Plan does not occur or if the
Prepackaged Plan does not become effective, then the Prepackaged Plan will be
null and void, and nothing contained in the Prepackaged Plan will (1)
constitute a waiver or release of any Claims by or against, or any interests
in, the Company, (2) constitute an admission of any fact or legal conclusion by
the Company, the Company as debtor in possession in the Reorganization Case
(the "Debtor in Possession") or any other individual, corporation, limited
liability company, partnership, association, joint stock company, joint
venture, estate, trust, unincorporated organization, government or any
political subdivision thereof, governmental unit, Creditors' Committee,
unofficial committee of creditors or equity holders or other entity (an
"Entity"), or (3) prejudice in any manner the rights of the Company or the
Debtor in Possession in any further proceedings involving the Company or the
Debtor in Possession.
CONFIRMATION OF THE PREPACKAGED PLAN
If the Requisite Plan Acceptances are received and the Company seeks to
implement the Prepackaged Plan by commencing the Reorganization Case under
Chapter 11 of the Bankruptcy Code, the Company will request that the Bankruptcy
Court hold a confirmation hearing as promptly as practicable, upon such notice
to the parties in interest as is required by the Bankruptcy Code, the
Bankruptcy Rules and the Bankruptcy Court. Parties in interest, including all
holders of Claims and Interests, will receive notice of the date and time fixed
by the Bankruptcy Court for the confirmation hearing. The Bankruptcy Court will
also establish procedures for the filing and service of objections to
confirmation of the Prepackaged Plan.
For the Prepackaged Plan to be confirmed, the Bankruptcy Code requires that
the Bankruptcy Court determine that the Prepackaged Plan complies with the
requirements of section 1129 of the Bankruptcy Code. Section 1129 provides that
the Bankruptcy Court must find, among other things, that (i) the Prepackaged
Plan has been accepted by all classes of impaired Claims and impaired Interests
entitled to vote on the Prepackaged Plan, except to the extent that
confirmation, despite the rejection of one or more classes, is available under
the "cramdown" provisions of section 1129(b) of the Bankruptcy Code, (ii) the
Prepackaged Plan has been accepted by at least one class of impaired Claims
without considering the votes of "insiders," (iii) the Prepackaged Plan is
feasible (i.e., that there is a reasonable probability that the Company will be
able
57
<PAGE>
to perform its obligations under the Prepackaged Plan and continue to operate
its business without further financial reorganization or liquidation), and (iv)
the Prepackaged Plan meets the requirements of section 1129(a)(7) of the
Bankruptcy Code, which requires that, with respect to each impaired class, each
holder of a Claim or Interest either (a) accepts the Prepackaged Plan, or (b)
receives at least as much under the Prepackaged Plan as such holder would
receive in a liquidation of the Company under Chapter 7 of the Bankruptcy Code.
There are several other confirmation standards that must be met including,
without limitation, (i) the Prepackaged Plan is proposed in good faith, (ii)
the Prepackaged Plan and its proponent comply with the Bankruptcy Code, (iii)
payments for services in or in connection with the Bankruptcy Case or the
Prepackaged Plan are approved by or subject to court approval, (iv) the
identity of management, officers or trustees of the Company have been
disclosed, including their compensation and their continuation in office is
consistent with the interests of creditors, shareholders and public policy, (v)
all statutory fees have been or will be paid, and (vi) if there has been a
modification, there is a continuation of retiree benefits at certain levels.
Although the Company believes that the Company and the Prepackaged Plan will
meet such tests, as well as the other requirements of section 1129 of the
Bankruptcy Code, there can be no assurance that the Bankruptcy Court will reach
the same conclusion and confirm the Prepackaged Plan. Moreover, even if the
Requisite Plan Acceptances have been obtained from the holders of Claims and
Interests prior to the commencement of the Reorganization Case, the Bankruptcy
Court may determine that such holders have not validly accepted the Prepackaged
Plan by finding that the Solicitation did not comply with all of the applicable
provisions of the Bankruptcy Code. See "Special Factors and Certain
Considerations--Considerations Relating to the Prepackaged Plan." In such
event, the Bankruptcy Court may order the Company to resolicit acceptances and,
therefore, confirmation of the Prepackaged Plan would be delayed and possibly
jeopardized. Although the Company believes that the Solicitation complies with
the applicable provisions of the Bankruptcy Code and that the acceptances
received will be accepted as votes for the Prepackaged Plan by the Bankruptcy
Court, there can be no assurance that the Bankruptcy Court will reach the same
conclusion.
Nonconsensual Confirmation. If any impaired class of Claims or Interests
(other than Class 2) entitled to vote on the Prepackaged Plan, does not vote to
accept the Prepackaged Plan, the Company intends to use "cramdown" procedures
with respect to any such impaired classes (other than Class 2), if necessary.
In the event that any impaired class of Claims or Interests does not accept the
Prepackaged Plan, the Bankruptcy Court may nevertheless confirm the Prepackaged
Plan at the Company's request by applying "cramdown" procedures under section
1129(b) if the requirements of section 1129(b) of the Bankruptcy Code are
satisfied. To invoke such "cramdown" procedures, at least one non-insider
impaired class of Claims must accept the Prepackaged Plan, and if, as to each
impaired class which has not accepted the Prepackaged Plan, the Bankruptcy
Court determines that the Prepackaged Plan "does not discriminate unfairly" (as
discussed below) and is "fair and equitable" (as discussed below) with respect
to such nonaccepting class, the Bankruptcy Court may confirm the Prepackaged
Plan. Under the Prepackaged Plan, Classes 2, 3, 4, 5 and 6 constitute classes
of impaired Claims or Interests. If the class of holders of Outstanding Common
Shares do not vote to accept the Prepackaged Plan, all Outstanding Common
Shares will be cancelled and holders of Outstanding Common Shares will not
receive or retain anything under the Prepackaged Plan. See "Special Factors and
Certain Considerations--Considerations Relating to the Prepackaged Plan--
Nonconsensual Confirmation." The Company reserves the right to request
nonconsensual confirmation of the Prepackaged Plan if any such classes (other
than Class 2) rejects the Prepackaged Plan.
No Unfair Discrimination. A plan of reorganization "does not discriminate
unfairly" if (a) the legal rights of a nonaccepting class are treated in a
manner that is consistent with the treatment of other classes whose legal
rights are identical with those of the nonaccepting class, and (b) no class
receives payments in excess of that which it is legally entitled to receive for
its claims or equity interests. The Company believes that under the Prepackaged
Plan (x) all classes of Claims and Interests are treated in a manner that is
consistent with the treatment of other classes of Claims and Interests, if any,
with which their legal rights are identical, and
58
<PAGE>
(y) no class of Claims or Interests will receive payments or property with an
aggregate value greater than the aggregate value of the Allowed Claims and
Allowed Interests in such class. Accordingly, the Company believes the
Prepackaged Plan does not discriminate unfairly with respect to any impaired
class of Claims or Interests.
Fair and Equitable Test. The Bankruptcy Code establishes the following
different "fair and equitable" tests for secured creditors, unsecured creditors
and equity holders:
(a) Secured Creditors. Either (i) each secured creditor in an impaired
class of claims retains the liens securing its secured claim and receives
on account of its secured claim deferred cash payments having a present
value equal to the amount of its allowed secured claim, (ii) each impaired
secured creditor realizes the "indubitable equivalent" of its allowed
secured claim, or (iii) the property securing the claim is sold free and
clear of liens with such liens to attach to the proceeds, and the liens
against such proceeds are treated in accordance with clause (i) or (ii) of
this subparagraph (a).
(b) Unsecured Creditors. Either (i) each unsecured creditor in an
impaired class of claims receives or retains under the plan of
reorganization property of a value equal to the amount of its allowed
claim, or (ii) the holders of claims that are senior to the claims of the
nonaccepting class do not receive more than 100% (present value) for their
claims and the holders of claims and equity interests that are junior to
the claims of the nonaccepting class do not receive any property under the
plan of reorganization on account of such claims and equity interests.
(c) Equity Holders. Either (i) each holder of an equity interest will
receive or retain, under the plan of reorganization, property of a value
equal to the greater of (a) the fixed liquidation preference or redemption
price, if any, of such stock or (b) the value of the stock, or (ii) the
holders of interests that are junior to the nonaccepting class will not
receive any property under the plan of reorganization.
THE COMPANY RESERVES THE ABSOLUTE RIGHT TO SEEK NONCONSENSUAL CONFIRMATION OF A
PLAN WITH RESPECT TO ANY CLASS OF CLAIMS OR INTERESTS (OTHER THAN CLASS 2)
VOTING ON THE PREPACKAGED PLAN IN THE EVENT THE REQUISITE PLAN ACCEPTANCES ARE
NOT RECEIVED WITH RESPECT TO ANY SUCH CLASS AND TO REVOKE THE PREPACKAGED PLAN
OR MAKE ANY MODIFICATIONS OR AMENDMENTS TO TREATMENTS PROVIDED IN THE
PREPACKAGED PLAN SUBJECT TO THE CONDITIONS CONTAINED IN THE PREPACKAGED PLAN
THAT ARE NECESSARY TO OBTAIN SUCH NONCONSENSUAL CONFIRMATION.
Acceptance of the Prepackaged Plan. Under section 1129(a)(10) of the
Bankruptcy Code, if a class of claims or interests is impaired under a plan,
the plan must be accepted by holders of at least one class of "impaired" claims
or interests without considering the votes of "insiders" within the meaning of
the Bankruptcy Code. The classes consisting of the Outstanding Notes,
Outstanding Common Shares, Other Secured Claims and Unsecured Claims are the
only classes of impaired Claims or Interests under the Prepackaged Plan that
are entitled to vote to accept or reject the Prepackaged Plan. No "insiders"
own Outstanding Notes, Other Secured Claims or Unsecured Claims. Outstanding
Common Shares are owned by "insiders" within the meaning of section 1129(a)(10)
and such insiders' votes will not be counted for purposes of determining
whether Class 5 accepts the Prepackaged Plan.
Feasibility Test. The Bankruptcy Code requires that the Bankruptcy Court must
find that a plan passes the Feasibility Test. For the Prepackaged Plan to meet
the Feasibility Test, the Bankruptcy Court must find that the Company, as
reorganized, will possess the resources and working capital necessary to
provide all creditors with the treatment specified in the Prepackaged Plan and
to continue to operate its business upon and after the consummation of the
Prepackaged Plan. The Company believes the Prepackaged Plan satisfies the
Feasibility Test.
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<PAGE>
As of the Effective Date, the Company will retain assets sufficient to pay
all Claims against the Company and to pay all principal and interest on the New
Senior Notes when and as due. Assuming holders of Outstanding Common Shares
vote to accept the Prepackaged Plan, such holders will retain their interests
in the Company, subject to the Reverse Stock Split and dilution upon issuance
of New Common Shares to the holders of Outstanding Notes.
The Company has analyzed its ability to meet its obligations under the
Restructuring. As part of this analysis, the Company has prepared projections
of its financial performance for the five-year period ending September 30,
2000. These projections, and the significant assumptions on which it is based,
are included in the "Financial Projections." The Company believes, based on
this analysis, that the Restructuring provides a feasible means of
reorganization and operation from which there is a reasonable expectation that,
subject to the risks disclosed in this Disclosure Statement, the Company will
be able to make all payments required to be made pursuant to the Restructuring.
Because financial projections are inherently imprecise, holders of Outstanding
Securities are cautioned not to place undue reliance on the projections. There
can be no assurance that a Bankruptcy Court will agree with the Company's
determination. See "Financial Projections."
Best Interests of Creditors Test; Liquidation Value. In addition, the
Bankruptcy Code requires that, to confirm a plan of reorganization, each holder
of a claim or equity interest in an impaired class must either (i) accept the
plan, or (ii) receive or retain under the plan cash or property of a value, as
of the effective date of the plan, that is not less than the value such holder
would receive or retain if the debtor were liquidated under Chapter 7 of the
Bankruptcy Code.
To calculate what holders of each impaired class of claims and equity
interests would receive if the debtor were liquidated under Chapter 7 of the
Bankruptcy Code, the Bankruptcy Court must determine the "liquidation value" of
the debtor, which would consist primarily of the proceeds from a sale of the
debtor's assets by a Chapter 7 trustee. The proceeds from a Chapter 7
liquidation that would be available to all claims would be reduced by, first,
the secured claims to the extent of the value of their collateral, by the costs
and expenses of liquidation, and by other administrative expenses and costs of
the Chapter 7 case and the costs and expenses of a Chapter 11 case, if any.
Costs of liquidation under Chapter 7 of the Bankruptcy Code would include the
fees of a trustee, and of counsel and other professionals (including financial
advisors and accountants) retained by the trustee, asset disposition expenses,
litigation costs and claims arising from the operations of the Company's
business during the Chapter 7 liquidation case. The liquidation itself could
trigger certain "priority claims," such as claims for severance pay, and could
accelerate other priority payments that otherwise would be due in the ordinary
course of business. Those priority claims would be paid in full out of the
liquidation proceeds before the balance would be made available to pay all
unsecured claims or to make any distributions in respect of equity interests.
To determine if the Prepackaged Plan is in the best interests of each
impaired class, the present value of the distributions of the proceeds from the
liquidation of the Company's assets and properties, after subtracting the
amounts attributable to the foregoing Claims, are compared with the value of
the property offered to such classes of Claims and Interests under the
Prepackaged Plan. Provided that the present values offered to such classes of
Claims and Interests under the Prepackaged Plan are equal to or exceed what
would be realized in a Chapter 7 liquidation, the Prepackaged Plan is in the
best interest of each impaired class.
In applying the "best interests test," it is possible that Claims and
Interests in the Chapter 7 case may not be classified as provided in the
Prepackaged Plan. In the absence of a contrary determination by the Bankruptcy
Court, all pre-Chapter 11 unsecured claims that have the same rights upon
liquidation would be treated as one class for purposes of determining the
potential distribution of the liquidation proceeds resulting from the Company's
Chapter 7 case. The distributions from the liquidation proceeds would be
calculated ratably according to the amount of the Claim held by each creditor.
The Company believes that the most likely outcome of liquidation proceedings
under Chapter 7 would be that no class junior to the Outstanding Notes will
receive any distribution.
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<PAGE>
Applying the "best interests test" to the Outstanding Notes, the Outstanding
Common Shares, Other Secured Claims and Unsecured Claims, the Company believes
that the confirmation of the Prepackaged Plan will provide each holder of the
Outstanding Notes, Outstanding Common Shares, Other Secured Claims and
Unsecured Claims with a greater recovery than it would receive if the Company
were liquidated under Chapter 7. In the Company's view, a Chapter 7 liquidation
is uncertain as to timing and amounts of payments to the holders of the
Outstanding Notes and would leave nothing for holders of Unsecured Claims or
Outstanding Common Shares. The Prepackaged Plan provides as much certainty as
is possible regarding these matters. The Company's analysis of estimated
recoveries under the Prepackaged Plan and in the context of a Chapter 7
liquidation is set forth below.
Chapter 7 Liquidation Analysis. The Bankruptcy Court will determine whether
the Prepackaged Plan meets the "best interests" test. Accordingly, the Chapter
7 liquidation analysis set forth herein is provided solely to disclose to
holders of Claims and Interests the effects of a hypothetical Chapter 7
liquidation of the Company, subject to the assumptions set forth herein. There
can be no assurance that such assumptions would be made or accepted by the
Bankruptcy Court. The Chapter 7 liquidation analysis was completed on or about
May 15, 1995. The Company is not aware of any events subsequent to such date
that would materially impact the Chapter 7 liquidation analysis.
The table below sets forth the computation of liquidation values as of March
31, 1995. See "Special Purpose Valuation Report of Kenneth Leventhal & Company
on Range of Liquidation Values" included herein as Annex D.
MORTGAGE AND REALTY TRUST
RANGE OF LIQUIDATION VALUES
AS OF MARCH 31, 1995
<TABLE>
<CAPTION>
RANGE
-----------------
LOW HIGH
-------- --------
(DOLLARS IN
THOUSANDS)
<C> <S> <C> <C>
Extrapolated Liquidation Value of Portfolio (A)............ $192,600 $218,100
Adjustments:
Add: Cash on Hand (B)................................... 1,500 1,500
Marketable Securities (B).......................... 71,600 71,600
Accounts Receivables and Other Assets (A)(B)....... 1,800 3,700
-------- --------
267,500 294,900
Less: Outstanding Debt--Imperial (B)..................... 17,600 17,600
Deferred Compensation (B).......................... 400 400
Accounts Payable and Accrued Expenses (B).......... 3,400 3,400
Termination Pay Plan (A)(B)........................ 1,400 1,400
Wind Down G&A Expenses (A)......................... 5,000 5,000
Legal, Liquidation Costs, etc. (A)................. 10,000 8,000
-------- --------
$229,700 $259,100
======== ========
Range of Liquidation Values as of March 31, 1995........... $220,000 $260,000
======== ========
</TABLE>
SEE ACCOMPANYING NOTES
61
<PAGE>
NOTES TO RANGE OF LIQUIDATION VALUES AS OF MARCH 31, 1995
(A) For the purposes of determining a range of liquidation values, the
following assumptions were utilized.
.All assets in the portfolio were disposed of within a 12 month period
under a judicially mandated process.
.The assets were sold in discrete individual transactions, not in a bulk
sale.
.The Extrapolated Liquidation Value of the Portfolio was determined by
applying capitalization rates of 14 percent (high) and 16 percent (low)
to the net operating income for selected assets for the 12 month period
from April 1996 to March 1997. These capitalized values were extrapolated
to the entire MRT portfolio. Real estate assets with outstanding offers
for sale at the valuation date were included at their offer price. Sales
proceeds were reduced by estimated selling expenses of five percent.
.Performing real estate loans were assumed sold at discounts from book
value of 10 percent (high) and 20 percent (low).
.Accounts Receivable and Other Assets are considered 50 percent collectible
(low) or 100% collectible (high).
.Termination Pay Plan has been estimated at approximately $1.4 million.
.Wind Down G&A expenses were assumed to be $5 million.
.Legal, accounting and other costs associated with the judicial liquidation
were assumed to be between $8 million (high) and $10 million (low).
(B) Amount per Mortgage and Realty Trust Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
Comparative Analysis
The Company believes that holders of impaired Claims and Interests will
realize a greater recovery under the Prepackaged Plan than they would under a
Chapter 7 liquidation because of (i) the increased costs and expenses of a
liquidation under Chapter 7 arising from the fees payable to a trustee in
bankruptcy and professional advisors to such trustee, (ii) the erosion in the
value of assets during the expeditious liquidation required under a Chapter 7
liquidation and the "forced sale" atmosphere that would prevail, (iii) the
adverse effects on the saleability of the Company's real estate assets in the
current depressed market for real estate, and (iv) the substantial increase in
Administrative Claims in a Chapter 7 case that would be satisfied on a priority
basis or on parity with existing Unsecured Claims.
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<PAGE>
The table below sets forth a comparison of the estimated distributions to
holders of impaired Claims and Interests under the Prepackaged Plan with the
estimated recoveries of such holders in a Chapter 7 liquidation of the Company.
The comparison should be read in conjunction with all other information set
forth under "--Chapter 7 Liquidation Analysis" above.
<TABLE>
<CAPTION>
LOW HIGH
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net Liquidation Value (a). $241,000 $281,000
</TABLE>
<TABLE>
<CAPTION>
APPROXIMATE
DESCRIPTION OF CLAIM
CLAIMS AMOUNT (b)
- -------------- -----------
<S> <C>
Outstanding
Notes........... $341,324
Other Secured
Claims (e)...... 17,600
Unsecured Claims
(f)............. 3,400
Outstanding Com-
mon Shares...... N/A
--------
Total......... $362,324
========
<CAPTION>
CHAPTER 7 PREPACKAGED PLAN
--------------------------------------------------- -----------------------------------------------------------
LOW HIGH LOW HIGH
------------------------- ------------------------- ----------------------------- -----------------------------
DESCRIPTION OF ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED
CLAIMS DISTRIBUTION RECOVERY (c) DISTRIBUTION RECOVERY (c) DISTRIBUTION (d) RECOVERY (c) DISTRIBUTION (d) RECOVERY (c)
- -------------- ------------ ------------ ------------ ------------ ---------------- ------------ ---------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding
Notes........... $223,400 65.5% $263,400 77.2% $261,850 76.7% $281,250 82.4%
Other Secured
Claims (e)...... 17,600 100% 17,600 100% 17,600 100% 17,600 100%
Unsecured Claims
(f)............. 0 0.0% 0 0.0% 3,400 100% 3,400 100%
Outstanding Com-
mon Shares...... 0 N/A 0 N/A 3,150 N/A 3,750 N/A
------------ ------------ ------------ ------------ ---------------- ------------ ---------------- ------------
Total......... $241,000 66.5% $281,000 77.6% $286,000 78.9% $306,000 84.5%
============ ============ ============ ============ ================ ============ ================ ============
</TABLE>
(a) Based on Liquidation Analysis as of March 31, 1995, before the deduction of
the Imperial Bank Debt equal to approximately $17.6 million and accounts
payable and accruals of approximately $3.4 million. See "Special Purpose
Valuation Report of Kenneth Leventhal & Company on Range of Liquidation
Values" included herein as Annex D.
(b) Includes accrued interest through March 31, 1995.
(c) Percentage shown in the table is the quotient of the available distribution
divided by the estimated amount of claims in such class.
(d) For purposes of computing available distribution under the Prepackaged
Plan, securities are valued based upon a reorganization value between
$265 million and $285 million, and a reorganization equity value between
$105 million and $125 million. See "Special Purpose Valuation Report of
Kenneth Leventhal & Company on Range of Going Concern Values" and "Special
Purpose Valuation Report of Kenneth Leventhal & Company on Range of
Liquidation Values" included herein as Annexes C and D, respectively. It
should be noted that depending on general market conditions, the size of
the block of New Common Stock that may trade and other factors prevailing
at the relevant times, the securities may trade at prices lower than those
reflected above. Accordingly, no representation can be or is being made
with respect to whether the percentage recoveries shown above will actually
be realized by the holder of claims in any particular Class under the
Prepackaged Plan.
(e) Represents Debt of a wholly-owned Subsidiary, which is a California limited
partnership, of the Company. The assets of such subsidiary are included in
the Net Liquidation Value described above.
(f) Represents accounts payable and accrued expenses as of March 31, 1995.
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<PAGE>
Accordingly, the Company believes that the Prepackaged Plan meets the
requirements of section 1129(a)(7) of the Bankruptcy Code because each holder
of a Claim or Interest impaired under the Prepackaged Plan will have accepted
the Prepackaged Plan or will recover at least as much under the Prepackaged
Plan as such holder would recover in a Chapter 7 liquidation of the Company.
EFFECTS OF PREPACKAGED PLAN CONFIRMATION
Discharge and Injunction. On the Effective Date, the Company will be
discharged from all Claims and Interests that exist prior to confirmation of
the Prepackaged Plan, except as provided for in the Prepackaged Plan or the
Confirmation Order. Except as otherwise provided in the Prepackaged Plan, the
rights afforded under the Prepackaged Plan and the treatment of all Claims and
Interests therein will be in exchange for and in complete satisfaction,
discharge and release of all Claims and Interests of any nature whatsoever,
including any interest accrued on such Claims from and after the Petition Date,
against the Company and the Debtor in Possession, or any of their assets or
properties. Except as otherwise provided in the Prepackaged Plan or the
Confirmation Order, (i) on the Effective Date, the Company will be deemed
discharged and released to the fullest extent permitted by section 1141 of the
Bankruptcy Code from all Claims and Interests, including, but not limited to,
demands, liabilities, Claims and Interests that arose before the Confirmation
Date and all debts of the kind specified in sections 502(g), 502(h) or 502(i)
of the Bankruptcy Code, whether or not, (a) a proof of Claim or proof of
Interest based on such debt or Interest is filed or deemed filed pursuant to
section 501 of the Bankruptcy Code, (b) a Claim or Interest based on such debt
or Interest is allowed pursuant to section 502 of the Bankruptcy Code, or (c)
the holder of a Claim or Interest based on such debt or Interest has accepted
the Prepackaged Plan, and (ii) all entities will be precluded from asserting
against the Reorganized Debtor, its successors or its assets or properties any
other or further Claims or Interests based upon any act or omission,
transaction or other activity of any kind or nature that occurred prior to the
Confirmation Date. Except as otherwise provided in the Prepackaged Plan or the
Confirmation Order, the Confirmation Order will act as a discharge of any and
all Claims against and all debts and liabilities of the Company, as provided in
sections 524 and 1141 of the Bankruptcy Code, and such discharge will void any
judgment against any of the Company at any time obtained to the extent that it
relates to a Claim discharged.
Except as otherwise provided in the Prepackaged Plan or the Confirmation
Order, on and after the Effective Date, all entities who held, currently hold
or may hold a debt, Claim or Interest discharged under the Prepackaged Plan are
permanently enjoined from taking any of the following actions on account of any
such discharged debt, Claim or Interest: (1) commencing or continuing in any
manner any action or other proceeding against the Company, the Reorganized
Debtor, their successors or their respective property; (2) enforcing,
attaching, collecting or recovering in any manner any judgment, award, decree
or order against the Company, the Reorganized Debtor, their successors or their
respective property; (3) creating, perfecting or enforcing any lien or
encumbrance against the Company, the Reorganized Debtor, their successors or
their respective property; (4) asserting any setoff, right of subrogation or
recoupment of any kind against any obligation due to the Company, the
Reorganized Debtor, their successors or their respective property; and (5)
commencing or continuing any action, in any manner, in any place that does not
comply with or is inconsistent with the provisions of the Prepackaged Plan or
the Confirmation Order. Any Entity injured by any willful violation of such
injunction will recover actual damages, including costs and attorneys' fees,
and, in appropriate circumstances, may recover punitive damages, from the
willful violator.
Revesting. Except as otherwise provided in the Prepackaged Plan, the Company
will, as the Reorganized Debtor, continue to exist after the Effective Date,
with all the powers of a REIT under applicable law and without prejudice to any
right to alter or terminate such existence under applicable state law. Without
limiting the foregoing, the Company as the Reorganized Debtor may pay the
charges that it incurs after the Effective Date for professionals' fees,
disbursements, expenses or related support services without application to the
Bankruptcy Court.
Except as otherwise provided in the Prepackaged Plan, on the Effective Date,
all property of the Estate of the Company will revest in the Reorganized
Debtor, free and clear of all Claims, liens, encumbrances and
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<PAGE>
other interests of holders of Claims and Interests. From and after the
Effective Date, the Reorganized Debtor may operate its business and use,
acquire and dispose of property and settle and compromise Claims or Interests
without supervision by the Bankruptcy Court and free of any restrictions of the
Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly
imposed by the Prepackaged Plan, the Confirmation Order, the New Senior Note
Indenture, the New Collateral Documents (as defined in the New Senior Note
Indenture) and any document, agreement or instrument delivered in connection
therewith.
Retention of Jurisdiction. Notwithstanding the entry of the Confirmation
Order or the occurrence of the Effective Date, the Bankruptcy Court will retain
such jurisdiction over the Reorganization Case after the Effective Date as is
legally permissible, including, without limitation, to (a) allow, disallow,
determine, liquidate, classify or establish the priority or secured or
unsecured status of or estimate of any Claim or Interest, including, without
limitation, the resolution of any request for payment of any Administrative
Claim or Class 2 Expense Claims and the resolution of any and all objections to
the allowance or priority of Claims or Interests, (b) grant or deny any and all
applications for allowance of compensation or reimbursement of expenses
authorized pursuant to the Bankruptcy Code or the Prepackaged Plan, for periods
ending on or before the Effective Date, (c) resolve any motions pending on the
Effective Date to assume, assume and assign or reject any executory contract or
unexpired lease to which the Company is a party or with respect to which the
Company may be liable and to hear, determine and, if necessary, liquidate, any
and all Claims arising therefrom, (d) ensure that distributions to holders of
Allowed Claims and Allowed Interests are accomplished pursuant to the
provisions of the Prepackaged Plan, (e) decide or resolve any and all
applications, motions, adversary proceedings, contested or litigated matters
and any other matters, and grant or deny any applications involving the Company
that may be pending on the Effective Date, (f) enter such orders as may be
necessary or appropriate to implement or consummate the provisions of the
Prepackaged Plan and all contracts, instruments, releases, and other agreements
or documents created in connection with the Prepackaged Plan or this Disclosure
Statement, (g) resolve any and all controversies, suits or issues that may
arise in connection with consummation of the Prepackaged Plan, (h) modify the
Prepackaged Plan before or after the Effective Date pursuant to section 1127 of
the Bankruptcy Code, or to modify this Disclosure Statement or any contract,
instrument, release or other agreement or document created in connection with
the Prepackaged Plan or this Disclosure Statement in accordance with section
1127 of the Bankruptcy Code; or remedy any defect or omission or reconcile any
inconsistency in any Bankruptcy Court order, the Prepackaged Plan, this
Disclosure Statement or any contract, instrument, release or other agreement or
document created in connection with the Prepackaged Plan or this Disclosure
Statement, in such manner as may be necessary or appropriate to consummate the
Prepackaged Plan, to the extent authorized by the Bankruptcy Code, (i) issue
injunctions, enter and implement other orders or take such other actions as may
be necessary or appropriate to restrain interference by any entity with
consummation or enforcement of the Prepackaged Plan, (j) enter and implement
such orders as are necessary or appropriate if the Confirmation Order is for
any reason modified, stayed, reversed, revoked or vacated, and (k) enter an
order on a final decree concluding the Reorganization Case.
If the Bankruptcy Court abstains from exercising jurisdiction or is otherwise
without jurisdiction over any matter arising out of the Reorganization Case,
including, without limitation, the matters set forth above, the Prepackaged
Plan will have no effect upon and will not control, prohibit or limit the
exercise of jurisdiction by any other court having competent jurisdiction with
respect to such matter.
ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PREPACKAGED PLAN
If the Company commences the Reorganization Case and the Prepackaged Plan is
not subsequently confirmed and consummated, the alternatives to the Prepackaged
Plan include (a) the proposal of an alternative plan of reorganization, or (b)
liquidation of the Company under Chapter 11 or 7 of the Bankruptcy Code or
otherwise.
Alternative Plans. If the Prepackaged Plan is not confirmed, the Company or,
if the Company's exclusive period in which to file a plan of reorganization has
expired or is terminated, any other party in interest could
65
<PAGE>
attempt to formulate a different plan. Such a plan might involve either a
reorganization and continuation of the Company's business or an orderly
liquidation of its assets. With respect to an alternative plan, the Company has
explored various other alternatives in connection with the extensive
negotiation process involved in the formulation and development of the
Prepackaged Plan. The Company believes that the Prepackaged Plan enables
holders of Claims and Interests to realize the most value under the
circumstances.
Liquidation Under Chapter 7. If no plan is confirmed, the Reorganization Case
may be converted to a case under Chapter 7 of the Bankruptcy Code, pursuant to
which a trustee would be elected or appointed to liquidate the assets of the
Company for distribution to creditors in accordance with the priorities
established by the Bankruptcy Code. A discussion of the effects that a Chapter
7 liquidation would have on the recovery of holders of Claims and Interests is
set forth under "--Confirmation of the Prepackaged Plan--Best Interests of
Creditors Test; Liquidation Value" above. The Company believes that holders of
impaired Claims would realize a greater recovery under the Prepackaged Plan
than would be realized under a Chapter 7 liquidation. Based upon the
liquidation value, holders of Outstanding Common Shares would not receive or
retain anything under a Chapter 7 liquidation.
INSIDER AND AFFILIATE CLAIMS
The Company is not aware of any claims that may be asserted by its former
affiliate or by any of its subsidiaries. Members of the Board of Trustees are
currently parties to a deferred compensation plan. The Company does not
anticipate any insider claims to be asserted based on this plan. However, the
Company cannot guarantee that such claims may not be asserted in the future.
HOLDERS OF OUTSTANDING NOTES, OUTSTANDING COMMON SHARES, OTHER SECURED CLAIMS
AND UNSECURED CLAIMS AND ALL OTHER INTERESTED PARTIES ARE URGED TO READ THE
PREPACKAGED PLAN IN ITS ENTIRETY SO THAT THEY MAY MAKE AN INFORMED JUDGMENT
CONCERNING THE PREPACKAGED PLAN.
APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS TO RESALES OF NEW COMMON
SHARES AND NEW SENIOR NOTES
After completion of the Restructuring, there will be approximately 11,226,000
New Common Shares outstanding and approximately $110 million in principal
amount of New Senior Notes outstanding.
The New Common Shares and New Senior Notes to be issued pursuant to the
Prepackaged Plan may be freely transferred by most recipients thereof and all
resales in the New Common Shares and New Senior Notes are exempt from
registration under federal and state securities laws, unless the holder is an
"underwriter" with respect to such securities. Section 1145(b) of the
Bankruptcy Code defines four types of "underwriters:"
(i) persons who purchase a claim against, an interest in, or a claim for
administrative expense against the debtor with a view to distributing
any security received in exchange for such a claim or interest;
(ii) persons who offer to sell securities offered under a plan for the
holders of such securities;
(iii) persons who offer to buy such securities for the holders of such
securities, if the offer to buy is (a) with a view to distributing such
securities or (b) made under a distribution agreement; and
(iv) a person who is an "issuer" with respect to the securities, as the
term "issuer" is defined in section 2(11) of the Securities Act.
Under section 2(11) of the Securities Act, an "issuer" includes any person
directly or indirectly controlling or controlled by the issuer, or any person
under direct or indirect common control with the issuer. ANY PERSON OR GROUP OF
PERSONS, WHO ACT IN CONCERT OR WHO RECEIVE A SUBSTANTIAL AMOUNT OF NEW COMMON
SHARES PURSUANT TO THE PREPACKAGED PLAN, MAY BE DEEMED TO BE AN "ISSUER" AND
THEREFORE AN "UNDERWRITER" UNDER THE FOREGOING DEFINITION.
66
<PAGE>
To the extent that persons deemed to be "underwriters" receive New Common
Shares or New Senior Notes pursuant to the Prepackaged Plan, resales by such
persons would not be exempted by section 1145 of the Bankruptcy Code from
registration under the Securities Act or other applicable law. Persons deemed
to be underwriters, however, may be able to sell such securities without
registration subject to the provisions of Rule 144 under the Securities Act,
which permits the public sale of securities received pursuant to the
Prepackaged Plan by "underwriters," subject to the availability to the public
of current information regarding the issuer and to volume limitations and
certain other conditions. In addition, each holder of Allowed Class 2 Claims
that receives sufficient New Common Shares such that it and its affiliates own
5% or more of the total New Common Shares outstanding or 5% or more of New
Senior Notes may enter into the Registration Rights Agreement which will permit
registration of the sale of their New Common Shares or New Senior Notes in
certain circumstances.
The Registration Rights Agreement requires the Company to file a registration
statement under the Securities Act for the offering on a continuous or delayed
basis in the future of the New Common Shares and New Senior Notes (the "Shelf
Registration") within 60 days from the Effective Date. Pursuant to the
Registration Rights Agreement, the Company will use its best efforts to cause
to be declared effective as soon as possible after such filing and to keep the
Shelf Registration continuously effective for the period beginning on the date
on which the Shelf Registration is declared effective and ending on the earlier
of (i) the third anniversary of such date plus the number of days of any
suspension of the holders' right to sell thereunder, and (ii) the first date
that there are no securities for which a right of registration exists. A group
of holders of at least 10% of the New Common Shares or New Common Notes may
demand registration beginning at the end of the Shelf Registration period and
ending on the earlier of (i) the seventh anniversary thereof and (ii) the first
date on which there are no securities for which a right of registration exists.
Whether or not any particular person would be deemed to be an "underwriter"
with respect to any security to be issued pursuant to the Prepackaged Plan
would depend upon various facts and circumstances applicable to that person.
Accordingly, the Company expresses no view as to whether any person would be an
"underwriter" with respect to any security to be issued pursuant to the
Prepackaged Plan.
GIVEN THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A PARTICULAR
PERSON MAY BE AN "UNDERWRITER," THE COMPANY MAKES NO REPRESENTATION CONCERNING
THE RIGHT OF ANY PERSON TO TRADE IN THE SECURITIES TO BE DISTRIBUTED PURSUANT
TO THE RESTRUCTURING. THE COMPANY RECOMMENDS THAT POTENTIAL RECIPIENTS OF THE
NEW COMMON SHARES AND NEW SENIOR NOTES CONSULT THEIR OWN COUNSEL CONCERNING
WHETHER THEY MAY FREELY TRADE SUCH SECURITIES.
No precise predictions can be made as to the effect, if any, that market
sales of New Common Shares and New Senior Notes or the availability of New
Common Shares for sale will have on the market prices of the Common Shares and
New Senior Notes prevailing from time to time. Nevertheless, sales of
substantial amounts of the New Common Shares and New Senior Notes in the public
market could adversely affect the then prevailing market prices of the Common
Shares and New Senior Notes and could impair the Company's ability to raise
capital at that time through the sale of securities.
THE PLAN SOLICITATION; VOTING PROCEDURES
GENERAL
This Disclosure Statement, together with the accompanying Ballot, Master
Ballot and the related materials delivered together herewith, is being
furnished to each Record Holder (as defined below) of Outstanding Notes,
Outstanding Common Shares, Other Secured Claims and Unsecured Claims in
connection with the Restructuring. The term "Record Holder" with respect to a
vote on the Prepackaged Plan means any person holding the beneficial interest
in a Claim or Interest on the Record Date. Holders
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<PAGE>
who purchase Claims or Interests or whose purchase of Claims or Interests is
registered after the Record Date who wish to vote on the Prepackaged Plan must
arrange with the seller of such Claims or Interests to receive a Ballot from
the Record Holder on such date. Abstentions will not be counted as votes for or
against the Prepackaged Plan, since only votes actually cast will be counted.
Therefore, the Prepackaged Plan could be approved by an affirmative vote of (i)
holders holding significantly less than two-thirds in amount and one-half in
number of each of the classes of holders of Outstanding Notes, Other Secured
Claims and Unsecured Claims and (ii) holders of Outstanding Common Shares
holding significantly less than two-thirds in amount of the Outstanding Common
Shares. See "--Required Votes" below.
"Record Holders" do not include brokerage firms, commercial banks, trust
companies or other nominees that do not hold Outstanding Securities for their
own account. Such entities should provide copies of this Disclosure Statement,
the Ballots and all of the related materials to their customers and to
beneficial owners of such Outstanding Securities. Any beneficial owner who has
not received a Disclosure Statement or Ballot should contact its brokerage firm
or nominee, the Solicitation Agent, the Information Agent or the Company.
If, by the Expiration Date, the Requisite Plan Acceptances have been received
from the holder of Outstanding Notes, the Company currently intends to commence
the Reorganization Case by filing a voluntary petition for relief under Chapter
11 of the Bankruptcy Code and to use the Plan Acceptances, as evidenced by the
Ballots and Master Ballots solicited pursuant to this Disclosure Statement, to
seek confirmation of the Prepackaged Plan under Chapter 11 of the Bankruptcy
Code as promptly as possible.
Under section 1126(b) of the Bankruptcy Code, a holder of a claim or equity
interest that has accepted or rejected a plan of reorganization before the
commencement of the Chapter 11 case will be deemed to have accepted or rejected
such plan for purposes of confirmation of such plan under Chapter 11 of the
Bankruptcy Code if the solicitation of such acceptance or rejection is in
compliance with any applicable non-bankruptcy law, rule or regulation governing
the adequacy of disclosure in connection with the solicitation.
Rule 3018(b) of the Bankruptcy Rules prescribes the conditions that must be
satisfied in order to count the ballots solicited with respect to a plan of
reorganization prior to the commencement of a Chapter 11 case. The rule
requires that the Bankruptcy Court must determine, after notice and a hearing,
that (i) such Chapter 11 plan was disseminated to substantially all holders of
impaired claims and equity interests, (ii) the time prescribed for voting on
such a plan was not unreasonably short, and (iii) the solicitation was
conducted in compliance with all applicable non-bankruptcy laws, rules and
regulations, or, if there are no such applicable laws, rules or regulations,
then the disclosure statement must contain "adequate information," or such pre-
petition solicitation will not be considered. Section 1125(a) of the Bankruptcy
Code defines "adequate information" as information of a kind, and in sufficient
detail, as far as is reasonably practicable in light of the nature and history
of a company and the condition of such company's books and records, that would
enable a hypothetical reasonable investor typical of holders of claims or
equity interests of the relevant class to make an informed judgment about the
plan of reorganization.
The Company believes that this Disclosure Statement and the Plan Solicitation
comply with applicable non-bankruptcy law and section 1125(a) of the Bankruptcy
Code and, therefore, with the requirements of the Bankruptcy Code and
applicable Bankruptcy Rules, including section 1126(b) of the Bankruptcy Code
and Rule 3018(b) of the Bankruptcy Rules, for the purpose of soliciting
acceptances or rejections of the Prepackaged Plan and that duly executed
Ballots and Master Ballots will be in compliance with the applicable provisions
of the Bankruptcy Code. This Disclosure Statement and the Prepackaged Plan
(delivered herewith as Annex A) are being transmitted to all known Record
Holders. The solicitation period for voting on the Prepackaged Plan is more
than 20 business days, which is the time prescribed by the Commission for an
exchange offer pursuant to Rule 14e-1 under the Exchange Act. The Company has
filed with the Commission proxy materials relating to Common Share acceptances
solicited hereby. Moreover, the Company believes that this Disclosure Statement
contains adequate information for all Holders to cast an informed vote to
accept or reject the Prepackaged Plan.
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<PAGE>
IF THE PREPACKAGED PLAN IS CONFIRMED BY THE BANKRUPTCY COURT, EACH HOLDER OF
AN OUTSTANDING NOTE WILL RECEIVE THE SAME CONSIDERATION AS OTHER HOLDERS OF
OUTSTANDING NOTES, EACH HOLDER OF OTHER CLAIMS WILL RECEIVE THE SAME
CONSIDERATION AS OTHER CLAIMS IN THE SAME CLASS AND EACH HOLDER OF OUTSTANDING
COMMON SHARES WILL RETAIN THE SAME PROPERTY AS OTHER HOLDERS OF OUTSTANDING
COMMON SHARES WHETHER OR NOT SUCH HOLDER VOTED TO ACCEPT THE PREPACKAGED PLAN.
MOREOVER, UPON CONFIRMATION, THE PREPACKAGED PLAN WILL BE BINDING ON ALL
CREDITORS AND INTEREST HOLDERS OF THE COMPANY REGARDLESS OF WHETHER SUCH
CREDITORS AND INTEREST HOLDERS VOTED TO ACCEPT THE PREPACKAGED PLAN.
VOTING RECORD DATE
Consistent with the provisions of Rule 3018(b) of the Bankruptcy Rules and
Rule 14e-1 under the Exchange Act, the Company has fixed the close of business
(New York City time) on July 7, 1995 as the Record Date for determining which
Holders are eligible to vote on the Prepackaged Plan.
REQUIRED VOTES
To confirm the Prepackaged Plan without utilizing the "cramdown" provisions
of Chapter 11 of the Bankruptcy Code as to a class of Claims or Interests
entitled to vote on the Prepackaged Plan, it is necessary, among other things,
for the Company to receive Plan Acceptances from (i) holders of Claims
constituting at least two-thirds in dollar amount and more than one-half in
number of the allowed Claims in each impaired class voting on the Prepackaged
Plan and (ii) holders of at least two-thirds in amount of the Outstanding
Common Shares in such class voting on the Restructuring. Ballots not cast in
favor of or against the Prepackaged Plan are not counted as votes for or
against the Prepackaged Plan. Therefore, the Prepackaged Plan could be approved
by (i) holders with an affirmative vote of significantly less than the holders
of two-thirds in dollar amount and one-half in number of each of the
Outstanding Notes, Other Secured Claims and Unsecured Claims and (ii) holders
of Outstanding Common Shares with an affirmative vote of significantly less
than two-thirds of the holders of the Outstanding Common Shares. If necessary,
the Company intends to use "cramdown" procedures with respect to all impaired
classes which reject the Prepackaged Plan other than the class of holders of
Outstanding Notes. In any event, confirmation of the Prepackaged Plan will
require, among other things, the acceptance (as indicated above) of at least
one impaired non-insider class of Claims. See "The Prepackaged Plan--
Confirmation of the Prepackaged Plan--Nonconsensual Confirmation." The Company
reserves the right to request nonconsensual confirmation of the Prepackaged
Plan in the event any impaired class entitled to vote (other than the class of
Outstanding Notes) fails to vote to accept the Prepackaged Plan.
HOW TO VOTE
Persons Entitled to Vote. The following classes of Claims and Outstanding
Common Shares are impaired under the Prepackaged Plan and holders of allowed
Claims or Interests in such classes, as of the Record Date, are entitled to
vote to accept or reject the Prepackaged Plan upon the terms and subject to the
conditions set forth herein and in the Prepackaged Plan:
Class 2--Claims of Holders of Outstanding Notes
Class 3--Other Secured Claims
Class 4--Unsecured Claims
Class 5--Interests of Holders of Outstanding Common Shares
The class of holders of Outstanding Stock Rights Claims (Class 6) is also
impaired under the Prepackaged Plan; however, no distribution shall be made to
holders of such Claims and, therefore, such class is deemed to have rejected
the Prepackaged Plan and is not being solicited to vote to accept or reject the
Prepackaged Plan.
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<PAGE>
Voting Procedure. The Company will not hold a meeting to vote on the
Prepackaged Plan. Rather, the Company is soliciting acceptance of the
Prepackaged Plan by means of Ballots and Master Ballots. All votes to accept or
reject the Prepackaged Plan must be cast by using the Ballot or, in the case of
a brokerage firm or other nominee holding Outstanding Securities in its own
name on behalf of a beneficial owner, the Master Ballot, enclosed with this
Disclosure Statement (or original, manually executed facsimiles thereof).
Brokerage firms or other nominees holding Outstanding Notes for the account of
only one beneficial owner may use the Ballot. Purported votes that are cast in
any other manner will not be counted. Ballots and Master Ballots must be
received by the solicitation agent no later than 12:00 Midnight, New York City
time, on the Expiration Date.
ONLY BALLOTS AND MASTER BALLOTS ARE BEING REQUESTED AT THIS TIME. DO NOT
DELIVER ANY OTHER DOCUMENTS PERTAINING TO THE PLAN SOLICITATION TO THE COMPANY,
THE SOLICITATION AGENT OR ANY OTHER AGENT UNLESS AND UNTIL REQUESTED TO DO SO
BY THE COMPANY.
Beneficial Owners. Any beneficial owner holding Outstanding Securities in its
own name that is reflected on the register (maintained with respect to the
Outstanding Notes by the Outstanding Note Trustee pursuant to the Outstanding
Note Indenture and maintained with respect to the Outstanding Common Shares by
the transfer agent for the Company's Common Shares) on the applicable Record
Date can vote by completing and signing the enclosed Ballot and returning it
directly to the Solicitation Agent (using the enclosed pre-addressed, stamped
envelope) prior to the Expiration Date. For purposes of voting to accept or
reject the Prepackaged Plan, such beneficial owners of Outstanding Securities
will be deemed to be the "holders" of such Outstanding Securities.
Any broker or other intermediary having power of attorney or a proxy to vote
on behalf of a beneficial owner or a beneficial owner holding Outstanding
Securities in "street names" (i.e., through a brokerage firm, bank, trust
company or other nominee) can vote by following the instructions set forth
below:
1. Fill in all the applicable information on the Ballot.
2. Sign the Ballot (unless the Ballot has already been signed by the bank,
trust company or other nominee).
3. Return the Ballot to the addressee in the pre-addressed, stamped
envelope enclosed with the Ballot. If no envelope was enclosed, contact
the Solicitation Agent for instructions.
Any Ballot submitted to a brokerage firm or proxy intermediary will not be
counted until such brokerage firm or proxy intermediary (i) properly executes
and delivers such Ballot to the Solicitation Agent or (ii) properly completes
and delivers a corresponding Master Ballot to the Solicitation Agent prior to
the Expiration Date.
Brokerage Firms, Banks, and Other Nominees. A brokerage firm, commercial
bank, trust company or other nominee that is the Record Holder of Outstanding
Securities for a beneficial owner can vote on behalf of such beneficial owner
by (i) distributing a copy of this Disclosure Statement, the Ballot and all of
the related materials and all appropriate Ballots to such beneficial owner,
(ii) collecting all such Ballots, (iii) completing a Master Ballot compiling
the votes and other information from the Ballots collected, and (iv)
transmitting such completed Master Ballot to the Solicitation Agent prior to
the Expiration Date. A proxy intermediary acting on behalf of a brokerage firm
or bank may follow the procedures outlined in the preceding sentence to vote on
behalf of such beneficial owner. Alternatively, a brokerage firm, commercial
bank, trust company or other nominee that is the Record Holder of Outstanding
Securities for only one beneficial owner may arrange for such beneficial owner
to vote by distributing a copy of this Disclosure Statement and a Ballot to
such beneficial owner for such beneficial owner to execute and return to the
Solicitation Agent.
Other. If a Ballot is signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should indicate such
capacity when signing and, unless otherwise determined by the Company, must
submit proper evidence satisfactory to the Company of their authority to act in
such capacity.
70
<PAGE>
AGREEMENTS UPON FURNISHING BALLOTS ACCEPTING THE RESTRUCTURING
The delivery of a Ballot or Master Ballot accepting the Prepackaged Plan
pursuant to one of the procedures set forth herein will constitute the
agreement of the Holder to accept all the terms of, and conditions to, the
Prepackaged Plan (or any modification thereof that does not materially and
adversely affect the treatment of the class of Claims or Interests of which
such Holder is a member).
WAIVERS OF DEFECTS, IRREGULARITIES, ETC.
Unless otherwise directed by the Bankruptcy Court, all questions regarding
the validity, form, eligibility (including the time of receipt), acceptance and
revocation or withdrawal of Ballots and Master Ballots will be determined by
the Company in its sole discretion (subject to applicable law), whose
determinations will be final and binding. As indicated below under "Revocation
Rights," effective revocation of Ballots and Master Ballots must be delivered
to the Solicitation Agent prior to 12:00 Midnight (New York City time) on the
Expiration Date. The Company reserves the right to contest the validity of any
such revocation. The Company also reserves the right (subject to applicable
law) to reject any and all Ballots and Master Ballots not in proper form, the
acceptance of which would, in the opinion of the Company or its counsel, be
unlawful. The Company further reserves the right (subject to applicable law) to
waive any defects or irregularities or conditions of delivery with respect to
any particular Ballot or Master Ballot. The interpretation of defects or
irregularities (including the Ballot or Master Ballot and the respective
instructions thereto) by the Company, unless otherwise directed by the
Bankruptcy Court, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with deliveries of Ballots or Master
Ballots must be cured within such time as the Company (or the Bankruptcy Court)
determines. Neither the Company nor any other person will be under any duty to
provide notification of defects or irregularities with respect to deliveries of
Ballots or Master Ballots nor will any of them incur any liabilities for
failure to provide such notification. Unless otherwise directed by the
Bankruptcy Court, delivery of such Ballots and Master Ballots will not be
deemed to have been made until such irregularities have been cured or waived.
Ballots and Master Ballots with irregularities that have not been cured or
waived will be invalidated.
EXPIRATION DATE; EXTENSION; AMENDMENTS
The Solicitation will expire at 12:00 Midnight, New York City Time, on August
17, 1995, unless extended by the Company, in its sole discretion, in which case
the term "Expiration Date" will mean the latest time and date to which the
Solicitation is extended. Except to the extent the Company so determines or as
permitted by the Bankruptcy Court pursuant to Rule 3018 of the Bankruptcy
Rules, Ballots and Master Ballots that are received after the Expiration Date
will not be accepted or used by the Company in connection with the Company's
request for confirmation of the Prepackaged Plan.
The Company reserves the absolute right, in its sole discretion, at any time
or from time to time, to extend the Solicitation during which Ballots and
Master Ballots will be accepted by making a public announcement of such
extension no later than 9:00 a.m., New York City time, on the business day next
succeeding any previously announced Expiration Date. Without limiting the
manner in which the Company may choose to make any public announcement, the
Company will not have any obligation to publish, advertise or otherwise
communicate any such public announcement, except as may be required by
applicable law, other than by issuing a news release to the Dow Jones News
Service. During any extension, all Ballots and Master Ballots previously
delivered will remain subject to all the terms and conditions of the
Solicitation as modified or amended, including the withdrawal and revocation
rights specified herein and therein.
The Company reserves the right to amend, modify or supplement the Prepackaged
Plan prior to effectiveness, subject to the conditions contained in the
Prepackaged Plan. The Company also reserves the right to cancel the
Solicitation at any time prior to the Expiration Date and revoke the
Prepackaged Plan, subject to the conditions contained in the Prepackaged Plan.
The Company will give the Record Holders
71
<PAGE>
notice of any amendments, modifications or supplements as may be required by
applicable law. See "The Prepackaged Plan--Modification of the Prepackaged
Plan" and "The Prepackaged Plan--Revocation of the Prepackaged Plan."
REVOCATION RIGHTS
Any Record Holder that previously submitted to the Solicitation Agent prior
to the Expiration Date a properly completed Ballot or Master Ballot, may revoke
such Ballot or Master Ballot and change its vote by submitting to the
Solicitation Agent prior to 12:00 Midnight (New York City time) on the
Expiration Date, a properly completed Ballot or Master Ballot for acceptance or
rejection of the Restructuring. In the event that more than one timely,
properly completed Ballot or Master Ballot is received, only the Ballot or
Master Ballot which bears the latest date will be counted for purposes of
determining whether the Requisite Plan Acceptances have been received. After
commencement of the Reorganization Case, revocation may be effected only with
the approval of the Bankruptcy Court.
To be valid, a notice of revocation prior to the Expiration Date must (i)
contain the description of the Claim or the Outstanding Securities to which it
relates and the aggregate principal amount represented by such Claim or
Outstanding Securities, (ii) be signed by the Record Holder, in the same manner
as the Ballot or Master Ballot was signed, and (iii) be received prior to the
Expiration Date by the Solicitation Agent at the address set forth in this
Disclosure Statement. Prior to the Expiration Date, the Company intends to
consult with the Solicitation Agent to determine whether any revocations of
Ballots or Master Ballots were received and whether the Requisite Plan
Acceptances have been received. The Company expressly reserves the absolute
right to contest the validity of any such revocation of Ballots or Master
Ballots.
Unless otherwise directed by the Bankruptcy Court, a purported notice of
revocation of Ballots or Master Ballots that is not received in a timely manner
by the Solicitation Agent will not be effective to revoke a previously
furnished valid Ballot or Master Ballot.
SOLICITATION AGENT
The Company, or its designee, will act as Solicitation Agent for the
Solicitation. All correspondence in connection with the Plan Solicitation, the
Ballots and the Master Ballots should be addressed to the Company at 8380 Old
York Road, Suite 300, Elkins Park, Pennsylvania 19027-1590, attention: Daniel
F. Hennessey (telephone: (215) 881-1525).
INFORMATION AGENT
The Company, or its designee, will act as Information Agent in connection
with the Solicitation. Questions and requests for assistance may be directed to
the Company at 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania 19027-
1590, attention: Daniel F. Hennessey (telephone: (215) 881-1525).
OTHER MATTERS
The cost of soliciting Ballots and Master Ballots will be borne by the
Company. Ballots and Master Ballots may be solicited by personal interview,
telephone and telegraph as well as by use of the mails. It is anticipated that
banks, brokerage houses and other custodians, nominees or fiduciaries will be
requested to forward soliciting material to their principals and to obtain
authorization for the execution of Ballots and Master Ballots. The Company will
not pay any commission or other remuneration to any broker, dealer, salesman or
other persons for soliciting acceptances. Employees of the Company
participating in the solicitation of Ballots and Master Ballots will not
receive any additional remuneration. The Company estimates that the total cost
to the Company of soliciting Ballots and Master Ballots will be approximately
$200,000.
Proposals of holders of Common Shares intended to be presented at the next
annual meeting of shareholders must be received by the Company on or prior to
September 1, 1995 in order to be considered for inclusion in the Company's
proxy statement relating to the 1996 annual meeting.
72
<PAGE>
FINANCIAL PROJECTIONS
(UNAUDITED)
In connection with the preparation of the Prepackaged Plan, the following
financial projections (the "Projections") were prepared in May 1995 by
management of the Company in a manner consistent with the special purpose
valuation reports prepared by Kenneth Leventhal and the valuations prepared by
Houlihan Lokey, based on assumptions considered reasonable by the management of
the Company, but SUCH PROJECTIONS DO NOT REFLECT A BUSINESS PLAN. NO BUSINESS
PLAN HAS BEEN APPROVED AS OF THE DATE THESE PROJECTIONS WERE PREPARED. THE
PROJECTIONS ASSUME THAT THE PREPACKAGED PLAN WILL BE APPROVED AND IMPLEMENTED
IN ACCORDANCE WITH ITS TERMS. See "Summary--Purposes of the Restructuring" and
"--Effect of the Prepackaged Plan" and "The Prepackaged Plan." The Projections
assume the Company is operated on a "going concern" basis with only a limited
number of assets liquidated in the ordinary course of business. IT DOES NOT
CONTEMPLATE AN ORDERLY LIQUIDATION STRATEGY. If the Prepackaged Plan is
approved, the Board of Trustees of the reorganized Company and its management
will be responsible for the preparation of a business plan, the results of
which may differ materially from those projected herein. As a result,
management and the Board of Trustees of the Company caution that NO
REPRESENTATION CAN BE MADE WITH RESPECT TO THE ACCURACY OF THESE PROJECTIONS OR
THE ABILITY OF THE COMPANY TO ACHIEVE THE PROJECTED RESULTS.
The following projected balance sheets, statements of operations and
statements of cash flow are based upon many assumptions, including, without
limitation, assumptions relating to industry performance, general business and
economic conditions and the assumption that excess cash flow will be used to
prepay debt and not to pay dividends except to the extent required to retain
REIT status under the Internal Revenue Code. The Projections are only
estimates, and actual results may vary considerably from the Projections. In
addition, uncertainties that are inherent in the Projections increase for later
years in the projection period due to the increased difficulty associated with
forecasting levels of economic activity and corporate performance at more
distant points in the future. Holders are cautioned not to place undue reliance
on the Projections.
After the Effective Date, the Board of Trustees of the reorganized Company
may, within the limitations of the New Senior Note Indenture, adopt a different
policy and there can be no assurance that any of these assumptions can be met.
As a result, there can be no assurance that the future performance of the
reorganized Company will not be materially different than projected herein. The
future performance of the Company's portfolio of assets will be subject to
prevailing economic conditions including the future performance of the real
estate market, the availability of financing in the real estate market and
other factors beyond the control of the Company.
The Projections were not prepared with a view towards compliance with the
published guidelines of the American Institute of Certified Public Accountants
regarding financial projections. The Projections have not been reviewed,
examined or compiled by the Company's independent auditors or any other
independent certified public accountants or by Houlihan Lokey or Kenneth
Leventhal. The Company does not, in the normal course of its business, prepare
multi-year projections as to future revenues or earnings. Accordingly, the
Company does not intend to update or otherwise revise the Projections to
reflect circumstances existing since the date of their preparation in May 1995
or to reflect the occurrence of unanticipated events. Furthermore, the Company
does not intend to update or revise the Projections to reflect changes in
general economic or industry conditions.
For purposes of the Projections, the effective date of the Prepackaged Plan
is assumed to occur as of September 30, 1995. Projections through 2000 are
based upon economic assumptions used by the Company for each year during the
projection period and are included in the notes to the projected financial
statements.
See Note 2--"Accounting Treatment" for a discussion of "fresh start"
accounting principles used by the Company in preparing the Projections. The
Projections should be read together with the information contained in "Pro
Forma Financial Information," "Accounting Treatment" and "Business" and the
Company's financial statements referred to under "Additional Information
Concerning the Company."
73
<PAGE>
MORTGAGE AND REALTY TRUST
UNAUDITED PROJECTED BALANCE SHEET
AT SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets
Mortgage loans--net............ $ 49,165 $ 44,886 $ 41,714 $ 36,436 $ 18,578
Real estate owned--net......... 163,104 158,659 154,606 151,363 146,514
Allowance for losses........... 0 0 0 0 0
-------- -------- -------- -------- --------
Invested assets................ 212,269 203,545 196,320 187,799 165,092
Cash and cash equivalents...... 8,039 8,255 6,545 5,682 6,022
Interest receivable and other
assets........................ 4,778 4,778 4,778 4,778 4,778
-------- -------- -------- -------- --------
Total Assets................... $225,086 $216,578 $207,643 $198,259 $175,892
======== ======== ======== ======== ========
Liabilities
New Senior Notes............... $ 86,419 $ 69,084 $ 50,704 $ 31,880 $ 0
Loan on equity investment...... 13,899 13,826 13,746 13,657 13,556
Accounts payable and accrued
expenses...................... 3,514 3,514 3,514 3,514 3,514
-------- -------- -------- -------- --------
Total Liabilities.............. 103,832 86,424 67,964 49,051 17,070
-------- -------- -------- -------- --------
Shareholders' equity
Reorganized capital............ 115,889 115,889 115,889 115,889 115,889
Retained earnings.............. 5,365 14,265 26,158 39,785 56,410
Cumulative dividends paid...... 0 0 (2,368) (6,466) (13,477)
-------- -------- -------- -------- --------
Total Shareholders' Equity..... 121,254 130,154 139,679 149,208 158,822
-------- -------- -------- -------- --------
Total Liabilities and Share-
holders' Equity............... $225,086 $216,578 $207,643 $198,259 $175,892
======== ======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES
74
<PAGE>
MORTGAGE AND REALTY TRUST
UNAUDITED PROJECTED STATEMENT OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income
Interest and fee income on mortgage
loans................................. $ 6,512 $ 6,517 $ 6,292 $ 5,860 $ 4,428
Net operating income from real estate
owned................................. 21,856 23,252 24,113 24,376 25,816
Interest on short-term investments..... 703 626 611 564 622
------- ------- ------- ------- -------
Total Income......................... 29,071 30,395 31,016 30,800 30,866
------- ------- ------- ------- -------
Expenses
Interest............................... 12,614 10,498 8,418 6,402 3,232
Depreciation and amortization on real
estate owned.......................... 7,892 7,997 7,805 7,971 8,309
Provision for losses................... 0 0 0 0 0
Other operating expenses............... 3,200 3,000 2,900 2,800 2,700
------- ------- ------- ------- -------
Total Expenses....................... 23,706 21,495 19,123 17,173 14,241
------- ------- ------- ------- -------
Net Income............................. $ 5,365 $ 8,900 $11,893 $13,627 $16,625
======= ======= ======= ======= =======
Dividend distributions................. $ 0 $ 0 $ 2,368 $ 4,098 $ 7,011
======= ======= ======= ======= =======
Earnings per share (based upon
11,226,215 shares outstanding)........ $ 0.48 $ 0.79 $ 1.06 $ 1.21 $ 1.48
</TABLE>
SEE ACCOMPANYING NOTES
75
<PAGE>
MORTGAGE AND REALTY TRUST
UNAUDITED PROJECTED STATEMENT OF CASH FLOWS
FISCAL YEARS ENDED SEPTEMBER 30
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating activities
Net income.................... $ 5,365 $ 8,900 $11,893 $13,627 $16,625
(Decrease) increase in
deferred income on mortgage
loans........................ (123) 397 0 (370) (226)
Depreciation/amortization..... 7,892 7,997 7,805 7,971 8,309
------- ------- ------- ------- -------
Net cash provided by operating
activities................... 13,134 17,294 19,698 21,228 24,708
------- ------- ------- ------- -------
Investing activities
Investments in real estate
owned........................ (9,163) (3,552) (3,752) (4,728) (3,460)
Mortgage loan advances........ 0 0 0 0 0
Sale of real estate owned..... 6,847 0 0 0 0
Principal repayments on mort-
gage loans................... 9,577 3,882 3,172 5,648 18,084
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities......... 7,261 330 (580) 920 14,624
------- ------- ------- ------- -------
Cash flow from financing ac-
tivities
Repayment of New Senior Notes
due 2002..................... (23,581) (17,335) (18,380) (18,824) (31,880)
Repayment of loan on equity
investment................... (65) (73) (80) (89) (101)
Dividends..................... 0 0 (2,368) (4,098) (7,011)
------- ------- ------- ------- -------
Net cash used in financing ac-
tivities..................... (23,646) (17,408) (20,828) (23,011) (38,992)
------- ------- ------- ------- -------
Net increase (decrease) in
cash equivalents............. (3,251) 216 (1,710) (863) 340
Cash and cash equivalents at
beginning of period.......... 11,290 8,039 8,255 6,545 5,682
------- ------- ------- ------- -------
Cash and cash equivalents at
end of period................ $ 8,039 $ 8,255 $ 6,545 $ 5,682 $ 6,022
======= ======= ======= ======= =======
Supplemental Schedule of
Non-Cash Investing
Activities
Transfer of mortgage loans to
real estate owned............ $26,481 $ 0 $ 0 $ 0 $ 0
======= ======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES
76
<PAGE>
NOTES TO PROJECTED FINANCIAL STATEMENTS
1. THE PREPACKAGED PLAN. See "The Prepackaged Plan" and "Description of New
Senior Notes" for a discussion of the terms and conditions of the Restructuring
and the New Senior Notes and the proposed treatments of holders of Outstanding
Notes. The projections assume that excess cash is used to optionally redeem
outstanding New Senior Notes and thereby reduce the outstanding principal
amount of New Senior Notes except to the extent needed to pay dividends in
order to maintain REIT status under the Internal Revenue Code.
2. ACCOUNTING TREATMENT. See "Accounting Treatment" for a discussion of how
the Company proposes to account for the Restructuring.
3. MORTGAGE LOAN AND REAL ESTATE OWNED PORTFOLIO.
In preparing the projections, each mortgage loan was individually analyzed
taking into account property type, property location, building age and
condition, leasing, local market conditions, and other pertinent factors,
including but not limited to environmental factors.
In determining the projected payoff dates for the Company's mortgage loans,
external factors such as the current state of the real estate markets in which
the properties are located, as well as the amount of potential refinancing
dollars for each property available to take out the Company's current loan
balances, were taken into account. As a result, those loans that are not
projected to pay-off are either assumed extended beyond their contractual
maturity date or foreclosed upon. The projection assumes that all earning loans
remain current on their monthly interest payments throughout the five-year
period.
Each property owned by the Company was analyzed using similar criteria
employed in reviewing the mortgage loan portfolio. Specific analysis of current
rent rolls and projected leasing assumptions determined projected amounts for
capital expenditures for items such as building improvements, tenant
improvements and leasing commissions. Current market conditions were taken into
account in determining rental rates for vacant space which is assumed to be
leased during the five-year projection. Two owned properties are projected to
be sold in fiscal 1996; in addition, several land sales are projected to occur
in fiscal 1996. No other real estate owned is projected to be sold during the
remainder of the projection.
4. NEW INVESTMENTS. No new investments have been assumed during the five-year
projections. The projection assumes that excess cash flow will be utilized to
prepay the New Senior Notes.
5. PROVISION FOR LOSSES: GAINS OR LOSSES ON SALES
No provision for losses are assumed during the five-year projection.
Mortgage loan payoffs and real estate asset sales are liquidated at the
values established under "fresh start" accounting. As a result, no gains or
losses are projected from sales of real estate or from mortgage loan payoffs.
6. DIVIDENDS/TAXABLE INCOME. The New Senior Note Indenture will restrict the
payment of dividends, other than such declaration and making of dividend
payments that the Company deems necessary to preserve its status as a REIT,
unless the consolidated net worth of the Company at the time of such payment
and after giving effect thereto is at least $50 million; provided, however,
that the Company shall in no event declare or make any such dividend payment or
other distribution if a default or event of default under the New Senior Note
Indenture has occurred and is continuing. Under the Internal Revenue Code, the
Company must distribute 95% of its "REIT taxable income" to its shareholders to
continue to qualify as a REIT. See "Certain Federal Income Tax Consequences--
REIT Status and Taxation of Company Under the Prepackaged Plan--Annual REIT
Distribution Requirements." Taxable income required to be distributed will be
materially less than generally accepted accounting principles ("GAAP")
accounting
77
<PAGE>
income due to differences related to depreciation, use of NOLs and timing
differences related to bad debt deductions. It is assumed in the projections
that the Company will use NOLs (subject to limitations under section 382 of the
Internal Revenue Code) to reduce taxable income. See "Certain Federal Income
Tax Consequences--Additional Tax Consequences to the Company from the
Prepackaged Plan." Notwithstanding the foregoing, the Company expects that the
Board of Trustees of the reorganized Company will, when appropriate, declare
and cause dividends to be made to holders of Common Shares.
7. OTHER OPERATING EXPENSES. Other operating expenses are based upon 1.25% of
invested assets at the beginning of each fiscal year.
8. INVESTMENT INCOME. The projections assume that excess cash is invested in
commercial paper rated A-1/P-1 or better, with a rate of 5.75% throughout the
projection period.
9. OTHER ASSETS. Other assets include accounts receivable, accrued interest
receivable and prepaid assets. It is assumed these amounts remain constant
throughout the projection period.
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES. It is assumed that these amounts
remain constant throughout the projection period.
11. SHAREHOLDERS' EQUITY. Retained earnings increase throughout the
projection period due to differences between GAAP accounting income and taxable
income (discussed above in Note 5). These differences, which are material,
allow the Company to retain earnings and thus, the required dividend
distributions are projected to be less than GAAP accounting income. It should
be noted that retained earnings could decline significantly from the figures
shown in the projection if (1) the projected rental rates and/or projected
occupancy levels are not achieved resulting in lower cash flow, (2) there is an
increase in the level of non-performing mortgage loans, or (3) additional
provisions for losses are incurred above the levels projected.
78
<PAGE>
ACCOUNTING TREATMENT
The Company proposes to account for the Restructuring using the principles of
"fresh start" accounting as required by Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-
7"). Pursuant to such principles, in general, the Company's assets and
liabilities will be revalued. The assets will be stated at their
"Reorganization Value" which is defined as value of the Company on a going
concern basis following the Restructuring. The Company based its Reorganization
Value on the midpoint of the going concern valuation prepared by Kenneth
Leventhal as of March 31, 1995. The liabilities will be stated at their fair
value. The difference between the Reorganization Value of the assets and the
fair value of the liabilities will be recorded as stockholders' equity with
retained earnings restated to zero.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statement of operations for the year ended
September 30, 1994, and the six months ended March 31, 1995, were prepared as
if consummation of the Prepackaged Plan had occurred at October 1, 1993. The
unaudited pro forma balance sheet as of March 31, 1995, was prepared as if the
consummation of the Prepackaged Plan had occurred as of March 31, 1995. The
adjustments set forth in the unaudited Pro Forma Statement of Operations for
the year ended September 30, 1994 and the six months ended March 31, 1995, and
the unaudited Pro Forma Balance Sheet as of March 31, 1995, under the caption
"Proposed Reorganization," reflect the assumed effects of the Restructuring.
The adjustments set forth in the unaudited Pro Forma Balance Sheet as of March
31, 1995, under the caption "Fresh Start" reflect the assumed effects of the
adoption of the "fresh start" accounting prescribed by SOP 90-7. The unaudited
pro forma financial information should be read in conjunction with the
financial statements of the Company and the related notes thereto referred to
under "Additional Information Concerning the Company" and management's
discussion thereof contained elsewhere in this Disclosure Statement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In management's opinion, all adjustments necessary to reflect the
effects of the Restructuring and "fresh start" accounting have been included.
The unaudited pro forma balance sheet is not necessarily indicative of what the
actual financial position would have been at March 31, 1995, nor does it
purport to represent the future financial position of the Company. The
unaudited pro forma statement of operations is not necessarily indicative of
what the actual financial results of the Company would have been for the year
ended September 30, 1994, and the six months ended March 31, 1995, nor does it
purport to represent the future financial results of the Company.
79
<PAGE>
PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PROPOSED FRESH PRO
HISTORICAL REORGANIZATION START FORMA
---------- -------------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets
Cash and marketable $ 73,140 ($ 60,000)(A) $ 11,267
securities..............
0 (B)
(1,873)(C)
Loans and owned real
estate, net............. 287,418 ($ 66,218)(F) 221,200
Interest receivable and
other assets............ 6,390 (2,690)(G) 3,700
--------- --------- --------- --------
Total assets.......... $ 366,948 ($ 61,873) ($ 68,908) $236,167
========= ========= ========= ========
Liabilities
Outstanding Notes....... $ 290,000 ($290,000)(D) $ 0
New Senior Notes........ 0 110,000 (D) 110,000
Loan on REO--bank debt.. 17,593 17,593
Interest payable........ 51,324 (51,324)(D) 0
Accounts payable and
other................... 3,715 0 (B) (315)(G) 3,400
--------- --------- --------- --------
Total Liabilities..... 362,632 (231,324) (315) 130,993
--------- --------- --------- --------
Shareholders' Equity
Common stock at par..... 11,226 11,226
Additional paid in
capital................. 182,375 171,324 (E) (259,751)(I) 93,948
Retained earnings
(deficit)............... (189,285) (1,873)(C) 191,158 (H) 0
--------- --------- --------- --------
Total shareholders'
equity................ 4,316 169,451 (68,593) 105,174
--------- --------- --------- --------
Total liabilities and
shareholders' equity.. $ 366,948 ($ 61,873) ($ 68,908) $236,167
========= ========= ========= ========
</TABLE>
SEE ACCOMPANYING NOTES
80
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
ADJUSTMENT TO REFLECT PROPOSED REORGANIZATION
(A) Reflects a $60.0 million payment to creditors being made at implementation
of the Prepackaged Plan (including the $25.0 million payment made on April
11, 1995 pursuant to the Agreement of Understanding), provided that such
payment may be increased based upon the amount of cash held by the Company
in excess of its short-term obligations following confirmation of the
proposed plan. Note: Cash and marketable securities includes $1.4 million
of restricted cash related to the Company's termination pay plan and $1.6
million relating to borrower's deposits.
(B) Reflects cash payments to unsecured creditors totalling $0.
(C) Reflects cash payments for reorganization expenses totalling $1.9 million.
(D) Reflects the cancellation of Outstanding Notes in the face amount of $290.0
million and the related interest payable on these notes of $51.3 million
and the recording of the New Senior Notes due 2002 in the face amount of
$110.0 million.
(E) Reflects the conversion of amounts previously owed on the Outstanding Notes
converted to a 97% interest in the common shares of the reorganized Company
as follows:
<TABLE>
<CAPTION>
(DOLLARS
IN
THOUSANDS)
<S> <C>
Face amount of Outstanding Notes................................. $290,000
Interest payable at 3/31/95...................................... 51,324
--------
Total amount payable to creditors at 3/31/95..................... 341,324
Less: New Senior Notes due 2002.................................. (110,000)
Less: Cash payment to creditors.................................. (60,000)
--------
Amount previously due creditors converted to equity.............. $171,324
========
</TABLE>
ADJUSTMENT TO REFLECT "FRESH START" ACCOUNTING
(F) Reflects adjustment made to carrying value of loans and owned real estate
to estimated reorganization values.
<TABLE>
<CAPTION>
3/31/95
AMOUNT
--------------
($000 OMITTED)
<S> <C>
Invested assets (mortgage loans and real estate owned)...... $298,449
Less: Allowances for losses................................. (11,031)
--------
Invested assets, net of allowance for losses................ 287,418
--------
Extrapolated Valuation of Portfolio as of March 31, 1995
(see Footnote 1 below)..................................... 248,500
Less: Net present value of operating expenses............... (27,300)
--------
221,200
--------
Adjustment made to carrying value of invested assets, net... $ 66,218
========
</TABLE>
(G) Reflects adjustment made to carrying values of accounts receivable/other
assets and accounts payable/accrued expenses to adjust to estimated
reorganization values of $3.7 million and 3.4 million, respectively.
(H) Reflects the adjustment of the retained earnings/deficit to zero required
by "Fresh Start" Accounting.
81
<PAGE>
(I) Reflects the adjustment of the additional paid in capital as follows:
<TABLE>
<CAPTION>
(DOLLARS
IN
THOUSANDS)
<S> <C>
Adjust deficit to reset to zero (see H)........................... ($191,158)
Adjustment to carrying value of invested assets (see F)........... (66,218)
Adjustment to carrying value of receivables (see G)............... (2,690)
Adjustment to carrying value of payables/accrued expenses (see G). 315
---------
($259,751)
=========
</TABLE>
FOOTNOTE 1
For purposes of determining enterprise value it was assumed that operating
expenses (G&A) would be incurred at the following levels in the future:
<TABLE>
<CAPTION>
AMOUNT FISCAL YEAR
------ -----------
<S> <C>
$4,000,000 Year 1
$3,500,000 Year 2
$3,000,000 Year 3
$3,000,000 Year 4
$3,000,000 Year 5
$3,000,000 Year 6
</TABLE>
The valuation of the asset portfolio assumes continued operation of the
portfolio for several years. Sales and pay-offs of certain assets occur
throughout the analysis period. Property cash flows, loan payments and
pay-offs, and reversion amounts (based on normalized capital expenditures
in the reversion year) were discounted to present value at 12% per year.
Amounts DO NOT include extraordinary expenses for reorganization or
litigation.
The enterprise valuation assumes the portfolio is operated during the
projection period and that no additional investments are made. An
alternative enterprise valuation could be presented wherein the proceeds
from portfolio operations are used for alternative business purposes, i.e.,
new mortgages, other real estate investments, etc., and general and
administrative expenses are incurred to sustain such operations. Such
alternative valuation has not been presented herein.
The impact of general and administrative expenses has been reflected as a
direct reduction of total value. The present value of the general and
administrative expenses was calculated by applying a capitalization rate of
10% to year 6 stabilized general and administrative expenses and
discounting both the capitalized, stabilized year 6 expenses and the annual
expenses at 12%.
82
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- -------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Revenue
Interest Income............................... $ 14,709 $14,709
Real estate owned net operating income........ 10,372 10,372
Investment income............................. 1,238 (494)(J) 744
Other income.................................. 131 131
-------- ------- -------
Total income................................. 26,450 (494) 25,956
-------- ------- -------
Expenses
Interest expense--Outstanding Notes........... 31,302 (31,302)(K) 0
Interest expense--New Senior Notes............ 0 12,238 (K) 12,238
Interest expense--bank debt................... 1,700 1,700
Provision for losses.......................... 2,000 (2,000)(L) 0
Depreciation and amortization................. 5,840 (731)(M) 5,109
Administrative expenses....................... 4,838 4,838
Reorganization expenses....................... 2,360 (2,360)(N) 0
-------- ------- -------
Total expenses............................... 48,040 (24,155) 23,885
-------- ------- -------
Net income (loss)............................. ($21,590) $23,661 $ 2,071
======== ======= =======
Earnings per share............................ ($ 1.92) $ 0.18
Weighted Average Shares Outstanding........... 11,226 11,226
</TABLE>
SEE ACCOMPANYING NOTES
83
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- -------
(AMOUNTS IN THOUSANDS, EXCEPT
PER DATA)
<S> <C> <C> <C>
Revenue
Interest income............................... $ 5,181 $ 5,181
Owned real estate net operating income........ 7,212 7,212
Investment income............................. 1,864 (1,253)(O) 611
Other income.................................. 47 47
-------- ------- -------
Total income................................. 14,304 (1,253) 13,051
-------- ------- -------
Expenses
Interest expense--Outstanding Notes 18,759 (18,759)(P) 0
Interest expense--New Senior Notes 0 6,119 (P) 6,119
Interest expense--bank debt................... 1,073 1,073
Provision for losses.......................... 3,000 (3,000)(Q) 0
Depreciation & amortization................... 3,486 (681)(R) 2,805
Administrative expenses....................... 2,198 2,198
Reorganization expenses....................... 1,505 (1,505)(S) 0
-------- ------- -------
Total expenses............................... 30,021 (17,826) 12,195
-------- ------- -------
Net income (loss)............................. ($15,717) $16,573 $ 856
======== ======= =======
Earnings per share............................ ($ 1.40) $ 0.08
======== =======
Weighted Average Shares Outstanding........... 11,226 11,226
</TABLE>
SEE ACCOMPANYING NOTES
84
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
PRO FORMA ADJUSTMENTS--9/30/94
(J) Reflects adjustment to investment income based upon a reduced cash position
of approximately $11.2 million (pre-confirmation cash balance of $73.1
million less $60.0 million payment to secured creditors and $1.9 million
payment for reorganization expenses) at an average investment rate of 3.5%
for fiscal 1994.
(K) Reflects the reversal of interest expense related to the Outstanding Notes
which were cancelled and the addition of interest expense for the New
Senior Notes which bear interest at a fixed rate of 11.125%.
(L) Reflects the reversal of the $2.0 million provision for losses which would
be eliminated as a result of the adjustment of invested assets to projected
restructured value.
(M) Reflects the adjustment to depreciation and amortization resulting from the
reduced basis in owned real estate as a result of the adjustment of
invested assets to projected restructured value.
(N) Reflects the reversal of reorganization expenses of $2.4 million based upon
the assumption that the Restructuring was completed and no expenses related
to the Restructuring were incurred.
PRO FORMA ADJUSTMENTS--3/31/95
(O) Reflects adjustment to investment income based upon a reduced cash position
of approximately $11.2 million (pre-confirmation cash balance of $73.1
million less $60.0 million payment to secured creditors and $1.9 million
payment for reorganization expenses) at an average investment rate of 5.75%
for the six months ended March 31, 1995.
(P) Reflects the reversal of interest expense related to the Outstanding Notes
which were cancelled and the addition of interest expense for the New
Senior Notes which bear interest at a fixed rate of 11.125%.
(Q) Reflects the reversal of the $3.0 million provision for losses which would
be eliminated as a result of the adjustment of invested assets to projected
restructured value.
(R) Reflects the adjustment to depreciation and amortization resulting from the
reduced basis in owned real estate as a result of the adjustment of
invested assets to projected restructured value.
(S) Reflects the reversal of reorganization expenses of $1.5 million based upon
the assumption that the Restructuring was completed and no expenses related
to the Restructuring were incurred.
85
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended September 30,
1994, are derived from the audited consolidated financial statements of the
Company. The financial data for the six month periods ended March 31, 1995, and
1994 are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of only normal recurring
accruals, which the Company considers necessary for fair presentation of the
financial position and the results of operations for these periods. Operating
results for the six months ended March 31, 1995, are not necessarily indicative
of the results that may be expected for the entire year ended September 30,
1995. The data should be read in conjunction with the consolidated financial
statements and the related notes referred to in "Additional Information
Concerning the Company" and the other financial information included herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Total income............ $ 68,233 $ 56,253 $ 42,009 $ 38,342 $ 36,277 $ 19,776 $ 17,266
Interest and operating
expenses............... 47,601 51,736 42,077 43,967 47,668 27,502 22,824
Depreciation and amorti-
zation................. 2,391 3,062 4,470 5,500 5,839 3,486 2,833
Income (loss) before
provision for losses,
reorganization expenses
and gain on sales of
real estate............ 18,241 1,455 (4,538) (11,125) (17,230) (11,212) (8,391)
Provision for losses.... 23,790 33,000 32,000 37,000 2,000 3,000 --
Reorganization expenses,
net.................... 5,051 4,352 934 5,844 2,360 1,505 1,417
Gain on sales of real
estate................. 244 244 -- -- -- -- --
Net loss................ (10,356) (35,653) (37,472) (53,969) (21,590) (15,717) (9,808)
PER SHARE DATA
Net loss................ ($ .94) ($ 3.22) ($ 3.38) ($ 4.87) ($ 1.92) ($ 1.40) ($ .87)
Dividends declared (1).. .45 -0- -0- -0- -0- -0- -0-
Book value.............. 15.23 12.01 8.63 3.71 1.79 .38 2.83
BALANCE SHEET DATA
Total assets............ $595,640 $514,754 $427,268 $353,874 $364,244 $366,948 $359,465
Invested assets......... 547,480 505,600 424,394 347,526 309,477 298,449 327,546
Allowance for losses.... 10,792 14,707 19,353 11,808 13,430 11,031 11,050
Creditor Obligations.... 403,884 374,000 312,000 290,000 290,000 290,000 290,000
Loans on equity invest-
ment................... -- -- 15,515 17,572 17,593 17,593 17,593
Shareholders' equity.... 168,717 133,064 95,592 41,623 20,033 4,316 31,815
</TABLE>
- --------
(1) Dividends shown are those attributable to earnings for the period
indicated.
86
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Due to continued overcapacity and illiquidity in the real estate markets, the
Company has not been able to meet payment and other obligations on its
outstanding debt. As of May 31, 1995, the Company owed $322.9 million in
overdue principal and interest payments on its Outstanding Notes. See
"Summary--Background of the Restructuring" and "The Prepackaged Plan--
Background of the Restructuring" for additional information regarding the
Company's 1991 Plan, current debt service requirements and events of default.
For the six months ended March 31, 1995, cash provided by operating
activities increased the cash balance by approximately $10.4 million. This was
due primarily to an increase in interest payable as no payments were made in
respect of the Outstanding Notes during such period. Cash provided by investing
activities increased the cash balance by approximately $2.4 million. This was
due to higher repayments, net of advances, on (1) mortgage loans of $835,000,
and (2) in-substance foreclosures of $7.5 million. Offsetting these increases
were advances, net of repayments, on (1) properties acquired through
foreclosure of $2.8 million, (2) real estate equities of $1.3 million, and (3)
investment in partnerships of $1.8 million.
Under the financial covenants of the Outstanding Note Indenture, the Company
was required to maintain a ratio of outstanding securities to its Capital Base
(as such terms are defined in the Outstanding Note Indenture) of 515% at March
31, 1993. In addition, under the Outstanding Note Indenture the Company was
required to maintain a ratio of outstanding securities to its Capital Base of
438% at June 30, 1993, and September 30, 1993, 358% at December 31, 1993, and
March 31, 1994, and 313% at June 30, 1994, and September 30, 1994, and a ratio
of Earning Assets (as defined in the Outstanding Note Indenture) to outstanding
securities of 113% at June 30, 1993, and September 30, 1993, 116% at December
31, 1993, and March 31, 1994, 117% at June 30, 1994, and September 30, 1994,
and 120% at December 31, 1994, and March 31, 1995. For a more detailed
description of the financial covenants under the Outstanding Note Indenture,
see "Description of Outstanding Notes--Certain Covenants of the Company." The
Company failed to meet each of these ratios and such failures constituted
events of default under the Outstanding Note Indenture. On May 26, 1993, the
Company received from the holders of more than 66-2/3% in principal amount of
Outstanding Notes a waiver relating to the March 31, 1993 default. No waivers
have been received with respect to the subsequent events of default. See "The
Prepackaged Plan--Background of the Restructuring--Current Defaults."
Pursuant to the Outstanding Note Indenture, outstanding securities refers to
the $290 million of Outstanding Notes. Capital base means the amount equal to
the Company's Shareholders' Equity less 50% of non-earning assets. Non-earning
assets means the aggregate of non-earning loans (as defined in the Outstanding
Note Indenture) and non-earning properties (properties that do not produce and
maintain an annualized return of 5% or greater cash flow yield), and earning
assets means an amount equal to between the aggregate amount of invested assets
and aggregate amount of non-earning assets. For a more detailed description of
the definitions of the foregoing terms under the Outstanding Note Indenture,
see "Description of Outstanding Notes--Certain Definitions."
In April 1995, the Company and the Principal Holders entered into the
Agreement of Understanding pursuant to which, among other things, the Principal
Holders (who hold in excess of 80% of the Outstanding Notes) agreed to vote
when solicited in favor of the Prepackaged Plan. On April 11, 1995, pursuant to
the Agreement of Understanding, the Company paid $25.0 million, with such
payment to be credited against the cash payment of at least $50.0 million to be
made to the holders of the Outstanding Notes pursuant to the Prepackaged Plan.
In the event the Company does not receive the Requisite Plan Acceptances, the
Company will have to consider other alternatives, including the filing of
a voluntary petition
87
<PAGE>
under Chapter 11. The Company does not currently have any agreement with the
holders of the Outstanding Notes precluding such holders, the Outstanding Note
Trustee or the Outstanding Collateral Agent from taking remedial or enforcement
action with respect to the Outstanding Notes, including acceleration of the
Outstanding Notes and foreclosure on the Company's bank accounts and other
properties.
At May 31, 1995, the Company had cash and cash equivalents of $49.0 million.
Cash and cash equivalents includes $1.3 million of restricted cash, which
represents the funding of the employee retention plan, and $1.2 million related
to borrowers' deposits. The Company's unfunded loan commitments totalled
$617,000 at May 31, 1995.
RESULTS OF OPERATIONS
Six months ended March 31, 1995 compared with six months ended March 31,
1994. The Company reported a net loss for the six months ended March 31, 1995
of $15.7 million or $1.40 per share compared to a net loss of $9.8 million or
$.87 per share for the six months ended March 31, 1994. The six months ended
March 31, 1995 loss included a provision for losses of $3 million or $.27 per
share compared to no provision for the six months ended March 31, 1994. The
Company's spread (interest income on mortgage loans plus net operating income
from real estate owned less interest expense) decreased from a deficit of $3.2
million for the six months ended March 31, 1994 to a deficit of $7.4 million
for the six months ended March 31, 1995. Offsetting these decreases was an
increase in interest income on short-term investments which was $1.86 million
for the six months ended March 31, 1995 compared to $.23 million for the six
months ended March 31, 1994.
Interest and fee income on mortgage loans decreased $2.49 million to $5.18
million for the six months ended March 31, 1995 from $7.66 million for the six
months ended March 31, 1994. The decrease was due primarily to a reduction in
earning mortgage loans (including earning in-substance foreclosures) which
totalled $89.2 million at March 31, 1995 compared to $149.9 million at March
31, 1994. During the six months ended March 31, 1995, there were two mortgage
loans totalling $15.4 million that were transferred into investment in
partnerships. In addition, advances of $1.8 million on investment in
partnerships were made during the period.
During the six months ended March 31, 1995, no advances were made on mortgage
loans. Prepayments on mortgage loans of approximately $6 million were received
during the six months ended March 31, 1994. There were no prepayments on
mortgage loans received during the six months ended March 31, 1995. The average
interest rate on mortgage loans for the six months ended March 31, 1995 was
7.90% compared to 7.58% for the six months ended March 31, 1994.
Rental income increased $3.05 million to $11.51 million in the six months
ended March 31, 1995 from $8.47 million for the six months ended March 31,
1994. In addition to rental income, the Company received reimbursement of
certain operating expenses totalling $1.17 million and $.85 million for the six
months ended March 31, 1995 and 1994, respectively. Operating expenses,
depreciation and amortization on rental properties increased $1.4 million to $9
million for the six months ended March 31, 1995 from $7.6 million for the six
months ended March 31, 1994, primarily from continued growth in real estate
equities and properties acquired through foreclosure and held for sale.
Interest on short-term investments increased due to the continuing
accumulation of available cash. Available cash increased due to no payment of
principal and interest on the Secured Notes since September 30, 1993.
Interest expense increased $4.37 million to $19.83 million in the current
period from $15.46 million for the six months ended March 31, 1994. This
increase was due primarily to an increase in the average borrowing rate from
10.01% for the six months ended March 31, 1994 to 12.97% for the six months
ended March 31, 1995.
88
<PAGE>
Other operating expenses decreased $.43 million to $2.2 million for the six
months ended March 31, 1995 from $2.63 million for the six months ended March
31, 1994. The decrease was due to decreases in professional fees and expenses,
insurance costs, trustees expenses and tax (other than income).
Reorganization expenses related to the prior Bankruptcy Case and debt
restructuring expenses were $1.5 million for the six months ended March 31,
1995 compared to $1.42 million for the six months ended March 31, 1994. These
expenses reflect professional fees incurred by the representatives of the
creditors, shareholders and the Company.
Fiscal year ended September 30, 1994 compared with fiscal year ended
September 30, 1993. The Company reported a net loss for fiscal 1994 of $21.6
million or $1.92 per share compared to a net loss of $54.0 million, or $4.87
per share for fiscal 1993. The 1994 loss includes a provision for losses of
$2.0 million, or $.18 per share, and net expense for reorganization and debt
restructuring items of $2.4 million, or $.21 per share, compared to a provision
for losses of $37 million, or $3.34 per share, and net expense for
reorganization and debt restructuring items of $5.8 million, or $.53 per share,
for the 1993 loss.
Interest and fee income on mortgage loans was $14.7 million and $19.0 million
for fiscal 1994 and 1993, respectively. Earning mortgage loans (including
earning in-substance foreclosures) totalled $131.4 million at September 30,
1994 and $168.7 million at September 30, 1993. Non-earning mortgage loans
(including non-earning in-substance foreclosures) totalled $10.2 million at
September 30, 1994 and $22.7 million at September 30, 1993.
Average mortgage loans outstanding (including in-substance foreclosures) were
$172.2 million during fiscal 1994 and $253 million during fiscal 1993. The
average yield was 8.5% for fiscal 1994 and 7.5% for fiscal 1993.
Interest and fee income for 1994 declined by $4.3 million as compared to
1993. The decline in income is primarily attributable to (1) mortgage loans
repaid totalling $25.5 million in 1994 and (2) transfers of mortgage loans and
in-substance foreclosures to properties acquired through foreclosure and held
for sale which totalled $23.4 million in 1994.
During the quarter ended December 31, 1994, there were two mortgage loans
totalling $15.4 million that were transferred into investment in partnerships.
In addition, advances of $1.7 million on investment in partnerships were made
during the quarter.
Rental income was $18.4 million for fiscal 1994 compared to $17.4 million for
fiscal 1993. In addition to rental income, the Company received reimbursement
of certain operating expenses totalling $1.7 million and $1.6 million for
fiscal 1994 and 1993, respectively. Operating expenses, depreciation and
amortization on rental properties was $15.7 million for both fiscal 1994 and
1993. The increase in income on rental properties resulted from continued
growth in real estate equities and properties acquired through foreclosure and
held for sale.
Interest on short-term investments was $1.2 million for fiscal 1994 and
$237,000 for fiscal 1993. The increase was due to the continuing accumulation
of available cash. Available cash increased due to (1) no payment of principal
and interest on the Outstanding Notes since September 30, 1993, and (2) a net
increase of $32.4 million in cash provided by investing activities.
Interest expense increased from $28.5 million in fiscal 1993 to $33.0 million
in fiscal 1994. This was due primarily to an increase in the average borrowing
rate from 9.23% in 1993 to 10.73% in 1994. Offsetting the increase, the average
borrowings decreased from $293.2 million in 1993 to $290 million in 1994. At
September 30, 1994, the blended interest rate on the Outstanding Notes was
12.12%, composed of interest at 11.50% on $200 million of Outstanding Notes
(including default interest at 1%) and 13.50% on $90 million of deferred
amounts of Outstanding Notes (including default interest at 1%). The entire
unamortized costs of
89
<PAGE>
restructuring the Outstanding Notes were charged off during fiscal 1993 as a
result of the monetary default. The Company expensed $3.4 million in fiscal
1993, of which $2.4 million related to the acceleration of costs due to the
June 1993 monetary default. Prior to the default, these costs were being
amortized using the interest method over the term of the debt.
Other operating expenses were $4.8 million for fiscal 1994 compared to $5.3
million for fiscal 1993. The decrease in other operating expenses was due
primarily to decreases in professional fees and expenses.
Reorganization expenses related to the prior Bankruptcy Case and debt
restructuring expenses were $2.4 million for the fiscal year ended September
30, 1994, which reflects professional fees incurred by the Creditors'
Committee, the Equity Committee and the Company. Reorganization expenses were
$5.8 million for the fiscal year ended September 30, 1993, which reflects
professional fees and restructuring fees charged off as a result of the
monetary defaults on the Outstanding Notes.
A $2 million provision for losses was established in fiscal 1994 compared to
a provision of $37 million in fiscal 1993. Continued deterioration in many real
estate markets during the past years, the continuing liquidity crisis in the
real estate industry and the Company's requirement to generate cash and
liquidate investments contributed in 1993 to the establishment of a large
provision for losses based on the Company's regular analysis of the portfolio.
The Board of Trustees believes the allowance for losses to be adequate at
September 30, 1994. The Board of Trustees reviews the investment portfolio
quarterly using current estimates and assumptions to determine the adequacy of
the allowance for losses. The estimates and assumptions used in the valuation
process are subject to changes which may be material.
Non-earning loans (including non-earning in-substance foreclosures) and non-
earning properties acquired through foreclosure and held for sale were $42.5
million at September 30, 1994 compared to $58.8 million at September 30, 1993.
Fiscal year ended September 30, 1993 compared with fiscal year ended
September 30, 1992. The Company reported a net loss for fiscal 1993 of $54.0
million, or $4.87 per share, compared to a net loss of $37.5 million, or $3.38
per share, for fiscal 1992. The 1993 loss includes a provision for losses of
$37 million, or $3.34 per share, and net expense for reorganization and debt
restructuring items of $5.8 million, or $.53 per share, compared to a provision
for losses of $32.0 million, or $2.89 per share, and net expense for
reorganization and debt restructuring items of $934,000, or $.08 per share, for
the 1992 loss.
Interest and fee income on mortgage loans was $19.0 million for fiscal 1993
compared to $26.2 million for fiscal 1992. The decrease results primarily from
a reduction in average mortgage loans (including in-substance foreclosures),
which decreased from $336.3 million in 1992 to $253.0 million in 1993. The
average yield was 2.5% for fiscal 1993 and 7.8% for fiscal 1992. The decrease
in average mortgage loans was due to (a) repayment of mortgage loans (net of
advances) of $24.0 million and (b) transfer of $72.0 million of mortgage loans
to foreclosed properties and investments in partnerships.
Rental income was $17.4 million for fiscal 1993 compared to $13.7 million for
fiscal 1992. In addition to rental income, the Company received reimbursement
of certain operating expenses totalling $1.6 million and $1.3 million for
fiscal 1993 and 1992, respectively. Operating expenses, depreciation and
amortization on rental properties increased to $15.7 million for fiscal 1993
compared to $12.3 million for fiscal 1992. The increases in income and expenses
on rental properties result from continued growth in real estate equities and
properties acquired through foreclosure and held for sale.
For fiscal 1993 and 1992, additional interest and fee income was $30,000 and
$26,000, respectively, which was generated from participating in gross income
produced by the properties securing these loans.
Interest expense was $28.5 million in 1993 compared to $29.0 million in 1992
resulting from a decrease in average borrowings from $336.4 million in 1992 to
$293.2 million in 1993. Partially offsetting the decrease,
90
<PAGE>
the average borrowing rate increased from 8.34% in 1992 to 9.23% in 1993. At
September 30, 1993, the blended interest rate on the Outstanding Notes was
9.87%, composed of interest at 9.25% on $200 million of Outstanding Notes
(including default interest at 1%) and 11.25% on $90 million of deferred
amounts of Outstanding Notes (including default interest at 1%). The entire
unamortized costs of restructuring of the Outstanding Notes was charged off
during fiscal 1993 as a result of the monetary default. The Company expensed
$3.4 million in fiscal 1993, of which $2.4 million related to the acceleration
of costs due to the June 1993 monetary default. Prior to the default, these
costs were being amortized using the interest method over the term of the debt.
Other operating expenses were $5.3 million for both fiscal 1993 and 1992.
Reorganization expenses related to the prior Bankruptcy Case and debt
restructuring expenses were $5.8 million for the fiscal year ended September
30, 1993, which reflects professional fees incurred by the Creditors'
Committee, the Equity Committee and the Company and restructuring fees charged
off as a result of the monetary defaults on the Outstanding Notes.
Reorganization expenses were $934,000 for the fiscal year ended September 30,
1992.
A $37 million provision for losses was established in fiscal year ended
September 30, 1993 compared to a provision of $32 million in fiscal year ended
September 30, 1992. Continued deterioration in many real estate markets during
the past years, the continuing overcapacity and illiquidity crisis in the real
estate industry and the Company's requirement to generate cash and liquidate
investments contributed in fiscal 1993 and fiscal 1992 to the establishment of
large provision for losses based on the Company's regular analysis of the
portfolio.
Non-earning loans (including non-earning in-substance foreclosures) and non-
earning properties acquired through foreclosure and held for sale were $58.8
million at September 30, 1993 compared to $76.3 million at September 30, 1992.
91
<PAGE>
BUSINESS
GENERAL
The Company is a Maryland real estate investment trust organized in 1970
under the Declaration of Trust. As of May 31, 1995, the Company had available
cash of approximately $46.5 million and invested assets consisting of 34
mortgage loans and 37 investments in real estate located throughout the United
States. The Company is currently managed by a Board of Trustees comprised of
seven trustees, and has six executive officers, two of whom are also trustees.
Historically, the Company has engaged in the business of investing in a
portfolio of mortgage loans and real estate. However, since April 12, 1990,
when the Company filed the prior Bankruptcy Case, the Company has focused its
efforts on generating sufficient liquidity to meet its obligations under the
Prior Plan and the Outstanding Note Indenture and to maximize shareholder
value. To date, liquidity has been generated from operating cash flow as well
as through asset sales and mortgage loan repayments.
The Company conducts its business so as to qualify as a REIT. Its
approximately 11 million shares are traded on both the NYSE and PSE, and are
owned by approximately 15,000 shareholders. Its portfolio contains
approximately 71 investments in approximately 18 different states. Based upon
the committed amounts of its investments as of March 31, 1995, approximately
49% of the Company's portfolio was in investments in California, 23% in
Pennsylvania and 10% in New England states. Nationally, 38% of the committed
amounts of its investments are in industrial or research and development
properties, 26% in office buildings, 28% in shopping centers, 7% in apartments
and 1% in other types of real estate investments.
The Company has a variety of investments in income-producing properties
located in or near major metropolitan areas in the United States. These
investments include acquisition and rehabilitation loans with terms of two to
five years. Prior to the filing of the prior Bankruptcy Case, the Company
financed these variable rate loans with variable rate capital consisting
primarily of commercial paper. The Company also made direct investments in real
property ("Equities") as well as in participating loans that share many of the
features of pure real estate Equities. Because real estate Equities and
participating loans may have lengthy holding periods, the Company funded these
investments with long-term debt and equity capital. The Company's investment
activities included not only an initial investment underwriting analysis, but
also the ongoing asset management of its short-term and long-term investments.
The Company is a limited partner of (1) TPIP II Limited Partnership, a
Washington limited partnership, (2) Paseo Padre Associates, a California
limited partnership, of which MRT West, Inc., a California corporation and
wholly-owned subsidiary of the Company, is a general partner, (3) Creekside
Center Associates, a California limited partnership, of which MRT Creekside,
Inc., a California corporation and wholly-owned subsidiary of the Company, is a
general partner, and (4) Newark C & C Associates, a California limited
partnership, of which MRT Newark, Inc., a California corporation and wholly-
owned subsidiary of the Company, is a general partner. In addition, MRT Santa
Monica, Inc., a California corporation and wholly-owned subsidiary of the
Company, is a general partner of Bay City Holdings, L.P., a California limited
partnership, and 150 Rittenhouse Circle, Inc., a Maryland corporation and
wholly-owned subsidiary of the Company, is a general partner of Keystone
Venture I, a Pennsylvania general partnership. Each of these partnerships owns
certain real estate on which the Company formerly held a loan.
The Company was organized in 1970 as PNB Mortgage and Realty Investors
("PNB"), and operated as a REIT located in Pennsylvania until 1979, when it
combined with a California REIT, Sutro Mortgage Investment Trust ("Sutro"). The
combined entity retained the PNB name until 1984 when the name was changed to
"Mortgage and Realty Trust." Both PNB and Sutro engaged in similar business
activities, in that both were active makers of construction and development
loans, although operating in different geographic regions. The combination
provided the combined entity with a sufficient equity capital base to allow it
access to the capital markets on a competitive basis. The Company does not
currently issue commercial paper.
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<PAGE>
INVESTMENTS
Although the Company has continued to fund previously existing investment
commitments, tenant improvements and similar investments necessary to retain or
obtain tenants, the Company has not made any new investments since the prior
Bankruptcy Case. It does continue, however, to manage its investment portfolio.
The Company's investments include short- and intermediate-term standing loans,
long-term participating loans and investments in real estate Equities. See "--
General" above.
Loans may be secured by first or junior mortgages as well as mortgages
secured by leaseholds. The Company's investments in long-term participating
loans generally permit the Company to receive the following: interest at a
fixed rate; additional interest as a participation in gross income above a
predetermined base rental amount; a portion of the net proceeds upon the sale
or refinancing of the property securing the debt; and an option to convert the
participating loans into an ownership interest. Loans made by the Company are
secured by mortgages on income-producing properties, including office
buildings, shopping centers, industrial projects, apartments and condominium
projects. In making investments, the Company utilized various guidelines
consisting principally of loan-to-value ratios, investment ranges and
percentage of total assets invested in loans to a single borrower.
The Company's investments are primarily located in major metropolitan areas
throughout the United States. As of March 31, 1995, the Company held
investments in mortgage loans, investments in real estate equities and other
interests in real properties located in 18 states.
Total loans and investment commitments outstanding at March 31, 1995, were
$299,400,000, of which $690,000 remained to be disbursed.
The following pages contain summaries of the Company's commitments and
investments at March 31, 1995, and certain information pertaining to non-
earning loans, delinquent earning loans, in-substance foreclosures and
foreclosed properties.
93
<PAGE>
MORTGAGE AND REALTY TRUST
SUMMARY OF INVESTMENTS AT MARCH 31, 1995
<TABLE>
<CAPTION>
AMOUNT
AMOUNT COMMITTED OUTSTANDING
---------------- ------------
<S> <C> <C>
TYPE OF INVESTMENTS
SHORT AND INTERMEDIATE-TERM
Mortgage Loans................................ $ 54,863,000 $ 54,373,000
Properties Acquired Through Foreclosure and
Held for Sale:
Earning...................................... 72,642,000 72,642,000
Non-Earning.................................. 34,417,000 34,417,000
In-Substance Foreclosures:
Earning...................................... 30,408,000 30,408,000
Non-Earning.................................. 18,048,000 18,048,000
Notes Receivable.............................. 842,000 642,000
------------ ------------
Total Short and Intermediate-Term............ 211,220,000 210,530,000
------------ ------------
LONG-TERM
Participating Loans........................... 2,010,000 2,010,000
Amortizing Loans.............................. 2,719,000 2,719,000
Investment in Real Estate Equities............ 56,940,000 56,940,000
Investment in Partnerships.................... 26,511,000 26,511,000
------------ ------------
Total Long-Term.............................. 88,180,000 88,180,000
------------ ------------
Total Invested Assets......................... $299,400,000 298,710,000
============ ------------
Less Deferred Fees............................ (261,000)
------------
Total Invested Assets......................... $298,449,000
============
</TABLE>
MORTGAGE AND REALTY TRUST
NON-EARNING IN-SUBSTANCE FORECLOSURES
AND NON-EARNING FORECLOSED PROPERTY HELD FOR SALE
(BY GEOGRAPHIC DISTRIBUTION AND PROPERTY TYPE)
MARCH 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INDUSTRIAL
RETAIL CENTER CENTER OFFICE BUILDING TOTAL
------------- ---------- --------------- -------
<S> <C> <C> <C> <C>
California..................... $ -- $18,018 $3,953 $21,971
Massachusetts.................. 7,548 5,931 -- 13,479
New Hampshire.................. -- 5,173 -- 5,173
New Jersey..................... -- -- 5,333 5,333
Pennsylvania................... -- 3,012 3,467 6,479
------ ------- ------- -------
$7,548 $32,134 $12,753 $52,435
====== ======= ======= =======
</TABLE>
94
<PAGE>
MORTGAGE AND REALTY TRUST
GEOGRAPHIC DISTRIBUTION OF INVESTMENTS BY COMMITTED AMOUNTS*
MARCH 31, 1995
<TABLE>
<CAPTION>
RETAIL RESEARCH &
STATE APARTMENTS HOTEL INDUSTRIAL OFFICE RESIDENTIAL BUILDINGS DEVELOPMENT TOTALS %
- ---------------- ----------- ---------- ----------- ----------- ----------- ----------- ----------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona......... $ 4,384,479 $ 4,384,479 1.47%
California...... $ 234,631 51,991,487 $17,118,279 $ 70,235 $61,800,071 $15,448,626 146,663,329 49.12%
Colorado........ 186,345 186,345 0.06%
Delaware........ 200,190 200,190 0.07%
Georgia......... 59,977 59,977 0.02%
Indiana......... 4,296,330 4,296,330 1.44%
Maine........... 7,605,269 7,605,269 2.55%
Maryland........ 6,822,064 753,479 7,575,543 2.54%
Massachusetts... 6,966,038 2,322,563 7,547,467 16,836,068 5.64%
Minnesota....... 2,336,759 2,812,959 5,149,718 1.72%
Missouri........ 9,022,369 9,022,369 3.02%
Nevada.......... $3,060,000 3,060,000 1.02%
New
Hampshire...... 6,560,712 6,560,712 2.20%
New Jersey...... 5,333,713 5,333,713 1.79%
Oregon.......... 7,641,272 7,641,272 2.56%
Pennsylvania.... 15,644,930 37,696,622 13,862,363 2,009,867 69,213,782 23.18%
Virginia........ 135,505 135,505 0.05%
Washington...... 4,633,272 4,633,272 1.55%
----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------ ------
Totals.......... $21,158,599 $3,060,000 $92,517,677 $76,934,513 $1,219,386 $83,396,246 $20,271,452 $298,557,873
=========== ========== =========== =========== ========== =========== =========== ============
Percentage...... 7.09% 1.02% 30.99% 25.77% 0.41% 27.93% 6.79% 100.00%
=========== ========== =========== =========== ========== =========== =========== ======
</TABLE>
- --------
*Does not include notes receivable committed amount of $842,000 at 3/31/95.
NON-EARNING INVESTMENTS, DELINQUENT EARNING LOANS AND FORECLOSED PROPERTIES
Earning Mortgage Loans More Than 60 Days Delinquent. The Company generally
considers a loan as delinquent if payment of interest and/or principal, as
required by the term of the note, is more than 60 days past due. At March 31,
1995, there were no loans which were so delinquent as to principal and/or
interest.
Non-Earning Mortgage Loans. At March 31, 1995, there was one loan totalling
$25,000 classified as non-earning.
Non-Earning In-Substance Foreclosures. A loan is considered an in-substance
foreclosure if (1) the debtor has little or no equity considering the fair
value of the collateral, (2) proceeds for the repayment can be expected to come
only from the operation or sale of collateral, and (3) the debtor has either
formally or effectively abandoned control of the collateral. In-substance
foreclosures are classified as non-earning if they do not produce a minimum
annualized return of 5% or greater cash flow yield for two consecutive calendar
quarters. At March 31, 1995, there were four loans classified as non-earning
in-substance foreclosures, which totalled $18,018,000. Descriptions of the four
investments are as follows:
(1) The Company has a first mortgage loan on 6 industrial buildings containing
157,480 square feet located in Chula Vista, California. The loan was
classified as a non-earning in-substance foreclosure in April 1994. The
property is currently 74% leased and occupied.
(2) The Company has a first mortgage loan on 10 industrial buildings containing
106,663 square feet located in Chino, California. The loan was placed on
non-earning status in June 1993 and reclassified as a non-earning in-
substance foreclosure in September 1994. The property is currently 77%
leased and occupied.
(3) The Company has a first mortgage loan on an industrial building containing
114,375 square feet located in Santa Monica, California. The loan was
classified as a non-earning in-substance foreclosure in March 1995. The
property is currently 96% leased and occupied.
(4) The Company has a first mortgage loan on an industrial building containing
27,095 square feet located in San Dimas, California. The loan was
classified as a non-earning in-substance foreclosure in March 1995. The
property is currently 85% leased and occupied.
95
<PAGE>
Non-Earning Properties Acquired Through Foreclosure and Held For Sale. At
March 31, 1995, there were ten non-earning properties acquired through
foreclosure and held for sale, which totalled $34,417,000. Descriptions of the
ten investments are as follows:
(1) The Company had a first mortgage loan on an office/warehouse building
containing 119,000 square feet located in Hopkinton, Massachusetts. The
Company acquired title to this property in January 1991. The project is
currently unleased.
(2) The Company had a first mortgage loan on a retail shopping center
containing 111,339 square feet located in Fairhaven, Massachusetts. The
Company acquired title to this property in April 1991. The project is
currently 30% leased and occupied. Subsequent to September 1994, a 20-year
lease with Shaw's Supermarkets, Inc. for a 65,000 square feet supermarket
anchor store was completed, with occupancy expected in mid-1995, which will
result in the project being 88% leased and occupied.
(3) The Company had a first mortgage loan on a 3-story office building
containing 37,800 square feet located in Piscataway, New Jersey. The
Company acquired title to this property in August 1991. The project is
currently 77% leased and occupied.
(4) The Company had a first mortgage loan on an industrial building containing
57,900 square feet located in Framingham, Massachusetts. The Company
acquired title to this property in April 1992. The property is currently
65% leased and occupied.
(5) The Company had a first mortgage loan on two adjoining office buildings
containing 39,087 square feet located in Woodland Hills, California. The
Company acquired title to this property in May 1992. The property is
currently 85% leased and occupied.
(6) The Company had first and second mortgage loans on two office/industrial
buildings containing 91,710 square feet and a 33,600 square foot warehouse
building located in Salem, New Hampshire. The Company acquired title to
this property in August 1992. The project is currently 72% leased and
occupied.
(7) The Company had a first mortgage loan on a 4-story office building
containing 99,666 square feet located in Cherry Hill, New Jersey. The
Company acquired title to this property in November 1992. The project is
currently 54% leased and occupied.
(8) The Company had a first mortgage loan on an industrial building containing
120,000 square feet located in Willow Grove, Pennsylvania. The Company
acquired title to this property in June 1993. The project is currently
unleased.
(9) The Company had a first mortgage loan on an industrial building containing
50,972 square feet located in Canton, Massachusetts. The Company acquired
title to this property in January 1991. The project is currently 100%
leased and occupied.
(10) The Company had a first mortgage loan on an office building containing
49,953 square feet located in Philadelphia, Pennsylvania. The Company
acquired title to this property in January 1991. The project is currently
82% leased and occupied.
ALLOWANCE FOR LOSSES
An allowance for losses is maintained based upon the Board of Trustees'
evaluation of the Company's investments. A review of all investments is made
quarterly to determine the adequacy of the allowance for losses. During the six
months ended March 31, 1995, there were additions of $3,000,000 to the
allowance for
96
<PAGE>
losses and charges of $5,399,000, net of recoveries, against the allowance. The
amount of the allowance for losses at March 31, 1995, was $11,031,000 (3.7% of
the Company's invested assets). For a description of the Company's method of
determining the allowance for losses, see Notes 1 and 3 as set forth under
"Notes to the Financial Statements."
PROPERTIES
The Company's real estate portfolio consists primarily of equity investments
in completed, income-producing properties such as industrial/research and
development buildings, office buildings and retail buildings located primarily
in southern California, Pennsylvania and the New England states.
The Company's real estate portfolio at March 31, 1995 (net of accumulated
depreciation) consists of the following investments:
<TABLE>
<CAPTION>
NUMBER OF INVESTMENT % OF
TYPE OF PROPERTIES PROPERTIES AMOUNT TOTAL
------------------ ---------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Apartments....................................... 3 $ 20,924 11%
Office Buildings................................. 11 54,102 28%
Industrial Buildings............................. 14 53,233 28%
Retail Buildings................................. 5 56,236 30%
Research and Development Buildings............... 2 6,015 3%
--- -------- ---
35 $190,510 100%
=== ======== ===
</TABLE>
The Company does not own any real property for use in connection with its
day-to-day operations. Office space for the Company's principal office at 8380
Old York Road, Suite 300, Elkins Park, Pennsylvania is leased for a 3-year term
ending August 31, 1995. The Company's only other office, located at 3500 West
Olive Avenue, Suite 600, Burbank, California, is leased for a 5-year term
ending October 31, 1995. The total rental expended for the fiscal year ended
September 30, 1994 for both properties was $345,000. The Company has become,
and may from time to time become, the owner or lessor of real estate in
connection with its investment activities. See "--Investments" above.
LEGAL PROCEEDINGS
A discussion of events surrounding the Company's bankruptcy filing and an
explanation of the material terms of the Company's reorganization under the
1991 Plan are set forth under "Summary--Background of the Restructuring--
Previous Chapter 11 Case and 1991 Plan of Reorganization" and "The Prepackaged
Plan--Background of the Restructuring--Previous Chapter 11 Reorganization." The
bankruptcy case relating to the Prior Plan was closed on November 4, 1994
pursuant to a final order of the Bankruptcy Court.
97
<PAGE>
MANAGEMENT
The Company is governed by a board of seven trustees who meet at least once a
month, either in Pennsylvania or California. The trustees approve all material
transactions undertaken by the Company. In advance of each meeting of the
trustees, a written agenda is prepared, and each transaction to come before the
trustees is summarized in writing and presented to the trustees for
consideration. Each sale of real estate, loan modification, loan or prepayment
compromise, increase in a loan and loan workout is submitted for approval by
the trustees.
The following sets forth certain information regarding the executive officers
and trustees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES WITH THE COMPANY
---- --- --------------------------------------
<S> <C> <C>
Victor H. Schlesinger. 70 Chairman and Trustee
C.W. Strong, Jr....... 65 President, Chief Executive Officer and Trustee
James A. Dalton....... 52 Executive Vice President and Chief Operating Officer
Daniel F. Hennessey... 54 Treasurer and Chief Financial Officer
Donald W. Burnes, Jr.. 45 Senior Vice President
Douglas R. Eckard..... 49 Senior Vice President
Jeffrey M. Bucher..... 62 Trustee
Kent L. Colwell....... 64 Trustee
James M. Gassaway..... 73 Trustee
John E. Krout......... 75 Trustee
Gerhard N. Rostvold... 75 Trustee
</TABLE>
The officers of the Company generally serve a one-year term of office and are
elected to their positions each year by the Board of Trustees at the annual
organization meeting of the Board of Trustees, which normally immediately
follows the annual meeting of shareholders. Messrs. Schlesinger, Strong,
Dalton, Hennessey, Burnes and Eckard were elected as officers at the last
annual organization meeting held on February 10, 1993, with Mr. Eckard being
promoted to Senior Vice President on August 17, 1993. Messrs. Schlesinger,
Strong, Dalton, Hennessey and Eckard have served as officers of the Company for
more than the past five years. Mr. Burnes was first elected as an officer of
the Company on February 14, 1990. The Company has a total of 26 employees.
In connection with the Prepackaged Plan, the following persons have been
designated by the Principal Holders to serve on the Board of Trustees of the
reorganized Company:
Carl A. Mayer, Jr., 57, founded The Mayer Group in 1990, an advisor group
offering consulting and marketing expertise and services to real estate
investment companies who are seeking investment capital from the pension fund
community. Mr. Mayer continues to serve as a principal of The Mayer Group.
Martin Bernstein, 58, is a private investor who has been managing family
funds since 1988. Prior to this period, Mr. Bernstein served as the founding
General Partner of Halcyon Investments and Alan B. Slifka & Co. (investments).
Mr. Bernstein also currently serves on the Board of Directors of Astro
Communications and MBO Properties, Inc.
John B. Levy, 47, is currently the President of John B. Levy & Company, Inc.,
a real estate consulting firm based in Richmond, Virginia, and has served in
this capacity since June 1995. Mr. Levy was an Executive Vice President of
Republic Realty Mortgage Corporation from 1993 to June 1995. Prior to 1993, Mr.
Levy acted as the Senior Vice President of Nationsbanc Mortgage Corporation,
and was charged with lender relations, production of new income property loans
and management of the production offices.
Richard B. Jennings, 51, is currently the President of Realty Capital
International Inc., a real estate investment banking firm, and has served in
this capacity since 1991. Prior to 1991, Mr. Jennings acted as a
Senior Vice President of Landauer Associates, Inc., a real estate management
and advisory firm based in New York, New York. Mr. Jennings also currently
serves on the board of directors of MBO Properties, Inc.
98
<PAGE>
Richard S. Frary, 47, is currently the founding partner and majority
shareholder of Tallwood Associates, Inc., a private merchant banking firm
specializing in corporate restructurings and real estate, and has served in
this capacity since 1990.
In connection with the Prepackaged Plan, the Principal Holders have chosen
George R. Zoffinger to be the new President and Chief Executive Officer of the
reorganized Company. It is anticipated that Mr. Zoffinger will begin his term
of office upon ratification of such term by the Board of Trustees of the
reorganized Company after the Effective Date. Mr. Zoffinger is 47 years old and
has served as Chairman of the Board of Corestates New Jersey National Bank
since April 1994. From December 1991 to April 1994, he served as President and
Chief Executive Officer of Constellation Bankcorp and Constellation Bank. From
March 30, 1990 to December 1991, Mr. Zoffinger served as the Commissioner for
the New Jersey State Department of Commerce and Economic Development, as well
as Chairman of the Board of the New Jersey Economic Development Authority.
The seventh member of the Board of Trustees will be selected by the New Major
Holder on or before the Effective Date. The foregoing persons have consented to
serve as trustees of the reorganized Company.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION TABLES
The following table provides information about the compensation for the Chief
Executive Officer and the four other most highly compensated officers of the
Company for the fiscal years ended September 30, 1994, 1993, 1992
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
---------------------------------------- ------------------- -------
OTHER ANNUAL RESTRICTED OPTIONS/ ALL OTHER
FISCAL SALARY BONUS COMPENSATION SHARES SARS LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(2) ($) ($) ($) (#) PAYOUTS ($)(3)
- --------------------------- ------ -------- ------- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C.W. Strong, Jr., Chief 1994 $175,000 -- -- -- -- -- $3,000
Executive Officer....... 1993 175,000 -- -- -- -- -- 3,000
1992 250,000 -- -- -- 25,000 -- 3,000
Victor H. Schlesinger, 1994 $100,000 -- -- -- -- -- $3,000
Chairman................ 1993 100,000 -- -- -- -- -- 3,000
1992 27,500(4) -- -- -- 23,500 -- 1,650
James A. Dalton, 1994 $188,348 $25,000(5) -- -- -- -- $3,000
Executive Vice 1993 181,104 20,000 -- -- -- -- 3,000
President............... 1992 177,511 90,000(6) -- -- 25,000 -- 3,000
Daniel F. Hennessey, 1994 $129,488 $20,000(5) -- -- -- -- $3,000
Chief Financial Officer. 1993 124,508 20,000 -- -- -- -- 3,000
1992 122,038 65,000(6) -- -- 20,000 -- 3,000
Donald W. Burnes, Jr., 1994 $120,595 $30,000(5) -- -- -- -- $3,000
Senior Vice President... 1993 114,448 30,000 -- -- -- -- 3,000
1992 113,114 65,000(6) -- -- 15,000 -- 3,000
</TABLE>
- --------
(1) In the fiscal year ended September 30, 1993, the Company provided certain
personal benefits to its executive officers. The amount of such benefits to
each of the named individuals did not exceed the lesser of $50,000 or 10%
of salary and bonus for such fiscal year.
(2) Includes salary deferrals and employee contributions to the Company's
Savings Incentive Plan. See "Savings Incentive Plan" below.
(3) Includes the Company's matching contributions under the Company's Savings
Incentive Plan. See "Savings Incentive Plan" below.
(4) Represents fees received as Chairman and trustee.
(5) Does not include bonus for calendar year 1994, which was paid in November
1994. The bonuses were $25,000 for Mr. Dalton, $20,000 for Mr. Hennessey,
and $25,000 for Mr. Burnes.
(6) Includes retention bonus of $75,000, $50,000 and $35,000 for Messrs.
Dalton, Hennessey and Burnes, respectively.
99
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUES
The following table sets forth information with respect to the Outstanding
Stock Rights held by the Named Executive Officers at September 30, 1994. The
Prepackaged Plan provides that Outstanding Stock Rights will be canceled.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES ACQUIRED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/
ON EXERCISE VALUE REALIZED OPTIONS/SARS AT FY-END SARS AT FY-END
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------ --------------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
C.W. Strong, Jr......... -- -- 34,000/-0- 0/0
Victor H. Schlesinger... -- -- 29,500/-0- 0/0
James A. Dalton......... -- -- 74,000/-0- 0/0
Daniel F. Hennessey..... -- -- 57,500/-0- 0/0
Donald W. Burnes, Jr.... -- -- 35,000/-0- 0/0
</TABLE>
PENSION PLANS
On September 20, 1989, the Board of Trustees adopted an Employees' Retirement
Plan effective September 30, 1989. On December 16, 1992, the Board of Trustees
amended and restated the Employees' Retirement Plan effective January 1, 1992
(as amended on July 20, 1994, and as may be further amended, the "Retirement
Plan"). The Retirement Plan continues the benefits provided to employees of the
Company who were formerly employees of GMAC Realty Advisors, Inc. (these
employees were acquired pursuant to a settlement agreement entered into between
and among the Company, GMAC Mortgage Corporation of PA, and GMAC Realty
Advisors, Inc., which, among other things, transferred the GMAC Realty
Advisors, Inc. employees to the Company). All other employees are eligible to
participate in the Retirement Plan provided that they are at least 21 years old
and have been employed for 12 consecutive months, during which period the
employee has completed at least 1,000 hours of service. Under the Retirement
Plan, after completing five years of service, each eligible employee becomes
100% vested and entitled to a retirement pension. Benefits can be paid as a
lump sum or as an annual retirement income for life equal to the greater of (a)
the sum of (i) 1.3% of the highest five-year average annual base salary,
multiplied by the number of years of credited service up to and including 35
years thereof and (ii) 0.4% of the highest five-year average annual base salary
in excess of Social Security covered compensation (as adjusted every five
years), multiplied by the number of years of credited service up to and
including 35 years thereof or (b) the sum of (i) 1.3% of the highest five-year
average annual base salary, multiplied by the number of years of credited
service up to and including 15 years thereof, (ii) 1.5% of the highest five-
year average annual base salary, multiplied by the number of years of credited
service from 16 to 25 years inclusive, (iii) 0.5% of the highest five-year
average annual base salary, multiplied by the number of years of credited
service from 26 to 35 years inclusive, and (iv) 0.4% of the highest five-year
average annual base salary in excess of Social Security covered compensation
(as adjusted every five years), multiplied by the number of years of credited
service up to and including 25 years thereof.
Unreduced retirement benefits may begin to be paid at normal retirement (age
65 and five years of participation in the Retirement Plan), late retirement or
five years prior to Social Security retirement age with 20 years of service.
The table below shows the estimated annual benefits payable upon retirement
under the Company's Retirement Plan. Retirement benefits shown are based upon
retirement at age 65 and the payment of a straight life annuity to the
employee. The annual benefit under the Retirement Plan shall not exceed the
lesser of $112,221 or 100% of the participant's average compensation for three
consecutive Fiscal Years (as defined in the Retirement Plan) in which such
eligible employee is an active participant in the Retirement Plan.
100
<PAGE>
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE OF 5
HIGHEST ANNUAL 15 20 25 30 35
COMPENSATION LEVELS ------- ------- ------- -------- --------
- -------------------
$125,000 $29,427 $40,486 $51,545 $ 58,854 $ 68,663
150,000 35,802 49,236 62,670 71,604 83,538
175,000 42,177 57,986 73,795 84,354 98,413
200,000 48,552 66,736 84,920 97,104 113,288
225,000 54,927 75,486 96,045 109,854 128,163
</TABLE>
For the fiscal year ended September 30, 1994, the base salary for purposes of
the Retirement Plan for the Named Executive Officers in the Summary
Compensation Table is set forth in the salary column of the Summary
Compensation Table. Officers named in the Summary Compensation Table have been
credited with years of service under the Retirement Plan as follows: Mr.
Dalton, 12 years; Mr. Hennessey, 23 years; and Mr. Burnes, 5 years. Mr.
Schlesinger and Mr. Strong do not participate in the Retirement Plan.
The benefits listed in the Pension Plan Table are not subject to reduction
for Social Security or other offset amounts.
TRUSTEE COMPENSATION
During the fiscal year ended September 30, 1994, the trustees, other than
Messrs. Strong and Schlesinger, received the following as compensation for
their service on the Board of Trustees: (i) an annual retainer of $10,000 plus
$800 for each regular, monthly Board of Trustees meeting attended in person or
conducted by telephone conference; (ii) $600 for each committee meeting
attended in person; and (iii) $400 for any Board of Trustees or committee
meeting, other than the regular, monthly Board of Trustees meeting, convened by
telephone conference; provided that no additional compensation was paid for
attendance at any committee meeting held on the same day as any Board of
Trustees meeting. An additional $100 fee was payable per meeting to the
chairman of any committee.
On September 29, 1989, the Board of Trustees adopted a Pension Plan for
trustees, effective October 1, 1989 (as amended on April 5, 1995, and as may be
further amended, the "Pension Plan"). Trustees become eligible for plan
benefits upon completion of five years of service as trustee, including years
served prior to the plan's effective date. Under the plan, each eligible
trustee will be entitled to a normal retirement benefit equal to the annual
retainer for trustees at the rate in effect on the trustee's normal retirement
date or, if earlier, the trustee's last day of board membership. For purposes
of this plan, normal retirement date is the first day of the month following
the trustee's 75th birthday. Plan benefits will generally begin on the normal
retirement date, but eligible former trustees may elect to have reduced
payments commence up to five years earlier. The reduction will be 10 percent
for each year by which commencement precedes the normal retirement date. Plan
benefits will be paid for a period equal to the number of years served as
trustee after January 1, 1980, except that payments will cease upon the death
of the trustee. On April 5, 1995, the Board of Trustees amended the pension
plan for trustees to provide that should any trustee's service terminate for
any reason within one year after the Effective Date of the Prepackaged Plan,
such terminated trustee shall receive a one-time single-sum cash payment equal
in amount to the net present value of the maximum aggregate projected benefit
obligation of the Company to that trustee. No other death benefits shall become
payable on behalf of any trustee under the plan.
SAVINGS INCENTIVE PLAN
On September 20, 1989, the Board of Trustees adopted a Savings Incentive Plan
effective September 30, 1989, to provide retirement benefits for eligible
employees of the Company. On December 16, 1992, the Board of Trustees amended
and restated the Savings Incentive Plan effective January 1, 1992 (as amended
and restated, the "Savings Plan"). The Savings Plan continues the benefits
provided under the GMAC Mortgage Corporation Savings Incentive Plan to
employees of the Company who were formerly employees of GMAC Realty Advisors,
Inc. All other employees of the Company are eligible to participate in the
Savings Plan
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provided that they have been employed for 12 consecutive months, during which
period the employee has completed at least 1,000 hours of service. Under the
Savings Plan, each eligible employee may authorize payroll deductions not less
than 1% nor more than 15% of the employee's earnings before bonus income, not
to exceed the dollar limit permissible under the Internal Revenue Code ($9,240
in 1994). The Company will match each employee's contribution for the payroll
period, subject to a limitation of 6% of the employee's compensation for the
payroll period, with the maximum amount of contribution by the Company in any
year being $3,000.
Benefits will be paid to terminating participants as soon as possible
following the participant's date of termination. Participants have a 100%
nonforfeitable right to their contributions to the Savings Plan. The Company's
matching contributions vest at the rate of 20% for each year of service, but
will, in any event, be 100% vested at the later of age 65 or after five years
of participation in the Savings Plan, or in the event of disability or death.
Subject to certain limitations, hardship distributions of a participant's fully
vested account balance are permitted when a demonstrable, immediate and heavy
financial need has been shown.
EMPLOYEE RETENTION PLAN
The Board of Trustees adopted an Employee Retention Plan (as amended, the
"Retention Plan"), dated October 17, 1990, as amended January 16, 1991, March
20, 1991 and March 15, 1995, designed to provide a financial incentive for key
employees to successfully restructure the organization and maximize the net
worth of the Company. The Retention Plan was approved in connection with the
1991 Plan by the Bankruptcy Court by order dated February 26, 1991 and will
remain in effect after the Confirmation Date of the Prepackaged Plan.
The Retention Plan is administered by the Compensation and Nominating
Committee which determines the allocation of amounts among the participants.
All full-time employees of the Company as of February 27, 1991 except the
Chairman and the President and Chief Executive Officer are eligible to
participate in the Retention Plan.
The first portion of the Retention Plan provides for a termination pay plan
that will remain in effect during the period ending on the later of (i) the
date that the obligations (including, without limitation, interest accrued from
and after January 31, 1991) payable by the Company to or for the benefit of any
creditor holding a Class 3 Claim, which is defined under the Prior Plan as an
Unsecured Claim that is also an Allowed Claim pursuant to the Prior Plan or the
Outstanding Collateral Agreement (collectively, the "Class 3 Creditor
Obligations") are no longer outstanding (the "Original Effective Period"), (ii)
the maturity date of the New Senior Notes, or (iii) the date on which the New
Senior Notes are repaid in full (periods set forth in (i)-(iii), collectively,
shall be referred to as the "Effective Period"). Any eligible employee who is
terminated without cause during the Effective Period will be entitled to
termination pay of not less than three and not more than 18 months salary
depending on the employee's years of employment and position with the Company.
The number of months salary for Messrs. Dalton, Hennessey and Burnes are 18, 18
and 12, respectively. Medical and dental coverage will be continued during the
termination pay period. An employee who is terminated for cause, voluntarily
leaves, dies or becomes disabled during the Effective Period will not be
entitled to benefits under the Retention Plan. The benefits that may be payable
under the Retention Plan have been funded in a separate trust.
The second portion of the Retention Plan includes a retention bonus plan that
provides for the aggregate payment of up to $350,000 to employees who remained
in the employ of the Company until February 27, 1992, a period of one year from
the date of the confirmation of the 1991 Plan. A separate trust was funded for
the payment of these benefits and such benefits were paid to the employees on
February 28, 1992.
The third portion of the Retention Plan provides for the grant, under the
Company's 1984 Share Option Plan, of non-qualified stock options for up to an
aggregate of 200,000 shares of Common Stock to participants. On March 29, 1991,
options for 197,500 shares were granted at an exercise price of $4.15 per
share, which was the greater of (i) the average of the closing price of the
Company's Common Shares on the NYSE for the last five days of the 30-day period
after the effective date of the 1991 Plan and (ii) the fair market value of the
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Common Stock on the date of grant. Options will not vest to employees until
three years after the date of grant and any employee who leaves voluntarily or
is discharged for cause during the 3-year period will forfeit his or her
rights under the option. After vesting, options can be exercised any time up
to five years from the date of grant except that an employee with a vested
option who leaves the employ of the Company must exercise the option within a
3-month period after resignation. If a change in control of the Company
occurs, all options which have not previously been forfeited will vest
immediately. All options granted prior to the Effective Date of the
Prepackaged Plan will be cancelled under the Prepackaged Plan. See "The
Prepackaged Plan."
The final portion of the Retention Plan is an incentive program which may
provide total incentive payments during the Original Effective Period of not
more than $1,250,000. For calendar year 1991, the program was based on an
incentive pool calculated as follows: At June 30, 1991, if the Class 3
Creditor Obligations were no greater than $380,000,000 (the maximum amount
allowed under the 1991 Plan without any deferrals), $75,000 would be deposited
in the pool with an added $5,000 for each full $1,000,000 that the Class 3
Creditor Obligations were reduced below $380,000,000. Voluntary repayments by
the Company were eliminated from this calculation, reducing cash on hand below
$15,000,000. As a result, $95,000 was deposited in the pool. At December 31,
1991, if the Class 3 Creditor Obligations were no greater than $340,000,000,
$125,000 would be deposited in the pool with an added $5,000 for each full
$1,000,000 that the Class 3 Creditor Obligations are below $340,000,000 after
deducting any amounts credited at June 30, 1991. As a result, $125,000 was
deposited in the pool. On September 16, 1992, the Compensation and Nominating
Committee approved a continuation of the incentive program for calendar year
1993 based on a similar formula for reducing the Outstanding Notes. Under this
incentive program, because the Outstanding Notes were no greater than
$290,000,000 at December 31, 1992, $125,000 was deposited in the pool. The
amounts paid from the pool to the Named Executive Officers for the fiscal
years ended September 30, 1994, 1993 and 1992 are included in the Summary
Compensation Table. The form and amount of this program for future years will
be at the discretion of the Compensation and Nominating Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Bucher, Colwell, Gassaway, Krout and Rostvold served as members of
the Company's Compensation and Nominating Committee during the Company's
fiscal year ended September 30, 1994. None of such individuals was, during
such fiscal year, an officer or employee of the Company, was formerly an
officer of the Company or had any relationship requiring disclosure by the
Company.
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
Under the Employee Retention Plan, Messrs. Dalton, Hennessey and Burnes are
entitled to termination pay equal to 18, 18 and 12 months salary,
respectively. In addition, all options granted to such individuals under the
Employee Retention Plan that have not otherwise vested will vest automatically
upon the occurrence of a change-in-control of the Company. See "--Employee
Retention Plan" above.
INDEMNIFICATION
The Maryland General Corporation Law provides for indemnification of
directors, trustees, officers, employees and agents, except to the extent that
(i) it is proved that the person actually received an improper benefit or
profit in money, property or services, or (ii) a judgment or other final
adjudication is entered in a proceeding based on a finding that the person's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudication in the proceeding. (Md.
Code, Title 2 Sec. 2-418 (1994)) Article 7.04 of the Declaration of Trust
provides that the Company will indemnify, to the full extent permitted by
Maryland law, now or hereafter in force, the trustees and officers of the
Company. The Company is not aware of any pending legal proceedings for which
any such person would be entitled to indemnification.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CURRENT HOLDERS
The following table sets forth information at May 31, 1995 with respect to
the beneficial ownership of shares of the Outstanding Common Shares by each
Named Executive Officer and trustee of the Company and by all officers and
trustees as a group. The information set forth below is based upon filings with
the Commission, the Company's share records, and information obtained by the
Company from the persons named below. As of May 31, 1995, no individual trustee
or officer had beneficial ownership of 1% or more of the Outstanding Common
Shares and all trustees and officers as a group beneficially owned 3.4% of the
Outstanding Common Shares. To the Company's knowledge, as of May 31, 1995, no
person or group (as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934) owned beneficially 5% or more of the Outstanding Common
Shares of the Company.
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES
BENEFICIALLY
NAME BENEFICIAL OWNER(1) OWNED
------------------------ -------------
<S> <C>
Victor H. Schlesinger....................................... 32,038(2)
C.W. Strong, Jr............................................. 29,914(3)
Jeffrey M. Bucher........................................... 8,600(4)
Kent L. Colwell............................................. 11,650(4)(5)
James M. Gassaway........................................... 13,302(4)
John E. Krout............................................... 8,612(4)
Gerhard N. Rostvold......................................... 10,648(4)
James A. Dalton............................................. 71,880(6)(7)
Daniel F. Hennessey......................................... 50,569(8)
Donald W. Burnes, Jr........................................ 35,000(9)
All Officers and Trustees as a group (20 persons)........... 379,263(10)
</TABLE>
- --------
(1) The address of all Named Executive Officers is in the care of the Company.
(2) 23,500 of the shares reported as beneficially owned by Mr. Schlesinger are
obtainable upon exercise of options. Such options will be canceled without
consideration under the Prepackaged Plan.
(3) 25,000 of the shares reported as beneficially owned by Mr. Strong are
obtainable upon exercise of options. Such options will be canceled without
consideration under the Prepackaged Plan.
(4) 7,500 of the shares reported as beneficially owned by Messrs. Bucher,
Colwell, Gassaway, Krout and Rostvold are obtainable upon exercise of
options. Such options will be canceled without consideration under the
Prepackaged Plan.
(5) 3,500 of the shares reported as beneficially owned by Mr. Colwell are held
in a family trust of which Mr. Colwell and his wife are co-trustees.
(6) 65,000 of the shares reported as beneficially owned by Mr. Dalton are
obtainable upon exercise of options. Such options will be canceled without
consideration under the Prepackaged Plan.
(7) 450 of the shares reported as beneficially owned by Mr. Dalton are owned
by Mr. Dalton's wife.
(8) 50,000 of the shares reported as beneficially owned by Mr. Hennessey are
obtainable upon exercise of options. Such options will be canceled without
consideration under the Prepackaged Plan.
(9) All of the shares reported as beneficially owned by Mr. Burnes are
obtainable upon exercise of options. Such options will be canceled without
consideration under the Prepackaged Plan.
(10) Includes 242,004 shares reported as beneficially owned by Trustees and
Named Executive Officers as described in the footnotes above and 102,500
shares obtainable upon exercise of options by officers of the Company who
are not named in the foregoing table. Such options will be canceled
without consideration under the Prepackaged Plan.
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CERTAIN HOLDERS AFTER RESTRUCTURING
As of May 31, 1995, Mutual Series Funds is the beneficial owner of
Outstanding Notes with an aggregate principal amount of $133.8 million (46.1%).
Immediately upon consummation of the Restructuring, Mutual Series Funds will
beneficially own approximately 5.0 million Common Shares (44.7%). Fidelity
Investments, including its affiliates, is the beneficial owner of Outstanding
Notes with an aggregate principal amount of $45.0 million (15.5%). Immediately
upon consummation of the Restructuring, Fidelity Investments will beneficially
own approximately 1.7 million Common Shares (15.0%). Intermarket Corporation,
including its affiliates, is the beneficial owner of Outstanding Notes with an
aggregate principal amount of $44.3 million (15.3%). Immediately upon
consummation of the Restructuring, Intermarket Corporation will beneficially
own approximately 1.7 million Common Shares (14.8%). Angelo Gordon & Co., L.P.,
including its affiliates, is the beneficial owner of Outstanding Notes with an
aggregate principal amount of $27.8 million (9.6%). Immediately upon
consummation of the Restructuring, Angelo Gordon & Co., L.P. will beneficially
own approximately 1.0 million Common Shares (9.3%). Strome Susskind & Co.,
including its affiliates, is the beneficial owner of Outstanding Notes with an
aggregate principal amount of $14.9 million (5.3%). Immediately upon
consummation of the Restructuring, Strome Susskind & Co. will beneficially own
approximately 558,941 Common Shares (5%).
The percentages of ownership set forth above do not necessarily reflect
either ownership or beneficial ownership as defined in the "Beneficial
Attribution Rules" of the Internal Revenue Code (as hereinafter defined).
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MARKET AND TRADING INFORMATION
COMMON SHARES
The Outstanding Common Shares are listed for trading on the NYSE and the PSE
under the symbol MRT. The following table shows the high and low sales prices
per share of Outstanding Common Shares on the NYSE for the first two quarters
of the current fiscal year and for each quarter of the two fiscal years ending
September 30, 1993, and September 30, 1994, respectively. There were no
dividends declared attributable to such quarters. The last reported sales price
of Outstanding Common Shares on the NYSE for June 26, 1995, the last
practicable date on which such information was available prior to the date of
this Disclosure Statement, was $.25. The last reported sales price of
Outstanding Common Shares on the NYSE for November 16, 1994, the last trading
day before the Company announced that it had reached an agreement in principle
relating to the Restructuring with the Creditors' Committee, was $.25. At the
close of business May 31, 1995, there were approximately 15,000 record holders
of Outstanding Common Shares. The following table sets forth the high and low
sales prices for each fiscal quarter during the past two years. There were no
dividends paid during any such quarter.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter................................................. $ 3/8 $ 1/8
Second Quarter................................................ 1/4 1/8
1994
First Quarter................................................. $ 5/8 $ 3/8
Second Quarter................................................ 5/8 3/8
Third Quarter................................................. 1/2 3/8
Fourth Quarter................................................ 1/2 1/4
1993
First Quarter................................................. $1-3/8 $ 7/8
Second Quarter................................................ 2-1/2 1-1/4
Third Quarter................................................. 1-7/8 3/8
Fourth Quarter................................................ 7/8 3/8
</TABLE>
On September 16, 1993, the NYSE notified the Company in a letter that a
review of the Company's annual financial results for the fiscal year ended
September 30, 1992 and for the nine months ended June 30, 1993 indicated that
the Company had fallen below the continued listing criteria for the aggregate
market value of outstanding shares (less than $8,000,000) and average earnings
for the prior three years (less than $600,000 per year). On November 29, 1994,
the NYSE notified the Company in a letter that a review of the Company's annual
financial results for the fiscal year ended September 30, 1994 indicated that
the Company still fell below the continued listing criteria for the aggregate
market value of outstanding shares (less than $8,000,000) and average earnings
for the prior three years (less than $600,000 per year), and that the Company
had fallen below the continued listing criteria for the aggregate market value
of publicly-held shares ($5,000,000). Also, the NYSE advised the Company that
it would normally give consideration to delisting the securities of a company
when an intent to file under any of the sections of the bankruptcy law has been
announced. The NYSE indicated in its letter of November 29, 1994 that
consideration is being given to the appropriateness of continued listing of the
Common Shares. Management of the Company provided the NYSE with information to
support a recommendation for the continued listing of the Common Shares on the
NYSE and is awaiting a response from the NYSE. Although the Company is working
with representatives of the NYSE to allow the Company to continue to be listed,
there can be no assurance that the NYSE will not commence a formal delisting
action. To date, to the Company's knowledge, the NYSE has taken no affirmative
action to delist the Common Shares, but has reserved the right to do so in the
future. If the Common Shares are delisted from the NYSE, (i) there can be no
assurances that a public market will continue to exist for the Common Shares,
(ii) the Company may be unable to obtain news coverage, have greater
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difficulty in obtaining financing, suffer a significant decline in the market
value of its Common Shares, and (iii) shareholders of the Company may
subsequently have difficulty in selling their Common Shares should they desire
to do so. See "Special Factors and Certain Considerations--Absence of Public
Market" and "--Delisting of the Common Shares from Trading on the NYSE."
The Company has not paid any dividends on the Outstanding Common Shares since
February 20, 1990. The payment of dividends or other distributions to
shareholders is restricted under the Outstanding Note Indenture to dividends
required for the Company to maintain its REIT status and inadvertent
overpayments of such dividends. The New Senior Note Indenture also restricts
the payment of dividends and other distributions to shareholders on the Common
Shares or any preferred stock which may be issued by the Company, other than
such declaration and making of dividend payments that the Company deems
necessary to preserve its status as a REIT, unless the Consolidated Net Worth
(as defined in the New Senior Note Indenture) of the Company at the time of
such payment and after giving effect thereto is at least $50.0 million;
provided, however, that the Company shall in no event declare or make any such
dividend payment or other distribution if a Default or Event of Default (as
such terms are defined in the New Senior Note Indenture) has occurred and is
continuing. In addition, the New Senior Note Indenture provides that the
Company may not purchase, redeem or otherwise acquire for value its Common
Shares or any preferred stock of the Company, whether outstanding on the
Effective Date or thereafter issued and outstanding, unless the Consolidated
Net Worth (as defined in the New Senior Note Indenture) of the Company at the
time of such purchase, redemption or other acquisition and after giving effect
thereto is at least $50 million; provided, however, that the Company shall in
no event make any such purchase, redemption or other acquisition if a Default
or Event of Default (as respectively defined in the New Senior Note Indenture)
has occurred and is continuing. See "Special Factors and Certain
Considerations--Restricted Payments."
The Company incurred net operating losses of approximately $38 million, $31
million and $12 million for federal income tax purposes in fiscal 1993, 1992
and 1991, respectively, each of which will be available as a loss carryforward
to future years' taxable income, subject to the limitations imposed by Section
382 of the Internal Revenue Code and the effects of the Restructuring. The
Company estimates a net operating loss for tax purposes of approximately $35
million in fiscal 1994. To the extent that the loss carryforward used in future
years eliminates taxable income, no dividend distribution will be required as a
condition to preserving REIT status.
OUTSTANDING NOTES
There is not any active trading market for the Outstanding Notes. These
securities are traded over the counter by certain dealers that are from time to
time willing to effect transactions in these securities. Prior to April 1993,
trading in these securities was extremely limited and sporadic. From April 1993
through May 26, 1995, approximately $429.5 million in principal amount of
Outstanding Notes was traded in approximately 86 trades. Meaningful information
regarding the current trading prices for the Outstanding Notes is not
available.
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DESCRIPTION OF NEW SENIOR NOTES
GENERAL
The New Senior Notes will be secured obligations governed by the New Senior
Note Indenture, between the Company and Wilmington Trust Company, as trustee
(the "New Indenture Trustee"), dated as of the Effective Date. The Company's
obligations under the New Senior Note Indenture will be secured as provided in
the New Collateral Documents (as hereinafter defined). See "Collateral and
Security" below. The following summary of certain provisions of the New Senior
Notes and the New Senior Note Indenture does not purport to be complete and is
subject to and is qualified in its entirety by reference to all of the
provisions of the New Senior Note Indenture and the New Collateral Documents,
including the definitions therein of certain terms. Capitalized terms used in
the following summary and not otherwise defined herein shall have the meanings
ascribed to them in the New Senior Note Indenture, the New Collateral Documents
or the Prepackaged Plan, as applicable.
The New Senior Notes will be limited to $110,000,000 aggregate principal
amount and will mature on the anniversary of the Effective Date in 2002.
Interest on the New Senior Notes will accrue at 11-1/8% per annum and will be
payable semiannually in arrears on each June 30 and December 31, commencing
after the Effective Date of the Prepackaged Plan, to holders of record of the
New Senior Notes at the close of business on the immediately preceding June 1
and December 1, whether or not a Business Day. Interest will be computed on the
basis of a 360-day year consisting of 12 30-day months. Interest will accrue
from the most recent date to which interest has been paid for, or, if no
interest has been paid, from the Effective Date. The Company will pay interest
on overdue principal at the rate equal to 2% per annum in excess of the
interest rate on the New Senior Notes to the extent lawful; and it will pay
interest on overdue installments of interest (without regard to any applicable
grace periods) at the same rate to the extent lawful. Regularly scheduled
payments of principal and interest, are payable to holders of New Senior Notes
at the office or agency of the Company in Philadelphia, Pennsylvania, or at the
option of a holder of New Senior Notes, payment of interest may be made by
check mailed to such holder at its address set forth in the register of holders
or by wire to an account designated by such holder. Unless otherwise designated
by the Company, the Company's office or agency in Philadelphia, Pennsylvania
will be the office of the New Indenture Trustee maintained for such purpose.
The New Senior Notes will be issued in registered form, without coupons, and
only in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Company will have the option to redeem the New Senior Notes, in whole or
in part, upon not less than 30 nor more than 60 days' notice, at a redemption
price equal to 100% of the principal amount plus accrued and unpaid interest,
if any, thereon to the applicable redemption date.
MANDATORY REDEMPTION
Except as set forth below with respect to Asset Sale Proceeds and Change of
Control, the Company will not be required to make mandatory redemption payments
or sinking fund payments with respect to the New Senior Notes.
NOTICE AND SELECTION
If the Company elects to redeem New Senior Notes pursuant to the optional
redemption provisions described above, it shall furnish to the New Indenture
Trustee, at least 45 days but not more than 75 days before a redemption date,
written notice setting forth (i) the redemption date, (ii) the principal amount
of New Senior Notes to be redeemed and (iii) the redemption price. If less than
all of the New Senior Notes are to be redeemed, the New Indenture Trustee shall
select the New Senior Notes to be redeemed among the holders of New Senior
Notes in compliance with the requirements of the principal national securities
exchange, if any, on which the New Senior Notes are listed, or, if the New
Senior Notes are not so listed, on
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a pro rata basis, by lot or in accordance with any other method the New
Indenture Trustee considers fair and appropriate (and in such manner as
complies with applicable legal and stock exchange requirements, if any),
provided that no New Senior Notes of $1,000 or less shall be redeemed in part.
In the event of partial redemption by lot, the particular New Senior Notes to
be redeemed shall be selected, unless otherwise provided in the New Senior Note
Indenture, not less than 30 nor more than 60 days prior to the redemption date
by the New Indenture Trustee from the outstanding New Senior Notes not
previously called for redemption.
The New Indenture Trustee will promptly notify the Company in writing of the
New Senior Notes selected for redemption and, in the case of any New Senior
Note selected for partial redemption, the principal amount thereof to be
redeemed. New Senior Notes and portions of them selected shall be in amounts of
$1,000 or whole multiples of $1,000; except that if all of the New Senior Notes
of a holder are to be redeemed, the entire outstanding amount of New Senior
Notes held by such holder, even if not a multiple of $1,000, will be redeemed.
Except as provided in the preceding sentence, provisions of the New Senior Note
Indenture that apply to New Senior Notes called for redemption also apply to
portions of New Senior Notes called for redemption.
GUARANTEE
The due, punctual and full payment of the principal of and interest on the
New Senior Notes will be jointly, severally and unconditionally guaranteed by
the Subsidiaries of the Company. Each of the Guarantors will execute the New
Senior Note Indenture and the guarantee to be endorsed on each New Senior Note.
The Company currently has five Subsidiaries: MRT West, Inc., MRT Creekside,
Inc., MRT Newark, Inc., MRT Santa Monica, Inc., and 150 Rittenhouse Circle,
Inc. Each of the Subsidiaries is a single-asset entity created solely for the
purpose of holding title to a specific property while insulating the Company
from liabilities associated with the ownership of or investment in such
property. As of March 31, 1995, the aggregate net book value of the
Subsidiaries represented 2.6% of the aggregate net book value of the Company on
a consolidated basis.
ASSET SALE PROCEEDS
If at any time the aggregate amount of Asset Sale Proceeds and the net cash
proceeds of Indebtedness incurred pursuant to the New Senior Note Indenture
that have not been applied in accordance with this provision (exclusive of any
Asset Sale Proceeds or net cash proceeds which remain after the completion of
any prior Asset Sale Offer) exceeds $10 million, the Company will make an offer
to all holders of New Senior Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of New Senior Notes that, together with accrued and
unpaid interest thereon, may be purchased with 80% of any such Asset Sale
Proceeds or 100% of the net cash proceeds of such Indebtedness, at an offer
price in cash in an amount equal to 100% of the outstanding principal amount
thereof plus accrued and unpaid interest, if any, to the date fixed for the
closing of such offer, in accordance with the procedures specified in the New
Senior Note Indenture and summarized in the remainder of this section "Asset
Sale Proceeds."
The Asset Sale Offer will remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Offer Period"). No later than five
Business Days after the termination of the Offer Period (the "Purchase Date"),
the Company will purchase the maximum principal amount of New Senior Notes that
may be purchased with 80% of such Asset Sale Proceeds or 100% of the net cash
proceeds of such Indebtedness (the "Offer Amount"), or, if less than the Offer
Amount has been tendered, all New Senior Notes tendered in response to the
Asset Sale Offer.
If the Purchase Date is on or after an interest record date and on or before
the related interest payment date, any accrued interest will be paid to the
person in whose name a New Senior Note is registered at the
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close of business on such record date, and no additional interest will be
payable to holders who tender New Senior Notes pursuant to the Asset Sale
Offer.
Upon the commencement of any Asset Sale Offer the Company will send, by first
class mail, a notice to the New Indenture Trustee and each of the holders of
the New Senior Notes, with a copy to the New Indenture Trustee. The notice will
contain all instructions and materials necessary to enable such holders to
tender New Senior Notes pursuant to the Asset Sale Offer. The notice, which
will govern the terms of the Asset Sale Offer will state the following: (1)
that such Asset Sale Offer is being made pursuant to this provision and that
the length of time such Asset Sale Offer will remain open; (2) the Offer
Amount, the purchase price and the Purchase Date; (3) that any New Senior Note
not tendered or accepted for payment will continue to accrue interest in
accordance with its terms; (4) that any New Senior Note accepted for payment
pursuant to such Asset Sale Offer will cease to accrue interest after the
Purchase Date; (5) that holders electing to have a New Senior Note purchased
pursuant to such Asset Sale Offer will be required to surrender the New Senior
Note at least three Business Days before the Purchase Date with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the New Senior
Note completed, to the Company, a depositary, if appointed by the Company, or a
paying agent at the address specified in the notice; (6) that holders of New
Senior Notes will be entitled to withdraw their election if the Company,
depositary or paying agent, as the case may be, receives, not later than the
expiration of the Offer Period, a telegram, telex, facsimile transmission or
letter setting forth the name of the holder of New Senior Notes, the principal
amount of the New Senior Note the holder delivered for purchase and a statement
that such holder is withdrawing his or her election to have the New Senior Note
purchased; (7) that, if the aggregate principal amount of New Senior Notes
surrendered by holders thereof exceeds the Offer Amount, the Company will
select the New Senior Notes to be purchased on a pro rata basis (with such
adjustments as may be deemed appropriate by the Company so that only New Senior
Notes in denominations of $1,000, or integral multiples thereof, will be
purchased); and (8) that holders whose New Senior Notes were purchased only in
part will be issued new New Senior Notes equal in principal amount to the
unpurchased portion of the New Senior Notes surrendered.
Any holder of New Senior Notes may at any time elect to deliver to the New
Indenture Trustee written instructions (each a "Standing Instruction") stating
that such holder desires to participate in any Asset Sale Offer by tendering
the maximum permitted number of such holder's New Senior Notes for repurchase
in such Asset Sale Offer. Upon receipt of such Standing Instruction, the New
Indenture Trustee will deem the maximum permitted number of such holder's New
Senior Notes tendered upon the commencement of any Asset Sale Offer. The
issuing holder of New Senior Notes may withdraw such Standing Instruction at
any time prior to the expiration of an Offer Period by so notifying the New
Indenture Trustee in writing. Each holder of New Senior Notes electing not to
deliver a Standing Instruction must respond to the notice of any Asset Sale
Offer, as set forth above, prior to the termination of the Offer Period if such
holder wishes to participate in an Asset Sale Offer.
On or before the Purchase Date, the Company will, to the extent lawful,
accept for payment, on a pro rata basis to the extent necessary, the Offer
Amount of New Senior Notes or portions thereof tendered pursuant to the Asset
Sale Offer, or, if less than the Offer Amount has been tendered, all New Senior
Notes, and deliver to the New Indenture Trustee an Officers' Certificate
stating that such New Senior Notes or portions thereof were accepted for
payment by the Company in accordance with the terms of this provision. The
Company, depositary or paying agent, as the case may be, shall promptly (but in
any case not later than five days after the Purchase Date) mail or deliver (or
wire, if requested by a holder of New Senior Notes in advance) to each
tendering holder of New Senior Notes an amount equal to the purchase price of
the New Senior Note tendered by such holder and accepted by the Company for
purchase, and the Company will promptly issue a new New Senior Note, and the
New Indenture Trustee will authenticate and mail or deliver such new New Senior
Note to such holder equal in principal amount to any unpurchased portion of the
New Senior Note surrendered. Any New Senior Note not so accepted shall be
promptly mailed or delivered by the Company to the holder thereof. The Company
will publicly announce the results of the Asset Sale Offer on the Purchase
Date. In the event that the aggregate amount of Asset Sale Proceeds or net cash
proceeds of
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Indebtedness incurred pursuant to the New Senior Note Indenture exceeds the
aggregate principal amount of New Senior Notes surrendered by holders thereof
pursuant to such Asset Sale Offer, the Company may use the remaining Asset Sale
Proceeds or net cash proceeds of such Indebtedness in accordance with the terms
of the New Senior Note Indenture. If the aggregate principal amount of New
Senior Notes surrendered by holders thereof exceeds the amount of Asset Sale
Proceeds or net cash proceeds of Indebtedness incurred pursuant to the New
Senior Note Indenture, the New Indenture Trustee will select the New Senior
Notes to be purchased on a pro rata basis. Upon completion of any Asset Sale
Offer, the amount of Asset Sale Proceeds or net cash proceeds of such
Indebtedness will be deemed to be reset at zero.
Other than as specifically provided in this provision, any purchase pursuant
to this provision will be made pursuant to the provisions of the New Senior
Note Indenture relating to redemptions in general.
Whenever any Asset Sale Proceeds or net cash proceeds of Indebtedness
incurred pursuant to the New Senior Note Indenture are received by the Company,
such Asset Sale Proceeds or net cash proceeds of Indebtedness will be set aside
in the Asset Sale Account pending allocation of such Asset Sale Proceeds or net
cash proceeds of Indebtedness incurred pursuant to the provisions of the New
Senior Note Indenture.
All cash Asset Sale Proceeds shall be deposited in the Asset Sales Account
immediately upon receipt by the Company or any Subsidiary or their agent. All
non-cash Asset Sale Proceeds shall be delivered immediately to the New
Collateral Agent upon receipt by the Company or any Subsidiary or their agent
and shall be pledged to the New Collateral Agent for the ratable benefit of the
holders of New Senior Notes to secure the obligations of the Company under the
New Senior Note Indenture and the New Senior Notes pursuant to a pledge
agreement in form and substance satisfactory to the New Indenture Trustee. When
the aggregate amount of Asset Sale Proceeds and net cash proceeds from
Indebtedness incurred pursuant to the New Senior Note Indenture exceeds $10
million, the Company will be required to apply all such Asset Sale Proceeds and
net cash proceeds to an Asset Sale Offer in accordance with the procedures set
forth above in this section "Asset Sale Proceeds." The cash Asset Sale Proceeds
shall be distributed to the holders of New Senior Notes also in accordance with
the procedures set forth above. Any cash Asset Sale Proceeds not so distributed
to holders of New Senior Notes will be returned to the Company.
CHANGE OF CONTROL
Unless waived by the Required Holders, upon the occurrence of a Change of
Control, the Company will make an offer (the "Change of Control Offer") to each
holder of New Senior Notes to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such holder's New Senior Notes at a purchase
price equal to 100% of the aggregate principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase (the "Change of Control
Payment"). Within 45 days following any Change of Control, the Company will
mail a notice to the New Indenture Trustee and each holder of New Senior Notes
stating: (1) that the Change of Control Offer is being made pursuant to this
provision and that all New Senior Notes tendered will be accepted for payment;
(2) the purchase price and the purchase date, which shall be no earlier than 30
days nor later than 45 days from the date such notice is mailed (the "Change of
Control Payment Date"); (3) that any New Senior Note not tendered shall
continue to accrue interest in accordance with its terms; (4) that, unless the
Company defaults in the payment of the Change of Control Payment, all New
Senior Notes accepted for payment pursuant to the Change of Control Offer shall
cease to accrue interest after the Change of Control Payment Date; (5) that
holders of New Senior Notes electing to have any New Senior Notes purchased
pursuant to a Change of Control Offer will be required to surrender the New
Senior Notes, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of the New Senior Notes completed, to the paying agent at the
address specified in the notice prior to the close of business on the third
Business Day preceding the Change of Control Payment Date; (6) that holders of
New Senior Notes will be entitled to withdraw their election if the paying
agent receives, not later than the close of business on the second Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder of New Senior
Notes, the principal amount of New
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Senior Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such New Senior Notes purchased; and (7) that
holders of New Senior Notes whose New Senior Notes are being purchased only in
part will be issued new New Senior Notes equal in principal amount to the
unpurchased portion of the New Senior Notes surrendered, which unpurchased
portion must be equal to $1,000 in principal amount or an integral multiple
thereof. The Company will comply with the requirements of Rule 14e-1 under the
Securities Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable to the
repurchase of the New Senior Notes in connection with a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment New Senior Notes or portions thereof tendered
pursuant to the Change of Control Offer, (2) deposit with the paying agent an
amount equal to the Change of Control Payment in respect of all New Senior
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the New Indenture Trustee the New Senior Notes so accepted together, with an
Officers' Certificate stating the New Senior Notes or portions thereof tendered
to the Company. The paying agent shall promptly mail to each holder of New
Senior Notes such accepted payment in an amount equal to the purchase price for
such New Senior Notes, and the New Indenture Trustee shall promptly
authenticate and mail to each holder a new New Senior Note equal in principal
amount to any unpurchased portion of the New Senior Notes surrendered, if any;
provided, however, that each such new New Senior Note shall be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The New Indenture Trustee shall be under no obligation to ascertain the
occurrence of a Change in Control or to give notice with respect thereto other
than upon receipt of the written notice of Change in Control from the Company.
The New Indenture Trustee may conclusively assume, in the absence of a written
notice to the contrary from the Company or any holder of New Senior Notes, that
no Change in Control has occurred. Except as described above with respect to a
Change of Control, the Company will not be required to repurchase or redeem the
New Senior Notes from the holders of the New Senior Notes in the event of a
takeover, recapitalization or similar transaction.
CERTAIN COVENANTS OF THE COMPANY
The following is a summary of certain of the covenants contained in the New
Senior Note Indenture:
Limitation on Investments. The Company will not be permitted to, nor will it
be permitted to allow any Subsidiary to, directly or indirectly, make any
Investment from and after the Effective Date except (1) Investments which
constitute leasing commissions and tenant improvements, related to the
ownership and maintenance of a parcel or parcels of Real Estate in an amount
not to exceed by more than 10% the amount of such commissions or improvements
set forth in a budget approved by the Board of Trustees of the Company (as the
same may be amended from time to time with the consent of the Board of Trustees
of the Company), (2) with any Asset Sale Proceeds that are not applied to the
then outstanding New Senior Notes in accordance with the "Asset Sale Proceeds"
provision above, new loans to non-Affiliates or new equity Investments, in each
case approved by the Board of Trustees of the Company, (3) Investments approved
by the Board of Trustees of the Company of Available Cash in Cash Equivalents,
(4) Investments approved by the Board of Trustees of the Company created by the
Company or any Subsidiary as a result of any sale, refinancing or disposition
of assets when the Company or such Subsidiary accepts, in partial payment of an
outstanding obligation, a new mortgage or equity interest in the same property,
and (5) Investments approved by the Board of Trustees of the Company in
Subsidiaries formed or maintained pursuant to the New Senior Note Indenture;
provided, however, that the stock of any such new Subsidiary is pledged to the
New Collateral Agent for the ratable benefit of the holders of New Senior Notes
in accordance with the New Senior Note Indenture.
Indebtedness. The Company will not be permitted to, directly or indirectly,
and will not directly or indirectly, permit any Subsidiary to incur, create,
assume or suffer to exist any Indebtedness except
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(1) Indebtedness represented by the New Senior Notes, (2) Contingent
Obligations constituting endorsements for collection or deposit in the
ordinary course of business, (3) current liabilities in respect of taxes,
assessments and governmental charges or levies incurred, or claims for labor,
materials, inventory, services, supplies and rentals incurred, or for goods or
services purchased, in the ordinary course of business consistent with the
past practice of the Company or such Subsidiary, (4) Indebtedness arising
under any performance bond reimbursement obligation entered into in the
ordinary course of business of the Company or such Subsidiary consistent with
the past practice of the Company or such Subsidiary, (5) unimpaired
indemnification claims under the Amended and Restated Declaration of Trust of
the Company, (6) Indebtedness arising in connection with Subsidiaries formed
or maintained pursuant to the New Senior Note Indenture, (7) the First Lien
Debt, (8) Indebtedness incurred to finance the purchase price of property;
provided, however, that such Indebtedness shall be non-recourse to the Company
or such Subsidiary, and (9) additional secured Indebtedness of the Company;
provided, however, that (i) 100% of the net cash proceeds of such
Indebtedness, after deducting all expenses related thereto, shall be applied
to the repayment of the New Senior Notes in accordance with the "Asset Sale
Proceeds" provision above, and (ii) the interest rate payable in respect of
such Indebtedness shall be lower than the interest rate then payable in
respect of the New Senior Notes; and, provided, further, that if such interest
rate is not a fixed rate of interest, the Company shall have entered into an
interest rate agreement or other contractual arrangement concurrently with the
incurrence of such Indebtedness the economic effect of which shall be that
such floating interest rate over the life of such Indebtedness shall be lower
than the interest rate then payable in respect of the Notes.
Restricted Payments. The Company will not be permitted to (1) declare or
make any dividend payment or other distribution of assets, properties, cash,
rights, obligations or securities on account of or in respect of any of its
Common Shares or any Preferred Stock which may be issued by the Company, other
than such declaration and making of dividend payments that the Company deems
necessary to preserve its status as a REIT, unless the Consolidated Net Worth
of the Company at the time of such payment and after giving effect thereto is
at least $50 million; provided, however, that the Company shall in no event
declare or make any such dividend payment or other distribution if a Default
or Event of Default has occurred and is continuing under the New Senior Note
Indenture, or (2) purchase, redeem or otherwise acquire for value its Common
Shares or any Preferred Stock which may be issued by the Company, whether
outstanding on the Effective Date or thereafter issued and outstanding, unless
the Consolidated Net Worth of the Company at the time of such purchase,
redemption or other acquisition and after giving effect thereto is at least
$50 million; provided, however, that the Company shall in no event make any
such purchase, redemption or other acquisition if a Default or Event of
Default has occurred and is continuing.
Transactions with Affiliate. The Company will not be permitted to, nor will
it be permitted to allow any Subsidiary to (1) make any Investment in an
Affiliate, (2) transfer, sell, lease, assign or otherwise dispose of any
assets to any such Affiliate, (3) merge into or consolidate with or purchase
or acquire assets from any Affiliate, (4) repay any Indebtedness to any
Affiliate (except under existing retirement or deferred compensation plans),
or (5) enter into any other transaction directly or indirectly with or for the
benefit of any such Affiliate (including, without limitation, guaranties and
assumptions of obligations of any such Affiliate) except for (i) transactions
in the ordinary course of business on a basis no less favorable to the Company
or such Subsidiary as would be obtained in a comparable arm's length
transaction with a person which is not an Affiliate, (ii) compensation to
trustees commensurate with current compensation levels, (iii) salaries and
other employee compensation and benefits to officers of the Company or such
Subsidiary commensurate with the compensation levels in effect as of the date
of the New Senior Note Indenture as may reasonably be adjusted over time but
in no event to exceed 10% annually in the aggregate, (iv) any transaction
required or otherwise permitted by the Prepackaged Plan or the New Senior Note
Indenture, and (v) transactions with respect to Subsidiaries pursuant to the
New Senior Note Indenture.
COLLATERAL AND SECURITY
The New Senior Notes will be secured by a first priority Lien in and on all
of the Collateral, in favor of the New Collateral Agent for the benefit of the
New Indenture Trustee, the New Collateral Agent and the
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holders of New Senior Notes, (i) superior to and prior to the rights of all
third persons other than those holding the First Lien Debt, and (ii) subject to
no Liens other than the Liens permitted under the New Senior Note Indenture.
The Collateral will consist of all of the Company's assets, including, without
limitation, all personal property and real property, tangible or intangible,
and all rents, issues, profits and proceeds thereof held by the Company or any
Subsidiary. The security interests will be granted by the Company and the
Subsidiaries pursuant to the New Collateral Documents.
Release of Collateral. Subject to the certain conditions set forth in the
Senior Note Indenture, Collateral which is sold, conveyed or disposed of in
compliance with the provisions of the New Senior Note Indenture may be released
(from the Lien and security interest created by the New Collateral Documents)
from time to time in accordance with the provisions of the New Collateral
Documents.
No Collateral will be released from the Lien and security interest created by
the New Collateral Documents unless the Company has made an Asset Sale Offer in
accordance with the New Senior Note Indenture. Notwithstanding any of the terms
of the New Senior Note Indenture or of any of the New Collateral Documents, at
any time when an Event of Default will have occurred and be continuing and the
maturity of the New Senior Notes shall have been accelerated (whether by
declaration or otherwise), the New Collateral Agent will not, without the
consent of the Required Holders, release any Collateral pursuant to the
provisions of the New Senior Note Indenture or any of the New Collateral
Documents.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Trustee, as applicable, may amend or supplement the New
Senior Note Indenture, the New Senior Notes or any amended or supplemental New
Senior Note Indenture with the written consent of the Required Holders
(including consents obtained in connection with a tender offer or exchange
offer for the New Senior Notes) and any existing Default or Event of Default
and its consequences or compliance with any provision of the New Senior Note
Indenture or the New Senior Notes may be waived with the consent of the
Required Holders (including consents obtained in connection with a tender offer
or exchange offer for the New Senior Notes); provided that, without the consent
of each holder of a New Senior Note affected, an amendment or waiver may not
(with respect to any New Senior Notes held by a nonconsenting holder of New
Senior Notes) reduce the principal amount of New Senior Notes whose holders
must consent to an amendment, supplement or waiver, reduce the principal of or
change the fixed maturity of any New Senior Note or reduce the redemption price
of the New Senior Notes, reduce the rate of or change the time for payment of
interest on any New Senior Note, waive a Default or Event of Default in the
payment of principal of or interest on the New Senior Notes (except a
rescission of acceleration of the New Senior Notes by the Required Holders and
a waiver of the payment default that resulted from such acceleration), make any
New Senior Note payable in money other than that stated in the New Senior
Notes, make any change in the provisions of the New Senior Note Indenture
relating to waivers of past Defaults or the rights of holders of New Senior
Notes to receive payments of principal of or interest on the New Senior Notes,
directly or indirectly release Liens on all or substantially all of the
Collateral except in connection with a merger, consolidation or disposition of
assets permitted under the New Senior Note Indenture, make any change in the
foregoing amendment and waiver provision, or waive a redemption payment with
respect to any New Senior Note. Without the consent of any holder of New Senior
Notes, the Company and the New Indenture Trustee, as applicable, may amend or
supplement the New Senior Note Indenture and the New Senior Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated New Senior
Notes in addition to or in place of certificated New Senior Notes, to provide
for (i) the assumption of the Company's obligations to the holders of the New
Senior Notes in the case of a merger or consolidation pursuant to the New
Senior Note Indenture and (ii) certain amendments to the New Collateral
Documents expressly called for therein pursuant to the New Senior Note
Indenture, to execute and deliver any documents necessary or appropriate to
release Liens on any Collateral as permitted by the New Senior Note Indenture,
to make any change that would provide any additional rights or benefits to the
holders of the New Senior Notes or that does not materially adversely affect
the legal rights under the New Senior Note Indenture of any holder of the New
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Senior Notes, or to comply with requirements of the Commission in order to
effect or maintain the qualification of the New Senior Note Indenture under the
TIA.
EVENTS OF DEFAULT
The following events will constitute "Events of Default" under the New Senior
Note Indenture: (a) the Company fails to make any payment in respect of
principal of the New Senior Notes or under the "Asset Sale Proceeds" or "Change
in Control" provisions of the New Senior Note Indenture described in the
appropriately captioned paragraphs above when the same becomes due and payable
and such failure continues for a period of 5 business days after the due date
of such payment, or the Company fails to make any payment when due of interest
on the New Senior Notes and such failure continues for a period of 10 days
after the due date of such payment; (b) any representation or warranty made or
deemed made by the Company or any Subsidiary (or any of their officers) under
this Disclosure Statement or the New Collateral Documents which proves to have
been untrue or incorrect in any material respect when made or deemed made; (c)
the Company (or the Company or any Subsidiary in the case of New Collateral
Documents) fails to perform any term, covenant or agreement of the Company
(subject in certain cases to a 30-day cure period); (d) the Company or any
Subsidiary fails, after any applicable grace period, to pay any principal of or
premium, if any, or interest on any of its Indebtedness in an amount exceeding
$1,000,000 (excluding the New Senior Notes), when the same becomes due and
payable (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise), or any other event occurs or condition exists under any
agreement or instrument relating to any such Indebtedness, if the effect of
such event or condition is to accelerate, or to permit the acceleration of, the
maturity of such Indebtedness; or any such Indebtedness shall be declared to be
due and payable, or required to be prepaid (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof; (e) bankruptcy,
insolvency, reorganization or other similar events with respect to the Company
or any Material Subsidiary; (f) any judgment or order for the payment of money
in excess of $1,000,000 is rendered against the Company or any Subsidiary, and
either enforcement proceedings has been commenced by any creditor upon such
judgment or order, or there shall be any period of 10 consecutive days during
which a stay of enforcement of such judgment or order by reason of a pending
appeal or otherwise, is not in effect; and (g) except for releases of
Collateral pursuant to Asset Sales effected in accordance with the New Senior
Note Indenture, the New Senior Note Indenture or the New Collateral Documents,
for any reason, cease to create a valid Lien on Collateral having a value of
$1,000,000 or more purported to be covered thereby, or such Lien ceases to have
the priority Lien status initially granted and be a perfected Lien as to
collateral having a value of $1,000,000 or more.
If an Event of Default occurs and is continuing, the New Indenture Trustee by
notice to the Company may, or upon written notice from the Required Holders
will, or the Required Holders by written notice to the Company and the New
Indenture Trustee may, declare all the New Senior Notes to be due and payable
immediately. Upon such declaration, the principal of, premium, if any, and
interest on the New Senior Notes shall be due and payable immediately. If an
Event of Default arising from bankruptcy, insolvency, reorganization or similar
events occurs with respect to the Company or any Material Subsidiary, such an
amount will ipso facto become and be immediately due and payable without any
declaration or other act on the part of the New Indenture Trustee or any holder
of New Senior Notes. The Required Holders by written notice to the New
Indenture Trustee may on behalf of all of the holders of New Senior Notes
rescind an acceleration and its consequences if the rescission would not
conflict with any judgment or decree and if all existing Events of Default
(except nonpayment of principal, interest or premium that has become due solely
because of the acceleration) have been cured or waived. If an Event of Default
occurs and is continuing, the New Indenture Trustee and/or the New Collateral
Agent, as applicable, may pursue any available remedy (under the New Senior
Note Indenture, the New Collateral Documents or otherwise) to collect the
payment of principal and interest on the New Senior Notes or to enforce the
performance of any provision of the New Senior Notes, the New Senior Note
Indenture or the New Collateral Documents.
A holder of a New Senior Note may pursue a remedy with respect to the New
Senior Note Indenture or such New Senior Note only if (i) the holder of a New
Senior Note gives to the New Indenture Trustee and
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the New Collateral Agent written notice of a continuing Event of Default, (ii)
the Required Holders make a written request to the New Indenture Trustee and
the New Collateral Agent to pursue the remedy, (iii) such holder of a New
Senior Note or holders of New Senior Notes offer and, if requested, provide to
the New Indenture Trustee and the New Collateral Agent indemnity satisfactory
to the New Indenture Trustee and the New Collateral Agent against any loss,
liability or expense, (iv) the New Indenture Trustee and the New Collateral
Agent do not comply with the request within 60 days after receipt of the
request and the offer and, if requested, the provision of indemnity, and (v)
during such 60-day period the Required Holders do not give the New Indenture
Trustee and the New Collateral Agent a direction inconsistent with the request.
Notwithstanding any other provision of the Senior Note Indenture, the right of
any holder of a New Senior Note to receive payment of principal and interest on
such New Senior Note, on or after the respective due dates expressed in such
New Senior Note, or to bring suit for the enforcement of any such payment on or
after such respective dates, will not be impaired or affected without the
consent of the holder of New Senior Notes, except that no holder of New Senior
Notes will have the right to institute any such suit if and to the extent that
the institution or prosecution thereof or the entry of judgment therein would
under applicable law result in the surrender, impairment, waiver or loss of the
Liens pursuant to the New Collateral Documents upon any property subject to
such Liens.
The Required Holders may direct the time, method and place of conducting any
proceeding for any exercising remedy available to the New Indenture Trustee
and/or the New Collateral Agent or exercising any trust or power conferred on
it or them. However, the New Indenture Trustee and/or the New Collateral Agent
may refuse to follow any such direction that conflicts with the law, the New
Senior Note Indenture or the New Collateral Documents, that the New Indenture
Trustee and/or the New Collateral Agent determines may be unduly prejudicial to
the rights of other holders of New Senior Notes or that may involve the New
Indenture Trustee and/or the New Collateral Agent in personal liability. Before
proceeding to exercise any rights or powers under the New Senior Indenture or
the New Collateral Documents at the request or direction of any of the holders
of New Senior Notes, the New Indenture Trustee and the New Collateral Agent
will be entitled to receive from the holders of New Senior Notes reasonable
security or indemnity against the costs, expenses and liabilities that might be
incurred by it in compliance with any such direction.
SUCCESSOR COMPANY
The Company may not consolidate or merge with or into (whether or not the
Company is the surviving entity), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions to, another person unless (i) the Company is
the surviving entity, or the person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia, (ii) the person formed
by or surviving any such consolidation or merger (if other than the Company),
or the person to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made, assumes, pursuant to a supplemental
indenture and appropriate collateral documents in forms reasonably satisfactory
to the New Indenture Trustee, all of the obligations of the Company under the
New Senior Notes and the New Senior Note Indenture and all the obligations of
the Company under the New Collateral Documents, (iii) immediately before and
immediately after giving effect to such transaction no Default or Event of
Default exists, and (iv) the Company or the person formed by or surviving any
such consolidation or merger, or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made after giving pro
forma effect thereto as of the end of the most recently completed fiscal
quarter, shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction.
DEFEASANCE
The Company may, at the option of its Board of Trustees evidenced by a
resolution set forth in an Officers' Certificate, at any time, with respect to
the New Senior Notes, elect to have the defeasance section
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of the New Senior Note Indenture be applied to all outstanding New Senior Notes
upon compliance with the conditions set forth in the defeasance article of the
New Senior Note Indenture. Upon the Company's exercise of this option the
Company will be deemed to have been discharged from its obligations with
respect to all outstanding New Senior Notes on the date the conditions set
forth in the New Senior Note Indenture are satisfied (hereinafter
"Defeasance"). For this purpose, such Defeasance means that the Company will be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding New Senior Notes, which shall thereafter be deemed to be
"outstanding" only for the purposes of the sections of the New Senior Note
Indenture so specified to in the defeasance article of the New Senior Note
Indenture, and to have satisfied all its other obligations under such New
Senior Notes and the New Senior Note Indenture (and the trustee, on demand of
and at the expense of the Company, will execute proper instruments
acknowledging the same), except for the following which will survive until
otherwise terminated or discharged hereunder: (a) the rights of holders of
outstanding New Senior Notes to receive solely from the trust fund described in
the New Senior Note Indenture, as more fully set forth in such defeasance
article, payments in respect of the principal of and interest on such New
Senior Notes when such payments are due, (b) the Company's obligations with
respect to such New Senior Notes under certain sections of the New Senior Note
Indenture, (c) the rights, powers, trusts, duties and immunities of the trustee
described in the New Senior Note Indenture and the Company's obligations in
connection therewith, and (d) the defeasance article of the New Senior Note
Indenture.
The following will be the conditions to the application of Defeasance: (a)
the Company will irrevocably have deposited or caused to be deposited with the
New Indenture Trustee (or another New Indenture Trustee satisfying the
requirements of the New Senior Note Indenture who will agree to comply with the
provisions of the defeasance article of the New Senior Note Indenture
applicable to it) as trust funds in trust for the purpose of making the
following payments, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of such New Senior Notes, (i) cash in an amount
or (ii) non-callable Governmental Securities which through the scheduled
payment of principal and interest in respect thereof in accordance with their
terms will provide, not later than one day before the due date of any payment
under the New Senior Notes, cash in an amount, or (iii) a combination thereof,
in such amounts, as will be sufficient to pay and discharge and which will be
applied by the New Indenture Trustee (or other qualifying New Indenture
Trustee) to pay and discharge (A) the principal of and interest on the
outstanding New Senior Notes on the stated maturity or on the applicable
redemption date, as the case may be, of such principal or interest to maturity
and (B) any mandatory sinking fund payments or analogous payments applicable to
the outstanding New Senior Notes on the day on which such payments are due and
payable in accordance with the terms of the New Senior Note Indenture and of
such New Senior Notes; provided that the New Indenture Trustee will have been
irrevocably instructed to apply such money or the proceeds of such non-callable
Governmental Securities to said payments with respect to the New Senior Notes;
(b) no Default or Event of Default with respect to the New Senior Notes will
have occurred and be continuing on the date of such deposit; (c) such
Defeasance will not result in a breach or violation of, or constitute a default
under, the New Senior Note Indenture or any other agreement or instrument to
which the Company is a party or by which the Company is bound; (d) the Company
will have delivered to the New Indenture Trustee an Officers' Certificate
stating that the deposit made by the Company pursuant to its election under the
New Senior Note Indenture was not made by the Company with the intent of
preferring the holders over other creditors of the Company or with the intent
of defeating, hindering, delaying or defrauding creditors of the Company or
others; (e) the Company will have delivered to the New Indenture Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Defeasance under the New
Senior Note Indenture have been complied with; (f) the Company will have
delivered to the New Indenture Trustee an opinion of counsel reasonably
acceptable to the New Indenture Trustee confirming that (i) the Company has
received from or there has been published by, the Internal Revenue Service a
ruling or (ii) since the date hereof, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel will confirm that, the holders of the outstanding New
Senior Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
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would have been the case if such Defeasance had not occurred; and (g) the
Company will have delivered to the New Indenture Trustee an opinion of counsel
to the effect that such deposit would not constitute a preference as defined in
Section 547 of the Bankruptcy Code, and the trust funds would not constitute
property included within the estate of the debtor.
THE NEW INDENTURE TRUSTEE AND NEW COLLATERAL AGENT
The New Indenture Trustee will also be the corporate collateral agent under
the Security Agreement. The New Indenture Trustee may be removed as trustee
under the New Senior Note Indenture by the Required Holders and may be removed
as collateral agent under the Security Agreement by the Required Holders.
CERTAIN DEFINITIONS
Set forth below are certain terms to be contained in the New Senior Note
Indenture, modified where appropriate to use terms as defined elsewhere in this
Disclosure Statement.
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person and includes each officer, director, trustee
or general partner of such person, and each owner of 5% or more of any class of
voting stock or interests of such person. For purposes of this definition,
"control" when used with respect to any specified person, means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Sale" means any sale or other disposition, or series of sales or other
dispositions, made on or after the Effective Date by the Company or any
Subsidiary to any person of any Collateral. For the purposes hereof, any
prepayment or payment at maturity of an Underlying Promissory Note shall be
deemed to be an "Asset Sale."
"Asset Sale Account" means that trust account (account no. 28666) maintained
at Wilmington Trust Company in the name of the New Collateral Agent, under the
sole dominion and control of the New Collateral Agent, and administered
pursuant to the New Collateral Documents.
"Asset Sale Proceeds" means payments in cash or other property (including
securities) received by the Company or any Subsidiary (including, without
limitation, any cash payments received by way of deferred payment of principal
pursuant to a note or receivable or otherwise, but only as and when received)
from any Asset Sale (after repayment of any indebtedness required to be paid by
reason of such Asset Sale), in each case net of the amount of (a) reasonable
brokers' and advisors' fees and commissions actually paid other than to an
Affiliate of the Company, (b) all foreign, federal, state and local taxes
actually payable by the Company as a direct consequence of such Asset Sale, (c)
the reasonable fees and expenses attributable to such Asset Sale, to the extent
not included in clause (a) above, except to the extent paid to any Affiliate of
the Company, and (d) any proportionate share of the proceeds required to be
paid to any person owing a beneficial interest in the property or assets sold
pursuant to such Asset Sale.
"Assignments of Leases" means each Assignment of Lease, made by the Company
or a Subsidiary, executed prior to the execution of the New Senior Notes
Indenture, concurrently with the execution of the New Senior Notes Indenture or
thereafter in favor of the New Collateral Agent on behalf of the New Indenture
Trustee, the New Collateral Agent and the holders of New Senior Notes,
assigning a Lease, as the same may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced in accordance with the
terms thereof.
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"Available Cash" means, as at any date of determination, all cash and Cash
Equivalents held by the Company, any Subsidiary or the New Indenture Trustee,
including, without limitation, cash and Cash Equivalents held in the Asset Sale
Account.
"Business Day" means any day other than a Legal Holiday.
"Capital Expenditures" means, for any person for any period, the aggregate of
all expenditures by such person and its consolidated Subsidiaries, except
interest capitalized during construction, during such period for property,
plant or equipment, including, without limitation, renewals, improvements,
replacements and capitalized repairs, that would be reflected as additions to
property, plant or equipment on a consolidated balance sheet of such person and
its Subsidiaries prepared in accordance with GAAP and includes, without
limitation, payments, other than those attributable to interest, on capitalized
leases and other indebtedness incurred to finance such property, plant and
equipment. For the purpose of this definition, the purchase price of equipment
which is acquired simultaneously with the trade-in of existing equipment owned
by such person or any of its Subsidiaries or with insurance proceeds, shall be
included in Capital Expenditures only to the extent of the gross amount of such
purchase price less the credit granted by the seller of such equipment being
traded in at such time or the amount of such proceeds, as the case may be.
"Cash Equivalents" means, collectively, (i) securities with maturities of 90
days or less from the date of acquisition issued or fully guaranteed or insured
by the United States government or any agency thereof, (ii) certificates of
deposit, overnight bank deposits and banker acceptances of any commercial bank
(including Wilmington Trust Company) having combined capital and surplus of at
least $200,000,000, a short term deposit rating of A1/P1 or better and
organized under the laws of the United States of America having maturities of
90 days or less from the date of acquisition and (iii) commercial paper with
maturities of 90 days or less having a rating of A1/P1 or better.
"Change of Control" means (i) the sale of all or substantially all of the
Company's and the Subsidiaries' assets (taken as a whole), in one or in a
series of transactions, to any "person" or "group" (as such terms are used in
or defined in Section 13(d)(3) of the Exchange Act), (ii) an event or series of
events (whether a stock purchase, merger, consolidation or other business
combination or otherwise) by which any person or group (other than the holders
of New Senior Notes existing on the date hereof, including any person becoming
a holder of New Senior Notes prior to the Effective Date and who is a holder of
New Senior Notes on the Effective Date) is or becomes the "Beneficial Owner"
(as defined under Rule 13d-3 under the Exchange Act), directly or indirectly,
of more than 50% of the combined voting power of the then outstanding
securities of the Company ordinarily (and apart from rights accruing after the
happening of a contingency) having the right to vote in the election of
trustees or (iii) after the date of first issuance of New Senior Notes, the
replacement of a majority of the Board of Trustees of the Company over a two-
year period from the trustees who constituted the Board of Trustees at the
beginning of such period other than by (a) trustees whose nomination for
election by the equityholders of the Company was approved by such Board of
Trustees, (b) trustees elected by such Board of Trustees or (c) trustees
nominated or elected by trustees approved as set forth in (a) or (b) above.
"Collateral" means all the assets of the Company defined as "Collateral" in
the New Collateral Documents.
"Collateral Assignment of Leases" means each Collateral Assignment of Lease
made by the Company or a Subsidiary, executed prior to the execution of the New
Senior Note Indenture, concurrently with the execution of the New Senior Note
Indenture or thereafter in favor of the New Collateral Agent on behalf of the
New Indenture Trustee, the New Collateral Agent and the holders of New Senior
Notes, assigning the related underlying assignment of lease, as the same may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced in accordance with the terms thereof.
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"Collateral Assignments of Mortgages" means each Collateral Assignment of
Mortgage or Collateral Assignment of Deed of Trust made by the Company or a
Subsidiary, executed prior to the execution of the New Senior Note Indenture,
concurrently with the execution of the New Senior Note Indenture or thereafter
in favor of the New Collateral Agent on behalf of the New Indenture Trustee,
the New Collateral Agent and the holders of New Senior Notes, assigning the
Underlying Mortgages, as the same may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced in accordance with the
terms thereof.
"Consolidated Net Worth" means, with respect to any person, the sum of (i)
the consolidated equity of the common equityholders of such person and its
consolidated Subsidiaries plus (ii) the respective amounts reported on such
person's most recent balance sheet with respect to any series of preferred
equity that by its terms is not entitled to the payment of dividends unless
such dividends may be declared and paid only out of net earnings in respect of
the year of such declaration and payment, but only to the extent of any cash
received by such person upon issuance of such preferred equity, after
eliminating inter-company items, including appropriate deductions for any
minority interest in such person's Subsidiaries, less (x) all write-ups (other
than write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the Issue Date in
the book value of any assets owned by such person or a consolidated Subsidiary
of such person and (y) all unamortized debt discount and expense and
unamortized deferred charges, all of the foregoing determined in accordance
with GAAP.
"Contingent Obligation" means with reference to any person, any direct or
indirect liability, contingent or otherwise, of such person with respect to any
Indebtedness or contractual obligation of another person, if the purpose or
intent of such person in incurring the Contingent Obligation is to provide
assurance to the obligee of such Indebtedness or contractual obligation that
such Indebtedness or contractual obligation will be paid or discharged, or that
any agreement relating thereto will be complied with, or that any holder of
such Indebtedness or contractual obligation will be protected (in whole or in
part) against loss in respect thereof.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"First Lien Debt" means indebtedness of Paseo Padre Associates, a California
partnership, 100% owned by the Company and its subsidiaries under the Imperial
Bank Loan Agreement in an aggregate principal amount at any time outstanding
not to exceed $18.1 million (plus interest, fees, costs and expenses).
"GAAP" means generally accepted accounting principles in the United States of
America as in effect from time to time set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Board, or in such other statements by such other
person as may be in general use by significant segments of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"Guarantor" means each of the Subsidiaries of the Company listed as
guarantors in the New Senior Note Indenture or any other guarantor of the
obligations under the New Senior Note Indenture.
"Governmental Securities" means direct obligations of, or obligations
guaranteed by, the United States of America, to the payment of which the full
faith and credit of the United States is pledged.
"Indebtedness" means with reference to any person (a) all indebtedness of
such person for borrowed money (including, without limitation, reimbursement
and all other obligations with respect to surety bonds, letter of credit and
bankers' acceptances, whether or not matured) or for the deferred purchase
price of property or services (other than normal trade accounts payable
incurred in the ordinary course of business), (b) all obligations of such
person evidenced by notes, bonds, debentures or similar instruments, (c) all
indebtedness of such person created or arising under any conditional sale or
other title retention agreement
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with respect to property acquired by such person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (d) all capitalized
lease obligations of such person, (e) all Contingent Obligations of such
person, (f) all obligations of such person under interest rate contracts, (g)
all indebtedness of the type referred to in clause (a), (b), (c), (d), (e) or
(f) above secured by (or for which the holder of such indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien against
property or an interest in property owned by such person, even though such
person has not assumed or become liable for the payment of such indebtedness,
and (h) in the case of the Company, the New Senior Notes.
"Investment" means any advance, loan, extension of credit or capital
contribution to, or purchase of any stocks, bonds, notes, debentures or other
securities of, or interests in, any person, any purchase of any interest in
Real Estate (other than by foreclosure, deed in lieu of foreclosure or other
method of realizing on security) or any commitment or other obligation, whether
contingent or absolute, to do any of the foregoing, which commitment or other
obligation does not constitute a Contingent Obligation and any Capital
Expenditures.
"Lease" means each underlying lease of Real Estate.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York, Los Angeles, California, Philadelphia,
Pennsylvania, Wilmington, Delaware or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
"Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment,
deposit arrangements, encumbrance, lien (statutory or other), security interest
or preference, priority or other security agreement or preferential arrangement
of any kind or nature whatsoever, including, without limitation, any
conditional sale or other title retention agreement, the interest of a lessor
under a capitalized lease obligation, any financing lease having substantially
the same economic effect as any of the foregoing, the filing, under the Uniform
Commercial Code or comparable law of any jurisdiction, of any financing
statement naming the owner of the assets to which such Lien relates as debtor,
and any agreement to grant a Lien.
"Material Subsidiary" means each Subsidiary of the Company that, as at any
time, has at such time capital equal to more than 10% of the Consolidated Net
Worth of the Company.
"Mortgages" means each Mortgage, Security Agreement and Financing Statement
or Deed of Trust, Security Agreement and Financing Statement and each Amendment
to Mortgage, Security Agreement and Financing Statement or Amendment to Deed of
Trust, Security Agreement and Financing Statement, in each case made by the
Company or a Subsidiary, executed concurrently with the execution of the New
Senior Note Indenture or thereafter in favor of the New Collateral Agent on
behalf of the New Indenture Trustee, the New Collateral Agent and the holders
of New Senior Notes, encumbering the Real Estate, as the same may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced in
accordance with the terms thereof.
"New Collateral Documents" mean the Security Agreement, the Pledge Agreement,
the Mortgages, the Assignments of Leases, the Collateral Assignments of
Mortgages and the Collateral Assignment of Leases, and, with respect to any of
the foregoing that may have been granted prior to the date hereof, amendments
or restatements of such documents, together with all related filings,
assignments, instruments, mortgages and other papers entered into or delivered
in connection with any of the foregoing, as such agreements, filings,
assignments, instruments, mortgages or papers or documents may from time to
time be amended, supplemented or otherwise modified in accordance with the
terms hereof and thereof.
"Officers' Certificate" means a certificate signed on behalf of the Issuer by
two Officers of the Issuer, one of whom must be the President or the Executive
Vice President, and the other must be the Treasurer, an
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Assistant Treasurer, the Controller, the Secretary, an Assistant Secretary, a
Senior Vice President or a Vice President of the Issuer.
"Pledge Agreement" means that certain Pledge Agreement, dated as of the date
of the New Senior Note Indenture, made by the Company, executed concurrently
with the execution of the New Senior Note Indenture, in favor of the Collateral
Agent on behalf of the New Indenture Trustee, the New Collateral Agent and the
holders of New Senior Notes, as the same may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced in accordance with the
terms thereof.
"Preferred Stock", as applied to the stock of any person, means stock of any
class or classes (however designated) which is preferred as to the payment of
dividends, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such person, over shares of stock of
any other class of such person.
"Real Estate" means any interest in all plots, pieces or parcels of land
owned in any capacity, whether as a joint venturer, participant, partner or
otherwise, or in which the Issuer may have a security interest, or leased as at
the date hereof or acquired or leased hereafter by the Issuer or any
Subsidiary, including, without limitation, those listed on Schedule 1 to the
New Senior Notes Indenture and described in the Mortgages, together with all of
the buildings and other improvements now or hereafter erected on the Real
Estate, and any fixtures appurtenant thereto.
"Required Holders" means the holders of a majority in principal amount of the
New Senior Notes outstanding on the date of determination.
"Security Agreement" means that certain Collateral and Security Agreement,
dated as of the date of the New Senior Note Indenture made by the Company and
the Subsidiaries, executed concurrently with the New Senior Note Indenture or
thereafter, in favor of the New Collateral Agent on behalf of the New Indenture
Trustee, the New Collateral Agent and the holders of New Senior Notes, as the
same may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced in accordance with the terms thereof.
"Subsidiary" means with respect to any person, any corporation, partnership
or other business entity of which an aggregate of 50% or more of the
outstanding Stock having ordinary voting power to elect a majority of the board
of directors, managers, trustees or other controlling persons is, at the time,
directly or indirectly, owned by such person and/or one or more Subsidiaries of
such person (irrespective of whether, at the time, shares of capital stock of
any other class or classes of such entity shall have or might have voting power
by reason of the happening of any contingency). Unless the context otherwise
requires, as used herein "Subsidiary" shall mean a Subsidiary of the Company.
"Underlying Loan Documents" means collectively, the Underlying Promissory
Notes, the Underlying Mortgages, underlying assignments of leases and rents and
any guarantees, instruments, agreements or other documents existing on the
effective date of the Prepackaged Plan and executed by any person to or for the
benefit of the Company or any Subsidiary in connection with any loan made by
the Company or any Subsidiary to or for the benefit of such person, as the same
may have been amended, modified or supplemented.
"Underlying Mortgages" means collectively, the mortgages or deeds of trust
granted by any person to or for the benefit of the Company or any Subsidiary
securing an Underlying Promissory Note or other obligation of such person, as
the same may have been or hereafter may be amended, modified or supplemented.
"Underlying Promissory Notes" means the promissory notes or other instruments
evidencing the Indebtedness of any person to the Company or any Subsidiary
other than (a) promissory notes or other instruments constituting Cash
Equivalents and (b) promissory notes or other instruments evidencing
indebtedness of any person to the Company or any Subsidiary in connection with
residential loans made by the Company or any Subsidiary to such person for the
purpose of purchasing a condominium unit.
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DESCRIPTION OF CAPITAL STOCK
The Company's Declaration of Trust provides that the Company may issue up to
3,500,000 Preferred Shares and 20,000,000 Common Shares, of which 11,226,215
were outstanding as of March 31, 1995. No Preferred Shares have been issued and
the voting, dividend, liquidation and other rights or preferences of Preferred
Shares have not been fixed and are subject to the adoption by the Board of
Trustees of a resolution or resolutions fixing any such rights or preferences.
The Declaration of Trust also provides that the Company may not issue non-
voting equity securities.
Under the Prepackaged Plan, pursuant to the Amended and Restated Declaration
of Trust the authorized capital stock of the Company will consist of 20,000,000
Common Shares and 3,500,000 Preferred Shares. Giving effect to the Reverse
Stock Split, the issuance of New Common Shares, and other transactions
contemplated by the Prepackaged Plan, the Company estimates that approximately
11,226,000 Common Shares will be outstanding as of the Effective Date.
All Common Shares participate equally in distributions declared by the Board
of Trustees and in net assets on liquidation after payments on the Preferred
Shares, if any, have equal voting rights and will be fully paid and non-
assessable by the Company upon issuance and sale as provided herein. The Common
Shares have no preference, conversion, exchange, preemptive or cumulative
voting rights. The Common Shares to be issued under the Prepackaged Plan will
have the same rights and characteristics of the Outstanding Common Shares,
subject to the Amended and Restated Declaration of Trust and the Reverse Stock
Split.
The Common Shares are (and, upon consummation of the Prepackaged Plan, will
continue to be) transferable in the same manner as the shares of a corporation
except that the Company may refuse to recognize transfer of shares and may
redeem shares as hereinafter set forth.
For the Company to qualify as a REIT under the Internal Revenue Code, it must
meet certain requirements concerning the ownership of its outstanding shares of
capital stock. Specifically, not more than 50% in value of its outstanding
shares may be owned, either directly or under special attribution rules for
this purpose under Section 544 of the Internal Revenue Code (the "Beneficial
Attribution Rules"), by five or fewer individuals (as defined in the Internal
Revenue Code to include certain non-natural persons) during the last half of a
taxable year, and the Company must be beneficially owned (without regard to any
attribution or constructive ownership rules) by 100 or more persons during at
least 335 days of a taxable year of 12 months or during a proportionate part of
a shorter taxable year. See "Certain Federal Income Tax Consequences--REIT
Status and Taxation of Company Under the Prepackaged Plan--REIT Organizational
Requirements." In addition, the Company must meet certain requirements
regarding the nature of its gross income in order to qualify as a REIT. One
such requirement is that at least 95% of the Company's gross income for each
year must consist of rents from real property and income from certain other
investments. See "Certain Federal Income Tax Consequences--REIT Status and
Taxation of Company Under the Prepackaged Plan--Income Tests." Any rents
received by the Company from a tenant would not qualify as good income for
purposes of this 95% gross income test if the Company were to own, directly or
under special constructive ownership rules for this purpose under Section 318
of the Internal Revenue Code, as modified (the "Constructive Ownership Rules"),
10% or more of the ownership interests in the tenant. Any tenant ownership
interests owned, directly or under the Constructive Ownership Rules, by a
person who owns, directly or under the Constructive Ownership Rules, 10% or
more by value of the Company's outstanding shares would be treated as owned by
the Company for purposes of this 10% tenant limitation.
Because the Board of Trustees believe it is in the best interests of the
Company to continue to qualify as a REIT, upon the Effective Date, the Amended
and Restated Declaration of Trust will include provisions restricting the
acquisition of capital stock of the Company (the "Stock Ownership Limit
Provisions"). In particular, the Stock Ownership Limit Provisions provide that
no person (other than an Existing Holder (as hereinafter defined)) may own,
directly or under the Beneficial Attribution Rules, more than 5% of the value
of the outstanding capital stock of the Company (the "Ownership Limit"). The
Stock Ownership Limit
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Provisions also prohibit any transfer or other event that would (i) result in
the outstanding capital stock of the Company being beneficially owned by fewer
than 100 persons (determined without reference to any rules of attribution or
constructive ownership), (ii) cause any person (other than an Existing Holder)
to own, directly or under the Constructive Ownership Rules, more than 9.99% of
the value of the outstanding stock of the Company (the "Constructive Ownership
Limit") or (iii) result in the Company being "closely held" within the meaning
of Section 856(h) of the Internal Revenue Code. The Stock Ownership Limit
Provisions exclude from the Ownership Limit and the Constructive Ownership
Limit any holder who holds Common Shares in excess of such limits on the
Effective Date, including, at present, Heine Securities Corporation and its
agents and affiliates, Fidelity Management & Research Company and its agents
and affiliates, Angelo Gordon & Co., L.P. and its agents and affiliates and
Intermarket Corporation ("Existing Holders"), but provide that no Existing
Holder may own, directly or under the Beneficial Attribution Rules, more than a
specified percentage determined separately for each such holder (the holder's
"Existing Holder Limit"). Except as otherwise provided below, any acquisition
or transfer of the Company's capital stock (including any acquisition or
transfer under the Beneficial Attribution Rules or Constructive Ownership
Rules) in violation of the above limits shall be null and void and the intended
transferee or owner will acquire no rights to, or economic interest in, the
shares.
Subject to certain exceptions described below, any purported transfer of or
other event that would cause a violation of the Stock Ownership Limit
Provisions will be deemed void ab initio; nonetheless any such purported
transfer or other event will cause any Common Shares or other capital stock
held in excess of such provision to be automatically transferred, by operation
of law, to a trust for the exclusive benefit of a beneficiary or beneficiaries
named by the Company (a "Share Trust") and will be designated as "Shares-in-
Trust." Any transfer of capital stock to a Share Trust, and subsequent
designation of such capital stock as Shares-in-Trust ("Shares-in-Trust"), will
be effective as of the close of business on the business day prior to the date
of the event that results in the transfer of such capital stock to a Share
Trust. Shares-in-Trust will remain issued and outstanding capital stock of the
Company and will be entitled to the same rights and privileges on identical
terms and conditions as the capital stock so transferred. The trustee of a
Share Trust, as record holder of Shares-in-Trust, will be entitled to receive
all dividends and distributions declared by the Board of Trustees of the
Company and will hold such dividends and distributions in trust for the benefit
of the beneficiary or beneficiaries of such Share Trust. The trustee of a Share
Trust will also be entitled to vote all Shares-in-Trust and will have the
exclusive right to designate a transferee or transferees of any and all Shares-
in-Trust (without violating the Stock Ownership Limit Provisions) who will
purchase the Shares-in-Trust for valuable consideration. The Company would have
the right, for a period of 90 days after the later of (i) the date the shares
are designated as Shares-in-Trust, and (ii) the date the Company determines in
good faith that a transfer resulting in Shares-in-Trust has occurred, to
purchase any or all of the Shares-in-Trust from the trustee at the lesser of
the price paid in the transaction that created Shares-in-Trust (or, in the case
of a devise, gift or other non-transfer event, the market price on the date of
such event) or the market price for the Shares-in-Trust on the date the Company
exercises its purchase right.
All certificates representing Common Shares will bear a legend referring to
the restrictions described above. Any person who acquires or attempts to
acquire capital stock of the Company in violation of the foregoing
restrictions, or any person who owned shares that were transferred to a Share
Trust, will be required to (i) give immediate written notice to the Company of
such event, and (ii) provide to the Company such other information as the
Company may request in order to determine the effect, if any, of such transfer
on the Company's status as a REIT.
All persons who own, directly or by virtue of the attribution provisions of
the Internal Revenue Code, more than 5% (or such lower percentage as is
required pursuant to regulations under the Internal Revenue Code) of the
Outstanding Common Shares shall, upon demand, file a written notice with the
Company containing the information specified in the Amended and Restated
Declaration of Trust within 30 days after January 1 of each year. In addition,
each shareholder shall, upon demand, be required to disclose to the Company in
writing such information with respect to the direct, indirect and constructive
ownership of
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Common Shares as the Board of Trustees deems necessary to comply with the
provisions of the Internal Revenue Code or regulations of the Treasury
Department applicable to a REIT or to comply with the requirements of any
taxing authority or governmental agency. Such requirements are in addition to
such shareholder's obligations to make any other filings required by law,
including filings required under the federal securities laws.
The Stock Ownership Limit Provisions generally will not apply to the
acquisition of capital stock by an underwriter that acquires securities of the
Company for resale. In addition, the Board of Trustees, upon receipt of a
ruling from the Internal Revenue Service or an opinion of counsel and upon such
other conditions as the Board of Trustees may direct, may, but is not required
to, exempt a person from the Ownership Limit or Existing Holder Limit under
certain circumstances if such person is not an individual or trust described in
Section 856(h)(3)(A) of the Internal Revenue Code.
Even if the REIT provisions of the Internal Revenue Code are changed so as to
no longer contain any ownership concentration limitation or if the ownership
concentration limitation is increased, except as otherwise described above, any
change in the Stock Ownership Limit Provisions would require an amendment to
the Amended and Restated Declaration of Trust. Amendments to the Amended and
Restated Declaration of Trust require the affirmative vote of holders owning
two-thirds of the outstanding Common Shares (or may be made pursuant to an
order of the Bankruptcy Court). In addition to facilitating the Company's
qualification as a REIT, the Stock Ownership Limit Provisions may have the
effect of precluding an acquisition of control of the Company without the
approval of the Board of Trustees.
Pursuant to the by-laws of the Company, annual meetings of shareholders are
normally held on the third Wednesday in February in each year unless otherwise
fixed by the Board of Trustees. Special meetings may be called by the Chairman,
a majority of trustees, or one or more shareholders holding not less than 25%
of the outstanding Common Shares entitled to vote at the meeting. At each
meeting, a holder of Common Shares is entitled to one vote for each Common
Share owned, which means that in voting for the election of trustees, the
holders of more than 50% of the Common Shares may elect all the trustees (upon
consummation of the Prepackaged Plan) and the remainder of the shareholders may
not elect any trustees. See "The Prepackaged Plan--Summary of Other Provisions
of the Prepackaged Plan--Officers and Trustees" concerning the appointment of
the Board of Trustees of the reorganized Company in connection with the
Prepackaged Plan. Shareholders may vote by proxy provided that proxies shall
have been filed with the Secretary of the Company before the time at which the
vote shall be taken.
The Declaration of Trust provides (and, upon consummation of the Prepackaged
Plan, the Amended and Restated Declaration of Trust will continue to provide)
that shareholders shall not be subject to any personal liability for the
obligations, acts or omissions of the Company and that as far as practicable
every written undertaking made by the Company shall contain a provision that
such undertaking is not binding on any of the shareholders personally. The
Company believes that no personal liability will attach to the shareholders
under any undertaking containing such provision, except possibly in the very
few jurisdictions which decline to recognize a business trust as a valid
organization of any kind. With respect to all types of claims in the latter
jurisdictions and with respect to tort claims, contract claims where such
provision is omitted, claims for taxes and certain statutory liabilities in
other jurisdictions, a shareholder may be held personally liable to the extent
that claims are not satisfied by the Company. However, upon payment of any such
liability the shareholder would, in the absence of willful misconduct on the
shareholder's part, be entitled to reimbursement from the assets of the
Company. The Company intends to carry insurance which the Board of Trustees
considers adequate to cover any foreseeable tort claims. The Board of Trustees
intends to conduct the operations of the Company with the advice of counsel in
such a way as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the Company.
The Declaration of Trust provides (and, upon consummation of the Prepackaged
Plan, the Amended and Restated Declaration of Trust will continue to provide)
that no trustee or officer of the Company shall
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be liable to the Company or any trustee for any act or omission of any other
trustee, shareholder, officer or agent of the Company or be held to any
personal liability whatsoever in connection with the affairs of the Company
except only that arising from his own willful misfeasance, bad faith, gross
negligence or reckless disregard of duty and that to the maximum extent that
the laws of the State of Maryland in effect from time to time permit limitation
of the liability of trustees or officers, no trustee or officer of the Company
shall be liable to the Company or its shareholders for money damages. In
addition, the Declaration of Trust provides agent of the Company or be held to
any personal liability whatsoever in connection with the affairs of the Company
except only that arising from his own willful misfeasance, bad faith, gross
negligence or reckless disregard of duty and that to the maximum extent that
the laws of the State of Maryland in effect from time to time permit limitation
of the liability of trustees or officers, no trustee or officer of the Company
shall be liable to the Company or its shareholders for money damages. In
addition, the Declaration of Trust provides (and, upon consummation of the
Prepackaged Plan, the Amended and Restated Declaration of Trust will continue
to provide) that the Company will indemnify the trustees and officers of the
Company to the full extent permitted by the general laws of the State of
Maryland now or hereafter in force.
The First National Bank of Boston, Boston, Massachusetts, is the transfer
agent and registrar for the Company's Common Shares.
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DESCRIPTION OF OUTSTANDING NOTES
GENERAL
The Outstanding Notes are secured obligations governed by the Outstanding
Note Indenture between the Company and the Outstanding Note Trustee, dated as
of July 15, 1992. The Company's obligations under the Outstanding Note
Indenture are secured by the Outstanding Collateral Agreement, dated as of
February 21, 1991, and amended on July 15, 1992. The following summary of
certain provisions of the Outstanding Notes and the Outstanding Note Indenture
does not purport to be complete and is subject to and is qualified in its
entirety by reference to all of the provisions of the Outstanding Note
Indenture and the Outstanding Collateral Agreement including the definitions
therein of certain terms. This summary is further subject to and qualified by
reference to all of the terms and provisions of the Outstanding Collateral
Agreement described further under the caption "Security" below. Capitalized
terms used in the following summary and not otherwise defined herein shall have
the meanings ascribed to them in the Outstanding Note Indenture or the
Outstanding Collateral Amendment as applicable.
DENOMINATION AND MODIFICATION
The Outstanding Notes were issued as uncertificated secured notes. The
Outstanding Notes were distributed pursuant to the 1992 Restructuring to each
holder of an obligation (including, without limitation, interest accrued from
and after January 31, 1991) payable by the Company to or for the benefit of any
holders of Unsecured Claims that are Allowed Claims pursuant to the Prior Plan
or the Outstanding Collateral Agreement (a "Creditor Obligation") in an amount
equal to the principal amount of such Creditor Obligations held by such holder
on July 15, 1992 after giving effect to any payments on such date. Regularly
scheduled payments of principal, premium, if any, and interest are payable to
holders of Outstanding Notes at the principal office of the Company in
Philadelphia, Pennsylvania, or at any paying agency maintained at the time by
the Company for such purpose. Payments to holders of Outstanding Notes are made
by wire transfer or interbank transfer of immediately available funds to such
holders. An instruction for transfer of Outstanding Notes may be presented for
registration of transfer or exchange at the Company's office in Los Angeles,
California, or at the principal trust office of the Outstanding Note Trustee in
Wilmington, Delaware or at such other location or locations as may be
established pursuant to the Outstanding Note Indenture, without any service
charge but subject to the limitations provided in the Outstanding Note
Indenture.
PAYMENTS
Required Payments. The Outstanding Note Indenture provides for required
payments on the dates set forth below (each, a "Required Payment Date")
necessary to reduce the aggregate outstanding principal amount of the
Outstanding Notes to the respective amounts set forth below:
<TABLE>
<CAPTION>
MAXIMUM AGGREGATE
REQUIRED OUTSTANDING
PAYMENT DATE SECURITIES
------------ -----------------
<S> <C>
July 15, 1992 $275,000,000
December 31, 1992 $200,000,000
June 30, 1993 $150,000,000
December 31, 1993 $105,000,000
June 30, 1994 $ 65,000,000
December 31, 1994 $ 40,000,000
June 30, 1995 $ -0-
</TABLE>
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Permitted Deferrals. The Company may, by notice to the Outstanding Note
Trustee and the holders of Outstanding Notes given at least ten days prior to
any Required Payment Date, elect to defer payment of a portion of the Required
Payment due and payable on such Required Payment Date not greater than the
amounts set forth below opposite the Required Payment Dates set forth below
(and as adjusted by certain carry-forward provisions discussed below):
<TABLE>
<CAPTION>
REQUIRED
PAYMENT DATE AMOUNT
------------ -----------
<S> <C>
July 15, 1992 $50,000,000
December 31, 1992 $40,000,000
June 30, 1993 $30,000,000
December 31, 1993 $11,250,000
June 30, 1994 $10,000,000
December 31, 1994 $ 6,250,000
June 30, 1995 $10,000,000
</TABLE>
For each Required Payment Date from July 15, 1992 to and including June 30,
1994, an amount equal to the excess, if any, of (i) the amount of any payment
permitted to be deferred (the "Permitted Deferred Payment") for such Required
Payment Date (as adjusted) over (ii) the amount actually deferred (the
"Deferred Payment") for such Required Payment Date will be added to the amount
of the Permitted Deferred Payment for the next Required Payment Date and
thereafter carried forward to each succeeding Required Payment Date until
actually deferred. Any Permitted Deferred Payment not deferred by the Company
on any such Required Payment Date that is carried forward to the December 31,
1994 Required Payment Date shall expire if not deferred on December 31, 1994.
Any Deferred Payment is due and payable on the date that is 30 months following
the Required Payment Date on which such Deferred Payment was deferred by the
Company; provided, however, that all Deferred Payments will be due and payable
on December 31, 1995.
Additional Payments. Pursuant to the terms of the Outstanding Note Indenture,
the Company was or is required to pay to each holder of Outstanding Notes on
(a) July 15, 1992, (b) quarterly on the last business day of each fiscal
quarter after July 15, 1992 and (c) on the Termination Date (each, an
"Additional Payment Date") an amount equal to such holder's ratable portion of
the Available Cash at each such Additional Payment Date.
Interest. The Company is obligated to pay interest on the outstanding
principal amount of Outstanding Notes from and after July 15, 1992 to and
including the Termination Date at an annual rate equal to the Adjusted Prime
Rate in effect from time to time, which was payable on July 15, 1992 and
thereafter in arrears on the last day of each Fiscal Quarter and on the
Termination Date. All Deferred Payments bear interest at the Deferred Payment
Interest Rate which is two percentage points above the Adjusted Prime Rate. In
addition, upon the occurrence and during the continuance of an Event of
Default, the outstanding principal amount of Outstanding Notes (including,
without limitation, all Deferred Payments and all Defaulted Interest) bears
interest, payable on demand, at an annual rate equal at all times to 1% above
the rate otherwise in effect from time to time. Notwithstanding the foregoing,
if at any time from July 15, 1992 to and including June 30, 1994, the Adjusted
Prime Rate or the Deferred Payment Interest Rate exceeds nine percent per
annum, then and for as long as either such rate exceeds nine percent per annum,
the Company is, at its option, permitted to accrue (and not currently pay in
cash) interest on account of such sums for which the interest rate exceeds nine
percent per annum, and any amounts of interest in excess of nine percent that
accrue and are not currently paid in cash continue to accrue and are payable on
December 31, 1995. Interest does not accrue on any such interest accrued in
excess of nine percent.
Application of Payments. In general, payments made by the Company under the
Outstanding Note Indenture are applied as follows: first, to unpaid interest
accrued on the Outstanding Notes (including any interest which is payable, but
is not punctually paid or duly provided for ("Defaulted Interest") and
excepting
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Deferred Interest); second, to the outstanding balance of any Deferred
Payments, if due and payable, and, at the election of the Company, to any
remaining outstanding balance of any Deferred Payments, whether or not due and
payable; third, to the outstanding principal balance of the Outstanding Notes,
in the order of maturity of each of the Required Payments; fourth, to Deferred
Interest, if any, and; fifth, to any remaining outstanding balance of any
Deferred Payments, whether or not due and payable. Payments applied to the
outstanding balance of any Deferred Payments are applied first to the Deferred
Payments that have been outstanding for the longest period of time.
CERTAIN COVENANTS OF THE COMPANY
The Outstanding Note Indenture contains covenants which, among other things,
(i) restrict investment, capital expenditures and other material outlays and
commitments relating thereto, (ii) restrict the incurrence of debt, (iii)
restrict dividends or and repurchases of capital stock, (iv) restrict mergers
and acquisitions and changes of business or conduct of business, (v) restrict
transactions with affiliates, (vi) restrict certain sales of assets or the
conduct of sales of assets, (vii) require maintenance of certain financial
ratios and levels, including capital ratios and total debt ratios, (viii) limit
the Company's ability to incur liens on its assets and (ix) limit the Company's
ability to incur lease obligations.
The following is a summary of certain of the covenants contained in the
Outstanding Note Indenture:
Ratio of Outstanding Securities to Capital Base. The Company is required to
maintain at the end of each Fiscal Quarter a ratio (expressed as a percentage)
of (a) the aggregate principal amount of Outstanding Securities to (b) the
Capital Base, for the periods set forth below, equal to or less than the
respective percentages set forth below:
<TABLE>
<CAPTION>
PERIOD REQUIRED PERCENTAGE
------ -------------------
<S> <C>
July 15, 1992 - December 30, 1992........................ 632%
December 31, 1992 - June 29, 1993........................ 515%
June 30, 1993 - December 30, 1993........................ 438%
December 31, 1993 - June 29, 1994........................ 358%
June 30, 1994 - December 30, 1994........................ 313%
December 31, 1994 - June 29, 1995........................ 209%
June 30, 1995 and thereafter............................. 102%
</TABLE>
Ratio of Earning Assets to Outstanding Securities. The Company is required to
maintain at the end of each Fiscal Quarter a ratio (expressed as a percentage)
of (a) Earning Assets to (b) the aggregate principal amount of Outstanding
Securities, for the periods set forth below, equal to or greater than the
respective percentages set forth below:
<TABLE>
<CAPTION>
PERIOD REQUIRED PERCENTAGE
------ -------------------
<S> <C>
July 15, 1992 - December 30, 1992........................ 96%
December 31, 1992 - June 29, 1993........................ 105%
June 30, 1993 - December 30, 1993........................ 113%
December 31, 1993 - June 29, 1994........................ 116%
June 30, 1994 - December 30, 1994........................ 117%
December 31, 1994 - June 29, 1995........................ 120%
June 30, 1995 and thereafter............................. 131%
</TABLE>
Expenses. The Company will not permit or suffer to exist the sum of actual
"Operating expenses of rental properties" and "Other operating expenses
(excluding professional expenses)" as described in a Form 10-Q for the Company
to exceed the sum of budgeted "Operating expenses of rental properties" and
"Other
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operating expenses (excluding professional expenses)" as set forth on an annual
budget approved by the Board of Trustees of the Company by more than 10% for
each Fiscal Quarter and by more than 10% for each Fiscal Year.
Non-Earning Assets. At the respective dates set forth below, the amount of
Non-Earning Assets maintained by the Company is not permitted to exceed the
respective amounts set forth below:
<TABLE>
<CAPTION>
PERIOD AGGREGATE AMOUNT
------ ----------------
<S> <C>
December 31, 1992........................................... $90,000,000
June 30, 1993............................................... $75,000,000
December 31, 1993........................................... $60,000,000
</TABLE>
In the event that at any specified date the amount of Non-Earning Assets
maintained by the Company exceeds the Permitted Non-Earning Assets for such
date, then within 45 days after such date, the Company is required to pay to
each holder of Outstanding Notes its proportionate share (as determined by the
outstanding principal amounts of Outstanding Notes held by each holder) of the
product of (i) the excess of (A) the Non-Earning Assets on such date set forth
above, over (B) the Permitted Non-Earning Assets for such date and (ii) 0.015.
Limitation on Existing Advances and Investments; Prohibition Against New
Investments. The Company is not permitted to fund any Investment under any
Contractual Obligation existing on the effective date of the Outstanding Note
Indenture, except in accordance with and subject to certain existing maximum
amounts set forth in the Outstanding Note Indenture. The Company is not
permitted to, directly or indirectly, become party or subject to any new
Contractual Obligation to fund an Investment in or to any Person from and after
the effective date of the Outstanding Note Indenture. Notwithstanding the
foregoing, the Company may fund (i) Investments under Qualified Contractual
Obligations that constitute increases in maximum amounts of such Qualified
Contractual Obligations; provided, however, that with respect to Underlying
Mortgages, such Investments, which constitute actual cash outlays in excess of
existing commitments pursuant to the Underlying Mortgages, may not exceed in
the aggregate (x) $5,000,000 from and after July 15, 1992, to and including
December 31, 1992, (y) $3,500,000 from and after January 1, 1993, to and
including December 31, 1993, and (z) $2,000,000 annually thereafter, and (ii)
Investments which constitute capital expenditures, leasing commissions and
tenant improvements, related to the ownership and maintenance of a parcel or
parcels of Real Estate in an amount not to exceed, by more than 10%, the amount
of such expenses set forth on a budget approved by the trustees of the Company
and subsequently submitted to and not objected to by the Required Holders.
The Company is not permitted to, directly or indirectly, fund or otherwise
make any Investment, except (i) Investments expressly permitted or required
under the Outstanding Note Indenture, (ii) Investments of Available Cash in
Cash Equivalents, (iii) Investments created by the Company as a result of sale,
refinancing or disposition of assets when the Company accepts in partial
payment of an outstanding obligation a new mortgage or equity interest in the
same property, and (iv) Investments in Subsidiaries formed or maintained
pursuant to the Outstanding Note Indenture.
Indebtedness. The Company is not permitted to, directly or indirectly, incur,
create, assume or suffer to exist any Indebtedness, except (a) the Outstanding
Notes and the Additional Cash Consideration, (b) Contingent Obligations
constituting endorsements for collection or deposit in the ordinary course of
business, (c) current liabilities in respect of taxes, assessments and
governmental charges or levies incurred, or claims for labor, materials,
inventory, services, supplies and rentals incurred, or for goods or services
purchased, in the ordinary course of business consistent with the past practice
of the Company, (d) Indebtedness arising under any performance bond
reimbursement obligation entered into in the ordinary
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course of business of the Company consistent with the past practice of the
Company, (e) unimpaired indemnification claims under the Declaration of Trust
of the Company, and (f) Indebtedness arising in connection with Subsidiaries
formed or maintained pursuant to the Outstanding Note Indenture.
Restricted Payments. The Company is not permitted to (a) declare or make any
dividend payment or other distribution of assets, properties, cash, rights,
obligations or securities on account of or in respect of any of its Common
Shares, except so long as there is no Default or Event of Default (i) such
minimum declaration and making of dividend payments required for the Company to
preserve its status as a REIT or (ii) the inadvertent making of Dividend
Overpayments or (b) purchase, redeem, prepay, defease or otherwise acquire for
value or make any payment on account or in respect of its Common Shares,
whether outstanding on the effective date of the Outstanding Note Indenture or
thereafter issued and outstanding.
REDEMPTION
The Company is required to redeem the Outstanding Notes pursuant to the
schedule of Required Payments and Permitted Deferrals described above under the
caption "--Payments." In addition, the Company may, upon at least five business
days' prior notice to the Outstanding Note Trustee (unless a shorter notice
shall be satisfactory to the Outstanding Note Trustee) and the holders of
Outstanding Notes stating the proposed date and aggregate principal amount of
the redemption, and if such notice is given, the Company shall, prepay the
outstanding principal balance of the Outstanding Notes, in whole or in part,
together with accrued interest to the date of such redemption on the
outstanding balance prepaid without penalty in amounts not less than $1,000,000
or integral multiples in excess thereof.
SECURITY
Pursuant to the 1992 Restructuring, on the effective date of the 1992
Restructuring (July 15, 1992) the liens then existing against the collateral
securing the Creditor Obligations pursuant to the Collateral Agreement dated as
of February 21, 1991 were continued pursuant to the Outstanding Note Indenture
and the Outstanding Collateral Agreement. Such documents provided that, without
further action, upon the effective date of the 1992 Restructuring such liens
continued to secure the Outstanding Notes as modified under the Outstanding
Note Indenture as it may be amended, modified, supplemented or replaced from
time to time. The Company executed, delivered and caused to be recorded, as
necessary, all agreements, instruments and other documents necessary to effect
the continuation of liens contemplated by the Outstanding Collateral Agreement
and the Outstanding Note Indenture and agreed to fully cooperate and take such
action as the Outstanding Note Trustee may request from time to time to
maintain the continued perfection of such liens.
Pursuant to the 1992 Restructuring, the terms of the Outstanding Notes were
modified. Under applicable law relating to the priority of liens, modification
of debt may adversely affect the priority of liens securing the original debt.
New mortgages were not recorded and new policies of title insurance, or the
like, were not obtained with respect to the existing liens as part of the 1992
Restructuring. Although as part of the 1992 Restructuring the Company
represented and warranted to the holders of Outstanding Notes that there were
no intervening liens and that the Prior Plan prohibited such liens, there can
be no assurance that there were no intervening liens or that if such
intervening liens existed, the liens securing the Outstanding Notes retained
their priority after the 1992 Restructuring.
Certain Amendments to the 1991 Collateral Agreement. As part of the 1992
Restructuring, the Company and the holders of the Outstanding Notes provided
for the collateral securing the Creditor Obligations (and, as a result of the
1992 Restructuring, the Outstanding Notes) to be subject to the terms and
provisions of the Outstanding Note Indenture as well as the Outstanding
Collateral Agreement and the Amended Plan, and the Company confirmed,
reaffirmed and ratified that the rights, including the liens and security
interests against the collateral, that the holders of the Outstanding Notes
were granted under the Prior Plan continued
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to secure the Company's obligations in respect of the Outstanding Notes as
modified by the 1992 Restructuring. The 1992 Restructuring amendments to the
Outstanding Collateral Agreement and the Security Agreement, dated as of
February 21, 1991, provided, among other things, for (a) a mechanism for the
Outstanding Note Trustee to obtain the consent of the holders of Outstanding
Notes to allow the Company to take certain actions with respect to the
collateral securing the Outstanding Notes if such actions are not otherwise
provided for in the Outstanding Collateral Agreement or the Prior Plan, and (b)
the Company to have certain rights to service and otherwise deal with the
collateral securing the Outstanding Notes without the approval of the holders
of Outstanding Notes, so long as no Event of Default has occurred and is
continuing, including the right to take title to (i) a mortgage or equivalent
security then held by the Company or acquired in connection with property held
by the Company in a wholly-owned Subsidiary organized solely for the purpose of
foreclosing upon such mortgage or equivalent security, or (ii) Real Estate
which is the subject of a lien of a mortgage or equivalent security then held
by the Company or acquired in connection with property held by the Company for
the purpose of holding and operating such Real Estate in a wholly owned
Subsidiary organized solely for the purpose of holding and operating such Real
Estate, provided that the Company or such Subsidiary delivers to the
Outstanding Collateral Agent, at the time of taking title in such Subsidiary,
(w) a mortgage lien upon the Real Estate, (x) a pledge of 100% of the issued
and outstanding stock of such Subsidiary, (y) a legal opinion of the Company's
counsel as to the Company's compliance with the foregoing or other evidence
reasonably satisfactory to the holders of Outstanding Notes, and (z) all
necessary documents and instruments necessary to grant to the Outstanding
Collateral Agent a valid, perfected and enforceable security interest in the
assets and stock of such Subsidiary.
AMENDMENT, SUPPLEMENT AND WAIVER
The Outstanding Note Indenture may be amended or supplemented with the
consent of the Required Holders and any past default and its consequences may
be waived with the consent of the Required Holders; provided that, without the
consent of each holder, no such amendment, supplement or waiver may change the
maturity of, the principal of, or any installment of principal of or interest
on, any Outstanding Note, or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or reduce,
waive or change the time for making any payment required on account of Non-
Earning Assets in excess of certain agreed amounts or reduce the aforesaid
percentage of principal amount of Outstanding Notes whose holders must consent
to an amendment, supplement or waiver. Without the consent of any holder of
Outstanding Notes, the Company and the Outstanding Note Trustee may amend or
supplement the Outstanding Note Indenture to, among other things, evidence
succession of another corporation to the Company to the extent otherwise
permitted under the Outstanding Note Indenture or to cure any ambiguity,
correct or supplement any provision of the Outstanding Note Indenture
inconsistent with other provisions thereof or make any other provision which
does not adversely affect the interests of the holders of Outstanding Notes.
EVENTS OF DEFAULT
The Outstanding Note Indenture defines an Event of Default as being any one
of the following events: (a) a default in any payment on the Outstanding Notes
or any payment to holders of Creditor Obligations under the Prior Plan when the
same becomes due and payable; (b) any representation or warranty of the Company
under the Outstanding Note Indenture or the Outstanding Collateral Agreement
that is incorrect in any material respect; (c) a default in the performance of
any term, covenant or agreement of the Company (subject in certain cases to a
30-day cure period); (d) the Company fails to pay any principal of or premium
or interest on any of its Indebtedness in an amount exceeding $1,000,000
(excluding the Outstanding Notes), when the same becomes due and payable, or
any other event occurs or condition exists under any agreement or instrument
relating to any such Indebtedness, if the effect of such event or condition is
to accelerate, or to permit the acceleration of, the maturity of such
Indebtedness; or any such Indebtedness is declared to be due and payable, or
required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof; (e) bankruptcy, insolvency,
reorganization or other similar events; (f) any
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judgment or order for the payment of money in excess of $1,000,000 rendered
against the Company and either enforcement proceedings have been commenced by
any creditor upon such judgment or order, or there is any period of 10
consecutive days during which a stay of enforcement of such judgment or order
by reason of a pending appeal or otherwise, is not in effect; and (g) except
for releases of collateral pursuant to Permitted Financings or Asset Sales, the
Outstanding Note Indenture or the Outstanding Collateral Agreement, for any
reason, ceases to create a valid Lien on collateral having a value of
$10,000,000 or more purported to be covered thereby, or such Lien ceases to
have the priority Lien status initially granted and be a perfected Lien as to
collateral having a value of $10,000,000 or more. If an Event of Default occurs
and is continuing, then (i) if such Event of Default is the result of
bankruptcy, insolvency, reorganization or similar events, the principal amount
of all Outstanding Notes and all obligations of the Company under the
Outstanding Note Indenture and the plan of reorganization then in effect shall
be automatically accelerated and (ii) in every other case, the Outstanding Note
Trustee may, and upon the direction from the Required Holders shall, declare
the principal amount of the Outstanding Notes and all obligations of the
Company under the Outstanding Note Indenture and the plan of reorganization
then in effect to be due and payable immediately, but under certain conditions
such acceleration may be rescinded by the Required Holders.
No holder of any Outstanding Note has any right to institute any proceeding
with respect to the Outstanding Note Indenture or for any remedy thereunder,
unless (i) the Required Holders previously shall have given to the Outstanding
Note Trustee written notice of an Event of Default, (ii) the Required Holders
shall have made written request upon the Outstanding Note Trustee, (iii) such
holder shall have offered indemnity satisfactory to the Outstanding Note
Trustee to institute such proceeding as Outstanding Indenture Trustee, (iv) the
Outstanding Note Trustee for ten Business Days shall have failed to institute
such proceeding, and (v) during such ten day period the Required Holders shall
not have issued a direction inconsistent with such prior request. However, the
right of any holder of any Outstanding Note to institute suit for enforcement
of any payment of principal of, and premium and interest on, such Outstanding
Note on or after the due date expressed in such Outstanding Note, may not be
impaired or affected without such holder's consent.
The Required Holders may direct the time, method and place of conducting any
proceeding for any remedy available to the Outstanding Note Trustee or
exercising any trust or power conferred on the Outstanding Note Trustee with
respect to Outstanding Notes. However, the Outstanding Note Trustee may refuse
to follow any such direction that conflicts with any rule of law or the
Outstanding Note Indenture. Before proceeding to exercise any right or power
under the Outstanding Note Indenture at the direction of the Required Holders,
the Outstanding Note Trustee shall be entitled to receive from the holders
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in its compliance with any such direction. If an
Event of Default shall occur, the Outstanding Note Trustee shall give notice
thereof to the Outstanding Collateral Agent and may direct the Outstanding
Collateral Agent to enforce any right under the Outstanding Collateral
Agreement.
The Company will be required under the Outstanding Note Indenture to notify
the Outstanding Note Trustee and the holders within five business days of the
existence of any default under the Outstanding Note Indenture of which any
officer of the Company is aware. In addition, the Company will be required to
furnish to the Outstanding Note Trustee within 45 days after the end of each
fiscal year, a statement as to whether any default under the Outstanding Note
Indenture occurred during the fiscal year.
MERGER; SALE OF ASSETS; PERMITTED FINANCINGS
Merger. Under the Outstanding Note Indenture, the Company may not (i) merge
with any Person, (ii) consolidate with any Person, (iii) acquire all or
substantially all of the stock or stock equivalents of any Person, (iv) acquire
all or substantially all of the assets of any Person, or (v) enter into any
joint venture or partnership with any Person.
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Sale of Assets. The Company is permitted to dispose of assets subject to
compliance with certain procedures in the Outstanding Collateral Agreement;
provided, however, that all cash Asset Sale Proceeds are required to be
deposited in a trust account held by the Outstanding Collateral Agent
immediately upon receipt by the Company or its agent, and all non-cash Asset
Sale Proceeds are required to be delivered immediately to the Outstanding Note
collateral agent upon receipt by the Company or its agent. Subject to required
Additional Payments of Available Cash, the Company may have the use of the
Asset Sale Proceeds (together with any interest thereon) up to an aggregate of
$10,000,000 in any one Fiscal Quarter, provided that the chief financial
officer of the Company furnishes to the Outstanding Note Trustee, the
Outstanding Note collateral agent and the holders of Outstanding Notes a
certificate stating that there is no existing Default or Event of Default and
that such Asset Sale Proceeds are to be used in accordance with the terms and
provisions of the Outstanding Note Indenture.
Permitted Financings. With the prior written consent of the Required Holders
(which consent may be given or withheld for any reason), the Company may sell,
otherwise dispose of, refinance or otherwise transfer any of its property as
part of a financing transaction that satisfies certain provisions limiting
application of proceeds (a "Permitted Financing"). In order for any proposed
financing transaction to be considered a Permitted Financing, the terms of such
financing transaction must provide that (i) the Company shall apply
substantially all of the net cash proceeds generated from such financing
transaction in the same manner provided for regularly scheduled principal and
interest payments and (ii) 100% of any non-cash proceeds shall be pledged as
collateral to the Outstanding Collateral Agent pursuant to the Outstanding
Collateral Agreement for the benefit of the holders of Outstanding Notes.
RESTRICTIONS ON TRANSFER
The Company is not required to register the transfer or exchange of
Outstanding Notes if the aggregate amount of Outstanding Notes being
transferred or exchanged pursuant to such transfer or exchange is less than
$5,000,000 or is not an integral multiple of $1,000,000 in excess thereof
(unless the transfer or exchange shall be of a holder's entire interest in the
Outstanding Notes), or unless the transferee or recipient of such exchange is
at such time a holder or is a Qualified Institutional Buyer as defined under
Rule 144A promulgated under the Securities Act. No Outstanding Notes may be
sold, transferred, negotiated or assigned to bearer.
SATISFACTION AND DISCHARGE
The Outstanding Note Indenture will cease to be of further effect (except as
to any surviving rights of registration of transfer or exchange of Outstanding
Notes therein expressly provided for), and the Outstanding Note Trustee, upon
written request by the Company, at the expense of the Company, will execute
proper instruments acknowledging satisfaction and discharge of the Outstanding
Note Indenture, when (1) either (A) all Outstanding Notes theretofore issued
(other than Outstanding Notes for whose payment money has theretofore been
deposited in trust with the Trustee for the benefit of the holders of
Outstanding Notes) have been cancelled and marked as such in the security
register in accordance with the terms of the Outstanding Note Indenture; or (B)
all such Outstanding Notes not theretofore cancelled and marked as such in the
security register (i) have become due and payable, or (ii) will become due and
payable at their stated maturity within one year, or (iii) are to be called for
redemption within one year under arrangements satisfactory to the Outstanding
Note Trustee for the giving of notice of redemption by the Outstanding Note
Trustee in the name, and at the expense, of the Company, and the Company, in
the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be
deposited with the Outstanding Note Trustee as trust funds in trust for the
benefit of the holders of Outstanding Notes for the purpose an amount
sufficient to pay and discharge the entire indebtedness on such Outstanding
Notes not theretofore cancelled, for principal (and premium, if any) and
interest, if any, to the date of such deposit (in the case of Outstanding
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Notes which have become due and payable) or to the stated maturity or
redemption date, as the case may be; (2) the Company has paid or caused to be
paid all other sums payable hereunder or under the Prior Plan by the Company;
(3) no default or event of default shall have occurred and be continuing on the
date of such deposit; and (4) the Company has delivered to the Outstanding Note
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent herein provided for relating to the satisfaction and
discharge of the Outstanding Note Indenture have been complied with.
THE OUTSTANDING NOTE TRUSTEE AND COLLATERAL AGENT
The Outstanding Note Trustee is also presently the Outstanding Collateral
Agent under the Outstanding Collateral Agreement. The Outstanding Note Trustee
may be removed as trustee under the Outstanding Note Indenture by the Required
Holders and may be removed as collateral agent under the Outstanding Collateral
Agreement by the Required Holders.
CERTAIN DEFINITIONS
Set forth below are certain terms contained in the Outstanding Note
Indenture, modified where appropriate to use terms as defined elsewhere in this
Disclosure Statement.
"Adjusted Prime Rate" means, for the periods set forth below, a floating
annual rate of interest equal to the rates set forth below:
<TABLE>
<CAPTION>
PERIOD RATE
------ ----
<S> <C>
July 15, 1992 - December 31, 1992................. Reference Rate, plus 1.75%
January 1, 1993 - June 30, 1993................... Reference Rate, plus 2.00%
July 1, 1993 - December 31, 1993.................. Reference Rate, plus 2.25%
January 1, 1994 - June 30, 1994................... Reference Rate, plus 2.50%
July 1, 1994 - December 31, 1994.................. Reference Rate, plus 2.75%
January 1, 1995 - June 30, 1995................... Reference Rate, plus 3.00%
From and after July 1, 1995....................... Reference Rate, plus 3.25%
</TABLE>
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person and includes each officer, director, trustee
or general partner of such person, and each owner of 5% or more of any class of
voting stock or interests of such person. For the purposes of this definition,
"control", when used with respect to any specified person, means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Available Cash" means, as at any date of determination, all cash and Cash
Equivalents held by the Company, any Subsidiary or the collateral agent under
the Outstanding Collateral Agreement, including, without limitation, cash and
Cash Equivalents held in the Asset Sale Account or in any Deposit Account (as
defined in the Outstanding Collateral Agreement) in excess of $10,000,000 less
the amount of Dividend Overpayments, if any, during the period following the
Effective Date.
"Asset Sale" means any sale or other disposition, or series of sales or other
dispositions, made on or after the Effective Date by the Company or any
Subsidiary to any person of any Collateral. For the purposes hereof, any
prepayment or payment at maturity of a Promissory Note shall be deemed to be an
"Asset Sale."
"Asset Sale Proceeds" means payments in cash or other property (including
securities) received by the Company or any Subsidiary (including, without
limitation, any cash payments received by way of deferred payment of principal
pursuant to a note or receivable or otherwise, but only as and when received)
from any Asset Sale (after repayment of any Indebtedness required to be paid by
reason of such Asset Sale) or any
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Permitted Financing which has been approved by the Required Holders pursuant to
Outstanding Note Indenture (after application of such Permitted Financing
proceeds in accordance with Outstanding Note Indenture) or otherwise, in each
case net of the amount of (a) reasonable brokers' and advisors' fees and
commissions actually paid other than to an Affiliate of the Company, (b) all
foreign, federal, state and local taxes actually payable by the Company as a
direct consequence of such Asset Sale, (c) the reasonable fees and expenses
attributable to such Asset Sale, to the extent not included in clause (a),
except to the extent paid to any Affiliate of the Company and (d) any
proportionate share of the proceeds required to be paid to any person owning a
beneficial interest in the property or assets sold pursuant to such Asset Sale.
"Capital Base" means, as at any date of determination, an amount equal to the
difference of (a) the sum of (i) the aggregate par value of the capital stock
of the Company (and any Subsidiary) as at such date of determination, plus (ii)
the paid in capital and earned surplus of the Company (and any Subsidiary) as
at such date of determination, minus (b) 50% of the Non-Earning Assets as at
such date of determination.
"Cash Equivalents" means, collectively, (a) securities with maturities of 90
days or less from the date of acquisition issued or fully guaranteed or insured
by the United States government or any agency thereof, (b) certificates of
deposit, overnight bank deposits and bankers' acceptances of any commercial
bank having combined capital and surplus of at least $200,000,000, a short term
deposit rating of A1/P1 or better and organized under the laws of the United
States of America having maturities of 90 days or less from the date of
acquisition and (c) commercial paper with maturities of 90 days or less having
a rating of A1/P1 or better.
"Collateral" means all property and interests in property, real or personal
and tangible or intangible, and all rents, issues, profits and proceeds thereof
held by the Company or any Subsidiary as at the effective date of the Plan or
acquired thereafter.
"Contingent Obligation" means with reference to any person, any direct or
indirect liability, contingent or otherwise, of such person with respect to any
Indebtedness or Contractual Obligation of another person, if the purpose or
intent of such person in incurring the Contingent Obligation is to provide
assurance to the obligee of such Indebtedness or Contractual Obligation that
such Indebtedness or Contractual Obligation will be paid or discharged, or that
any agreement relating thereto will be complied with, or that any holder of
such Indebtedness or Contractual Obligation will be protected (in whole or in
part) against loss in respect thereof.
"Contractual Obligation" means with reference to any person, any obligation,
agreement, undertaking or similar provision of any security issued by such
person or of any agreement, undertaking, contract, lease, indenture, mortgage,
deed of trust or other instrument to which such person is a party or by which
it or any of its property is bound or to which any of its properties is
subject.
"Dividend Overpayments" means, as at any date of determination, an amount
equal to the aggregate amount of dividends paid by the Company in excess of the
minimum amount which was required to preserve its status as a real estate
investment trust under the Internal Revenue Code.
"Earning Assets" means, as at any date of determination, an amount equal to
the difference of (a) Invested Assets as at such date of determination and (b)
the aggregate amount of Non-Earning Loans and Non-Earning Properties as at such
date of determination.
"Indebtedness" means with reference to any person (a) all indebtedness of
such person for borrowed money (including, without limitation, reimbursement
and all other obligations with respect to surety bonds, letters of credit and
bankers' acceptances, whether or not matured) or for the deferred purchase
price of property or services (other than normal trade accounts payable
incurred in the ordinary course of business), (b) all obligations of such
person evidenced by notes, bonds, debentures or similar instruments, (c) all
indebtedness of such person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such
person (even though the rights and remedies of the seller or lender
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under such agreement in the event of default are limited to repossession or
sale of such property), (d) all capitalized lease obligations of such person,
(e) all Contingent Obligations of such person, (f) all obligations of such
person under interest rate contracts, (g) all indebtedness referred to in
clause (a), (b), (c), (d), (e) or (f) above of such person secured by (or for
which the holder of such indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien against property or an interest in
property owned by such person, even though such person has not assumed or
become liable for the payment of such indebtedness, and (h) in the case of the
Company, the Outstanding Notes.
"Investment" means any advance, loan, extension of credit or capital
contribution to, or purchase of any stocks, bonds, notes, debentures or other
securities of, or interest in, any person, any purchase of any interest in Real
Estate (other than by foreclosure, deed in lieu of foreclosure or other method
of realizing on security) or any commitment or other obligation, whether
contingent or absolute, to do any of the foregoing, which commitment or other
obligation does not constitute a Contingent Obligation.
"Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), security interest
or preference, priority or other security agreement or preferential arrangement
of any kind or nature whatsoever, including, without limitation, any
conditional sale or other title retention agreement, the interest of a lessor
under a capitalized lease obligation, any financing lease having substantially
the same economic effect as any of the foregoing, and the filing, under the
Uniform Commercial Code or comparable law of any jurisdiction, of any financing
statement naming the owner of the asset to which such Lien relates as debtor.
"Net Cash Value" means, total cash investment in respect of a property, net
of any write-offs of the cash investment in such property, before the allowance
for accumulated depreciation.
"Non-Earning Assets" means, at any date of determination, the aggregate of
Non-Earning Loans and Non-Earning Properties.
"Non-Earning Loans" means, all of the Company's (a) notes and receivables on
which payment of interest or a contractual payment of principal is more than 60
days past due, (b) loans on which extensions (generally, where principal has
been increased or cumulative extensions of maturity for more than 24 months has
been granted or suffered) have been granted, (c) loans which the Company has
classified as non-accrual, and (d) loans on which the Company has reduced the
rate of interest so that the current cash payments yield an annualized return
of 5% or less, subject to temporary exclusion of certain of such assets upon
certification by the chief financial officer of the Company which would yield
an annualized return of five percent (5%) or more, calculated as if foreclosure
proceedings were otherwise completed and on the basis of Net Cash Value, for
the first six months after such certification date.
"Non-Earning Properties" means, as at any date of determination, any and all
Real Estate held by the Company that has not, on an individual basis, generated
for two consecutive Fiscal Quarters net Operating Income sufficient to yield an
annualized return of 5% or more, calculated on the basis of Net Cash Value of
the investment in such Real Estate. Notwithstanding the foregoing, at the date
of determination with respect to any property held for less than six months, if
the Company provides the Creditors' Committee with a certificate of the chief
financial officer stating that the Company reasonably believes that such
property will yield an annualized return of 5% or more, calculated as
aforesaid, for the first six months after acquisition, then such property shall
not be a Non-Earning Property.
"Promissory Note" means the promissory notes or other instruments evidencing
the Indebtedness of any person to the Company other than (a) promissory notes
or other instruments constituting Cash Equivalents and (b) promissory notes or
other instruments evidencing indebtedness of any person to the Company in
connection with residential end loans made by the Company to such person for
the purpose of purchasing a condominium unit.
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"Real Estate" means any interest in all of those plots, pieces or parcels of
land owned in any capacity, whether as a joint venturer, participant, partner
or otherwise, or leased as at the date hereof or acquired thereafter by the
Company, including, without limitation, those listed in the Outstanding Note
Indenture and described in the mortgages or equivalent security instruments
executed and delivered in connection with the Outstanding Note Indenture,
together with all of the buildings and other improvements now or hereafter
erected on the Real Estate, and any fixtures appurtenant thereto.
"Reference Rate" means the rate of interest publicly announced from time to
time by Bank of America in San Francisco, California, as its reference rate.
The reference rate is a rate set by Bank of America based upon various factors,
including, without limitation, Bank of America's costs and desired return,
general economic conditions and other factors and is used as a reference point
for pricing some loans, which may be priced at, above, or below such announced
rate. Any change in the reference rate announced by Bank of America shall take
effect at the opening of business on the day specified in the public
announcement of such change.
"Required Holders" means the holders of at least 66 2/3% in principal amount
of the Outstanding Notes on the date of determination.
"Subsidiary" means any corporation of which the Company, directly and/or
indirectly through one or more Subsidiaries owns 50% or more of the shares of
voting stock. For the purposes of this definition, "voting stock" means stock
of the class or classes having general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of a corporation (irrespective of whether or not at the time stock
of any other class or classes shall have or might have voting power by reason
of the happening of any contingency).
"Termination Date" means that date on which all of the Outstanding Notes are
paid in full and all amounts owing under the Outstanding Note Indenture and the
Prior Plan are paid in full.
"Underlying Mortgages" means collectively, the mortgages or deeds of trust
granted by any person to or for the benefit of the Company securing a
Promissory Note of such person, as the same may have been amended, modified or
supplemented.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The material federal income tax consequences of the Prepackaged Plan under
the Internal Revenue Code are described below. The state and local income tax
consequences of the Prepackaged Plan are not discussed herein. Due to the
unsettled nature of several of the tax issues presented by the Prepackaged
Plan, the differences (even among holders of Outstanding Common Shares and
among creditors within the same creditor class) in the nature of the claims of
the various creditors or holders of Outstanding Common Shares, their taxpayer
status, residence, and methods of accounting and prior actions taken by
creditors with respect to their claims, as well as the possibility that events
subsequent to the date hereof, including amendments to the Internal Revenue
Code, regulations thereunder or court decisions, could change the federal tax
consequences of the transactions, the tax consequences described below are
general descriptions and subject to significant uncertainties. The Company has
not sought, nor does it intend to seek, a ruling from the Internal Revenue
Service. Consequently, there can be no assurance that the treatment set forth
below will be accepted by the Internal Revenue Service.
ACCORDINGLY, HOLDERS OF CLAIMS AND OUTSTANDING COMMON SHARES ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH SPECIFIC REFERENCE TO THE FEDERAL, STATE AND
LOCAL TAX CONSEQUENCES OF THE PREPACKAGED PLAN WITH RESPECT TO THEIR CLAIM OR
EQUITY INTEREST.
TAX CONSEQUENCES TO CREDITORS
The federal income tax consequences to creditors arising from the Prepackaged
Plan will vary depending upon, among other things, whether or not a creditor's
Claim is an obligation classified as a Tax Security. The term "security" is not
defined in the Internal Revenue Code, but is generally regarded as stock or a
debt instrument due more than 10 years from the date of issuance. However, the
precise limits are unclear and an instrument with an original term of as little
as 5 years (or even less) may also qualify. All creditors who receive New
Common Shares pursuant to the Prepackaged Plan should consult their tax
advisors to determine whether their Claims constitute securities for federal
income tax purposes.
Claims Not Constituting Tax Securities. The tax treatment of a creditor whose
Claim is not classified as a Tax Security for federal income tax purposes (as
described above) on the exchange of such a Claim (other than any Claim for
interest) for cash or property will depend on several issues. A holder will
recognize gain or loss equal to the difference between the holder's "amount
realized," i.e., the sum of the amount of cash received, the issue price of new
debt instruments received the fair market value of stock and other property
received, and its adjusted tax basis in its Claim. The tax basis of property
received by creditors with respect to Claims that do not constitute Tax
Securities (other than with respect to Claims for interest) will be the amount
of such property that is included in the holder's amount realized on the
exchange. The holding period for property received in the exchange will begin
on the day following the exchange.
Claims Constituting Tax Securities. If the Prepackaged Plan as confirmed does
not qualify as a "reorganization" under the Internal Revenue Code, creditors
whose Claims constitute Tax Securities will be treated the same as creditors
whose Claims do not constitute Tax Securities. The Company expects the
Prepackaged Plan will constitute a "tax-free recapitalization" under Internal
Revenue Code section 368(a)(1)(E) as to the Company and that the New Senior
Notes will constitute Tax Securities. In that event, holders of Tax Securities
who receive New Common Shares, New Senior Notes, or both, will generally not
recognize gain or loss, subject to certain exceptions. First, income or loss
will be recognized to the extent that the value received for accrued interest
is more or less than the amount of accrued interest previously included in
income for federal income tax purposes. For a more detailed discussion of the
tax consequences of the receipt of interest, see "Claims for Interest" below.
Second, creditors with Claims constituting Tax Securities who receive stock (or
other Tax Securities, such as New Senior Notes) as well as "other property"
(including cash) in a reorganization generally do not recognize loss, and
recognize gain to the extent of the lesser of (i) the fair market value of such
other property, or (ii) the actual gain realized by such creditor
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determined by comparing the value received with the adjusted tax basis of the
Tax Security exchanged. The tax basis of "other property" received in a tax-
free reorganization in exchange for a Tax Security will generally equal the
fair market value of that "other property," and the holding period of the
"other property" will begin on the day following the exchange. A Tax Security
holder's aggregate basis in the stock (and, if applicable, other Tax Security)
received in a tax-free reorganization (other than a Tax Security representing a
Claim for interest) will equal the holder's basis in the surrendered Tax
Security (other than with respect of a Claim for interest), reduced by the
amount of cash and the fair market value of "other property" received for such
Tax Security (other than a Tax Security representing a Claim for interest) and
increased by the amount of gain (if any) recognized on the exchange. The
holding period for the stock and other Tax Securities received in the exchange
(other than in respect of a Claim for interest) will include the period the
holder of the exchanged Tax Security held that Tax Security, provided the Tax
Security was held as a capital asset on the date of the exchange.
Under these rules, Holders of Claims that receive New Common Shares or New
Senior Notes, or both, for their Claims may recognize gain, if any, only to the
extent of the cash they receive. They will hold the New Common Shares or New
Senior Notes, or both, with a basis computed as described above. A Tax Security
Holder who receives (i) no property other than cash, or (ii) nothing in
exchange for its Claim, will recognize gain or loss based on the amount of cash
received, if any, compared with the adjusted tax basis of its Claim.
Claims for Interest. The Plan provides that consideration received in
satisfaction of a Claim will first be allocated to repayment of principal of
Claims, and any payment in excess of such principal amount will be allocated to
unpaid interest on Claim. No assurance can be given that the Internal Revenue
Service will respect this allocation. Creditors will recognize ordinary income
to the extent they receive any cash or property (including New Common Stock or
New Senior Notes) that is allocable to interest income they have not previously
included in federal taxable income. The proper allocation of amounts received
in exchange for the discharge of a Claim at a discount between principal and
interest is unclear and may be affected by, among other things, the rules in
the Internal Revenue Code relating to imputed interest, original issue discount
and accrued market discount. Creditors should consult their own tax advisors to
determine the amount of consideration received under the Prepackaged Plan
allocable to interest. In the event that the amount of cash, New Common Shares,
New Senior Notes, and other property allocable to interest on a creditor's
Claim is less than the amount previously included as interest on the Claim in
the creditor's federal taxable income, the unpaid interest may be deducted,
generally as a loss or as an adjustment to a reserve for bad debts.
Character of Gain or Loss. The character of gain or loss recognized by a
holder of a Claim as capital or ordinary, and, in the case of capital gain or
loss, as short term or long term, will depend on a number of factors, including
the following: (i) the nature and origin of the Claim; (ii) the tax status of
the holder of the Claim; (iii) whether the holder is a financial institution;
(iv) whether the Claim is a capital asset in the hands of the holder; (v)
whether the Claim has been held for more than one year; (vi) the extent to
which the holder previously claimed a loss, bad debt deduction or charge to a
reserve for bad debts with respect to the Claim; and (vii) in the case of a
Claim arising from certain indebtedness issued after July 18, 1984 with a term
of more than one year for which no election was made to currently include
market discount in income, whether the difference between the holder's basis in
the indebtedness immediately after it was acquired and the amount of the
indebtedness exceeded any then unaccrued original issue discount (by more than
the de minimis amount).
In the case of a creditor whose existing Claims constitute capital assets in
the creditor's hands, the gain required to be recognized will be classified as
a capital gain, except to the extent of interest (including accrued market
discount). Any gain recognized will be treated as ordinary income to the extent
of accrued (and previously unrecognized) market discount on the Outstanding
Notes. See "Market Discount" below. It should also be noted that Internal
Revenue Code section 582(c) provides that the sale or exchange of a bond,
debenture, note or certificate, or other evidence of indebtedness by a bank or
certain other financial institutions will not be considered the sale or
exchange of a capital asset. Accordingly, any gain recognized by such creditors
as a result of the implementation of the Prepackaged Plan will be ordinary
income,
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notwithstanding the nature of their Claims. Any capital gain recognized by a
creditor will be long-term capital gain with respect to those Claims for which
the creditor's holding period is more than one year, and short-term capital
gain with respect to such Claims for which the creditor's holding period is one
year or less. There may be a favorable differential tax rate applied to capital
gain for certain holders. Proposed legislation would index such capital gain
for the effects of inflation after December 31, 1994.
Market Discount. The Tax Reform Act of 1984 provided extensive new rules
regarding the creation, recognition and reporting of interest (including
original issue and market discount) on debt obligations. In general, the new
rules expanded the instances of discount and unstated interest, both on
original issue and subsequent disposition or acquisition of the obligation. To
the extent that a creditor has a lower tax basis in Outstanding Notes than
their face amount, the difference should constitute market discount under
section 1276 of the Internal Revenue Code. Under a de minimis exception, there
is no market discount if the difference mentioned in the previous sentence is
less than 0.25% of the face amount of the debt instrument multiplied by the
number of complete years after the acquisition date to the obligation's date of
maturity. Unless the holder elects otherwise, the accrued market discount
generally would be the amount calculated by multiplying the market discount by
a fraction, the numerator of which is the number of days the obligation has
been held by the holder and the denominator of which is the number of days
after the holder's acquisition of the obligation up to and including its
maturity date.
Holders in whose hands Claims are "market discount bonds" will be required to
treat as ordinary income any gain recognized upon the exchange of their
Outstanding Notes to the extent of the market discount accrued during the
holder's period of ownership, unless the holder has elected to include such
market discount in income as it accrued. Any additional gain recognized by the
holder would be characterized in accordance with the rules described above. Any
accrued market discount not treated as ordinary income upon an exchange of
Outstanding Notes for New Senior Notes and New Common Shares in which gain or
loss is not recognized in whole or in part should carry over into the New
Common Shares and New Senior Notes received in the exchange. The allocation of
such market discount between the New Senior Notes and New Common Shares is
unclear. On disposition of such New Senior Notes and New Common Shares, any
gain recognized generally would be treated as ordinary income to the extent of
the amount of accrued market discount carried over.
Withholding. The Company will withhold any amounts required by law from
payments made to creditors. In particular, under the "backup withholding"
rules, the Company may be required to withhold cash equal to 31% of the amount
to be distributed to United States Claim holders in exchange for interest,
unless the Claim holders are eligible for certain exemptions or provide their
taxpayer identification numbers and certify that they are not subject to backup
withholding by filing a Form W-9. This may require payments by certain
creditors of the required withholding tax on the non-cash consideration
issuable under the Prepackaged Plan. Analogous withholding requirements may
apply to interest payments to foreign Claim holders. Many foreign Claim holders
holding debt instruments (as opposed, e.g., to Claims for goods or services)
may establish exemption from withholding by filing Forms W-8. In addition,
creditors may be required to provide general tax information to the Company.
RECAPTURE OF GAIN ON SUBSEQUENT SALE OF NEW COMMON SHARES
Any gain realized on a subsequent sale of New Common Shares received in
exchange for a Claim under the Prepackaged Plan will be treated as ordinary
income to the extent of the sum of any bad debt deductions, any charges to bad
debt reserves, any ordinary loss taken on the exchange of such Claim for such
New Common Shares, or any income not recognized due to the use of the cash
method of tax accounting with respect to the Claim exchanged. The amount of
ordinary income will be reduced by the amount of income, if any, included in
the creditor's taxable income as a result of the exchange of New Common Shares
for a Claim.
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TAX TREATMENT OF HOLDERS OF OUTSTANDING COMMON SHARES
Holders of Outstanding Common Shares will generally not recognize gain or
loss as a result of the reverse stock split. If Holders of Outstanding Common
Shares fail to accept the Prepackaged Plan and, as a consequence, the
Outstanding Common Shares are canceled and such holders receive nothing under
the Prepackaged Plan, such holders would recognize a loss equal to the holder's
aggregate tax basis in the Outstanding Common Shares. Any loss recognized
generally would be a capital loss and would be a long-term capital loss if the
Outstanding Common Shares were held for more than one year.
TAX CONSEQUENCES OF HOLDING NEW SENIOR NOTES
It is not anticipated that the New Senior Notes will be publicly traded. It
is also anticipated that the New Senior Notes will bear "adequate stated
interest." In that case, the issue price of the New Senior Notes should equal
the face amount of the New Senior Notes. Payments on the New Senior Notes that
do not constitute interest will constitute principal payments that will reduce
a holder's tax basis in the New Senior Notes. Upon a sale, exchange or other
taxable disposition of New Senior Notes, a holder will recognize gain or loss
in an amount equal to the difference between the holder's amount realized and
the holder's adjusted tax basis in the New Senior Notes. Except as discussed
above under "Tax Consequences to Creditors--Market Discount," any gain or loss
recognized will be a capital gain or loss if the New Senior Notes were held as
a capital asset, and will be long-term if, at the time of disposition, the
holder's holding period was, or was deemed to be, in excess of one year. If the
New Senior Notes are determined to be publicly traded for tax purposes and the
initial trading price of the New Senior Notes is less than their stated
redemption price, the New Senior Notes will bear original issue discount.
Holders of the New Senior Notes would be required to include any original issue
discount in income on a constant interest basis.
TAX CONSEQUENCES OF HOLDING NEW COMMON SHARES
Distributions, if any, made on the New Common Shares will be treated as
dividends to the extent of the current or accumulated earnings and profits of
the Company. See "--REIT Status and Taxation of Company Under the Prepackaged
Plan--Taxation to United States Shareholders of Distributions" for a discussion
of the treatment of such distributions. Distributions that are not treated as
dividends will first reduce a holder's tax basis in the New Common Shares and
the remainder, if any, will generally be treated as gain on a sale of the New
Common Shares. Upon a sale, exchange or other taxable disposition of New Common
Shares, a holder will recognize gain or loss in an amount equal to the
difference between the holder's amount realized and the holder's adjusted tax
basis in the New Common Shares. Except as discussed above under "Tax
Consequences to Creditors--Market Discount" and "Recapture of Gain on
Subsequent Sale of Common Shares," any gain or loss recognized will be a
capital gain or loss if the New Common Shares were held as a capital asset.
Except as discussed below under "REIT Status and Taxation of Company Under the
Prepackaged Plan--Taxation to United States Shareholders of Distributions,"
such capital gain or loss will be long-term if, at the time of disposition, the
holder's holding period was, or was deemed to be, in excess of one year.
REIT STATUS AND TAXATION OF COMPANY UNDER THE PREPACKAGED PLAN
General Tax Consequences. The Company will continue to elect to be taxed as a
REIT under Internal Revenue Code sections 856 through 860 and the applicable
Treasury Regulations (the "REIT Requirements" or the "REIT Provisions"), which
are the requirements for qualifying as a REIT after the Prepackaged Plan is
consummated. As long as the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on that portion
of its ordinary income or capital gain that is currently distributed to
shareholders. Such treatment substantially eliminates the federal "double
taxation" on earnings (at the corporate and the shareholder levels) that
generally results from investment in a corporation. The Company intends to
continue to operate in such a manner as to continue to qualify for taxation as
a REIT under the Internal Revenue Code, but no assurance can be given that it
will operate in a manner so as to
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qualify or remain qualified. Qualification as a REIT involves the application
of highly technical and complex Internal Revenue Code provisions for which
there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not entirely within
the Company's control may affect its ability to qualify as a REIT. In addition,
no assurance can be given that legislation, new regulations, administrative
interpretations, or court decisions will not significantly change the tax laws
with respect to the qualification as a REIT or the federal income tax
consequences of such qualification; however, the Company is not aware of any
proposal in Congress to amend the tax laws that would materially and adversely
affect the Company's ability to operate as a REIT. The REIT Requirements are
highly technical and complex. The following discussion sets forth only the
material aspects of those requirements. This summary is qualified in its
entirety by the applicable Internal Revenue Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
Despite the REIT election, the Company may be subject to federal income and
excise tax as follows:
First, the Company will be taxed at regular corporate income tax rates on
any undistributed REIT taxable income, including undistributed net capital
gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on certain of its items of tax preferences, if
any.
Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying
net income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income.
Fourth, if the Company has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business, other
than sales of foreclosure property), such income will be subject to a 100%
tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), but has nonetheless
maintained its qualifications as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the
75% or 95% test, multiplied by a fraction intended to reflect the Company's
profitability.
Sixth, if the Company should fail to distribute, or fail to be treated as
having distributed, with respect to each calendar year, at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed.
The Company does not now intend to acquire any appreciated assets from a
corporation generally subject to full corporate-level tax in a transaction in
which its basis in assets would carry over from the transferor. However, in the
event of such an acquisition, the Company could, under certain circumstances,
be subject to tax upon disposition of such assets.
REIT Organizational Requirements. The Internal Revenue Code defines a REIT as
a corporation, trust, or association (a) that is managed by one or more
trustees or directors, (b) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest,
(c) that would be taxable as a domestic corporation but for the REIT
Requirements, (d) that is neither a financial institution nor an insurance
company subject to certain provisions of the Internal Revenue Code, (e) the
beneficial ownership of which is held by 100 or more persons, (f) not more than
50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities) at any time during the last half of each
taxable year, and (g) meets certain
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other tests, described below, regarding the nature of its income and assets.
The Internal Revenue Code provides that conditions (a) through (d), inclusive,
must be met during the entire taxable year and that condition (e) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. For purposes of
condition (f), pension funds and certain other tax-exempt entities are
generally treated as individuals. Effective for taxable years beginning after
December 31, 1993, a pension trust that qualifies under section 401(a) of the
Internal Revenue Code generally will not be treated as an individual for these
purposes; instead the beneficiaries of the pension trust will be treated as
holding shares of the REIT in proportion to their actuarial interests in the
pension trust. The Company believes that it will issue sufficient New Common
Shares pursuant to the Prepackaged Plan to allow it to continue to satisfy
conditions (e) and (f) above.
Income Tests. In order to maintain qualification as a REIT, the Company must
satisfy annually three gross income requirements. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived, directly or indirectly, from investments
relating to real property or mortgages on real property (as interest on
obligations secured by mortgages, "rents from real property" or as gain on the
sale or exchange of such property), from certain types of temporary investments
or from certain other types of gross income. Second, at least 95% of the
Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from such real property investments as
aforesaid and from dividends, interest, and gain from the sale or other
disposition of stock or securities and certain other types of gross income (or
from any combination of the foregoing). Third, short-term gain from the sale or
other disposition of stock or securities, gain from prohibited transactions,
and gain on the sale or other disposition of real property held for less than
four years (apart from involuntary conversions and sales of foreclosure
property) generally must represent less than 30% of the Company's gross income
(including gross income from prohibited transactions) for each taxable year.
Rents received or deemed to be received by the Company will qualify as "rents
from real property" in satisfying the gross income requirements for a REIT
described above only if certain conditions are met. First, the amount of rent
must not be based in whole or in part on the income or profits of any person.
However, an amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Internal Revenue
Code provides that rents received from a tenant will not qualify as "rents from
real property" in satisfying the gross income tests if the Company, or an owner
of 10% or more of the Company, directly or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." The Company does not anticipate deriving rent attributable to
personal property leased in connection with real property in excess of the 15%
limitation described above. Finally, for rents received to qualify as "rents
from real property," the Company generally must not operate or manage the
property or furnish or render services to tenants, other than through an
"independent contractor" from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to property that
is not subject to the special regime for "foreclosure property" to the extent
the services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant primarily for his convenience." While the
Company believes that the services rendered to its tenants are usually or
customarily rendered in connection with the rental of space, if challenged by
the Internal Revenue Service, it may not be able to demonstrate that the extent
to which such services are rendered by other property owners is common enough
to cause them to be "customarily rendered." In the case of any property that is
subject to the special regime for "foreclosure property" or services that are
not "usual and customary" under the foregoing rules, the Company intends to
employ independent contractors to perform such services.
Relief Provisions. If the Company fails to satisfy one or both of the 75% or
95% gross income tests for any taxable year, it may nevertheless qualify as a
REIT for such year if it is entitled to relief under certain
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provisions of the Internal Revenue Code. These relief provisions will be
generally available if the Company's failure to meet such tests was due to
reasonable cause and not due to willful neglect, if the Company attaches a
schedule of the sources of its income to its return and if any incorrect
information on the schedule was not due to fraud with intent to evade tax. It
is not possible, however, to state whether in all circumstances the Company
would be entitled to the benefit of these relief provisions. As discussed
above, even if these relief provisions apply, a tax would be imposed with
respect to the Company's excess net income.
Asset Tests. At the close of each quarter of its taxable year, the Company
must satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by real
estate assets, cash, cash items, and government securities. Second, not more
than 25% of the Company's total assets may be represented by securities other
than those in the 75% asset class. Third, of the investments included in the
25% asset class, the value of any one issuer's securities owned by the Company
may not exceed 5% of the value of the Company's total assets, and the Company
may not own more than 10% of any one issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests, and to take such
action within 30 days after the close of any quarter as may be required to cure
any noncompliance.
Annual REIT Distribution Requirements. In order to be treated as a REIT, the
Company is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (a) the sum of (i) 95% of
the Company's "REIT taxable income" (computed without regard to the dividends
paid deduction and the Company's net capital gain) plus (ii) 95% of the net
income (after tax), if any, from foreclosure property in excess of the special
tax on income from foreclosure property, minus (b) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before the Company
timely files its tax return for such year and if paid on or before the first
regular dividend payment after such declaration. To the extent that the Company
does not distribute all of its net capital gain or distributes at least 95%,
but less than 100% of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gains corporate tax
rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (a) 85% of its REIT ordinary income for such
year, (b) 95% of its REIT capital gain net income for such year, and (c) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company intends to make timely distributions
sufficient to satisfy the annual distribution requirement. The Company
anticipates that it will generally have sufficient cash or liquid assets to
enable it to satisfy the 95% distribution requirement. REIT taxable income is
taxable income computed under general principles, subject to the following
modifications: the corporate dividends received deductions are not allowed; the
deduction for dividends paid under Internal Revenue Code section 561 is
computed without regard to that portion of the deduction that is attributable
to the amount excluded from REIT taxable income as net income from foreclosure
property; taxable income is computed without regard to the rules under Internal
Revenue Code section 443(b) relating to computation of tax on change of annual
accounting period; an amount equal to the net income from foreclosure property
is excluded; an amount equal to the tax imposed under Internal Revenue Code
section 857(b)(5) if certain REIT requirements is deducted; and an amount equal
to any net income derived from prohibited transactions is excluded ("REIT
Taxable Income").
It is possible that, from time to time, the Company may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (a) the actual receipt of income and actual payment
of deductible expenses and (b) the inclusion of such income and deduction of
such
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expenses in arriving at the taxable income of the Company. In the event that
such an insufficiency or such timing differences occur, the Company may find it
necessary to arrange for borrowings, or to pay dividends in the form of taxable
stock dividends, if it is practicable to do so, to meet the 95% distribution
requirement.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
Failure to Qualify As a REIT. If the Company fails to qualify for taxation as
a REIT in any taxable year, and the relief provisions described above do not
apply, the Company will be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. Distributions to
shareholders in any year in which the Company fails to qualify will not be
deductible by the Company and they will not be required to be made. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income, and subject
to certain limitations of the Internal Revenue Code, corporate distributees may
be eligible for the dividends-received deduction. Unless entitled to relief
under specific statutory provisions, the Company will also be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost, and will not be permitted to requalify unless it
distributes any earnings and profits attributable to the period when it failed
to qualify. In addition, it would be subject to tax on any built-in gains on
property held during the period during which it did not qualify if it sold such
property within 10 years of requalification. It is not possible to state
whether in all circumstances the Company would be entitled to such statutory
relief.
Taxation to United States Shareholders of Distributions. As long as the
Company qualifies as a REIT, distributions up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital gain
dividends) to a United States Shareholder (i.e., a holder of New Common Shares
that is for United States federal income tax purposes (a) a citizen or resident
of the United States, (b) a corporation, partnership, or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, or (c) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source), will be
taken into account by them as ordinary income and will not be eligible for the
dividends-received deduction for corporations. Distributions that are
designated by the Company as capital gain dividends will be treated as long-
term capital gain (to the extent they do not exceed the Company's actual net
capital gain) for the taxable year without regard to the period for which the
shareholder has held its stock. However, corporate shareholders may be required
to treat up to 20% of certain capital gain dividends as ordinary income,
pursuant to Internal Revenue Code section 291(d). A distribution in excess of
current and accumulated earnings and profits will first be treated as a tax-
free return of capital, reducing the tax basis in the United States
Shareholder's New Common Shares, and a distribution in excess of the United
States Shareholder's tax basis in such respective New Common Shares will be
taxable gain realized from the sale of such shares. Dividends declared by the
Company in October, November or December of any year payable to a shareholder
of record on a specified date in any such month will be treated as both paid by
the Company and received by the shareholder on December 31 of such year,
provided that the dividend is actually paid by the Company during January of
the following calendar year. Shareholders may not claim the benefit of any tax
losses of the Company on their own income tax returns.
The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required
to be distributed in order to avoid imposition of the 4% excise tax discussed
above. As a result, shareholders may be required to treat as taxable dividends,
certain distributions that would otherwise result in a tax-free return of
capital. Moreover, any "deficiency dividend" will be treated as a "dividend"
(an ordinary dividend or a capital gain dividend, as the case may be),
regardless of the Company's earnings and profits.
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A loss incurred on the sale or exchange of New Common Shares held for less
than six months will be deemed a long-term capital loss to the extent of any
capital gain dividends received by the selling shareholder with respect to such
stock.
Treatment of Tax-Exempt Shareholders. Distributions from the Company to a
tax-exempt employee pension trust or other domestic tax-exempt shareholder will
not constitute "unrelated business taxable income" unless the shareholder has
borrowed to acquire or carry its shares of the Company. A tax-exempt employee's
pension trust that holds more than 10% of the New Common Shares may under
certain circumstances be required to treat a certain percentage of dividends as
unrelated business taxable income if the Company is "predominantly held" by
qualified trusts. For these purposes, a qualified trust is any trust defined
under Internal Revenue Code section 401(a) and exempt from tax under Internal
Revenue Code section 501(a).
Taxation of Foreign Shareholders. The rules governing United States income
taxation of non-resident alien individuals, foreign corporations, foreign
partnerships, and foreign trusts and estates holding New Common Shares
(collectively, "Foreign Shareholders") are complex, and no attempt will be made
herein to discuss such rules. A Foreign Shareholder should consult with his or
her own tax advisor to determine the effect of federal, state, and local and
country of tax residence income tax laws on an investment in the Company,
including any reporting requirements.
ADDITIONAL TAX CONSEQUENCES TO THE COMPANY FROM THE PREPACKAGED PLAN
Availability of Tax Attributes. The Company's federal income tax returns
reflect significant NOLs. As discussed below, a portion of those NOLs may be
available to offset future income of the Company. The Company's tax returns for
years in which the NOLs were incurred have not been examined by the Internal
Revenue Service. Accordingly, the amount and availability of these NOLs
(including the applicability of Internal Revenue Code section 382) may be
subject to review upon audit by the Internal Revenue Service.
Internal Revenue Code Section 382 Limits on Use of Tax Attributes. Internal
Revenue Code section 382 (in conjunction with Internal Revenue Code section
383) provides rules governing the use of a corporation's NOLs and other tax
attributes following significant changes in the ownership of a corporation's
stock. Subject to the Title 11 Exception discussed below, Internal Revenue Code
section 382 provides that, following an "ownership change" of a corporation
with NOLs or a net unrealized built-in loss (a "Loss Corporation"), the amount
of the Loss Corporation's taxable income that can be offset by its NOLs and,
under certain circumstances, recognized built-in losses cannot exceed an amount
equal to the sum of (x) the product of the value of the Loss Corporation
immediately before the ownership change (increased as discussed below, in some
circumstances, by any increase in value resulting from any surrender or
cancellation of creditors' claims) multiplied by the long-term tax-exempt rate,
which is 6.83% for March, 1995 (the "Section 382 Limitation") plus (y)
recognized built-in gains (if any). Any portion of the Section 382 Limitation
not used in any taxable year can be carried forward to increase the
corporation's Section 382 Limitation in future years.
Recognized built-in gains include gains resulting from the disposition
(within 5 years after the ownership change) of assets, the fair market value of
which immediately before the ownership change is greater than the tax adjusted
basis of such assets at that time (to the extent of that excess) and income
attributable to periods before the ownership change but includible during the
5- year period after the ownership change. Recognized built-in gains increase
the Section 382 Limitation only to the extent of a corporation's net unrealized
built-in gain, i.e., generally, to the extent its potential built-in gains
exceed its potential built-in losses immediately before an ownership change.
Recognized built-in losses result from the disposition (within 5 years after
the ownership change) of assets, the fair market value of which immediately
before the ownership change is less than the adjusted tax basis of such assets
at that time (to the extent of that difference) and deductions attributable to
periods before the ownership change but claimed during the 5-year period after
the ownership change. Recognized built-in
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losses are subject to the Section 382 Limitation only to the extent of a
corporation's net unrealized built-in loss, i.e., generally, to the extent the
corporation's potential built-in losses exceed its potential built-in gains
immediately before an ownership change. A corporation's net unrealized built-in
loss is treated as zero unless the corporation's net unrealized built-in loss
exceeds a threshold amount and a corporation's net unrealized built-in gain is
treated as zero unless the corporation's net unrealized built-in gain exceeds a
threshold amount. After the Prepackaged Plan is effected, the Company
anticipates that it will have a net unrealized built-in loss.
An "ownership change" occurs if there is an "owner shift involving a 5-
percent Shareholder" or an "equity structure shift" and because of such event,
the percentage of stock of the new Loss Corporation owned by any one or more of
"5-Percent Shareholders" (described below) is increased by more than 50
percentage points relative to the lowest percentage of stock of the old Loss
Corporation owned by those 5-Percent Shareholders at any time during the
testing period (generally a 3-year period). The determination of whether an
ownership change has occurred is made by aggregating the increases in
percentage ownership for each 5-Percent Shareholder whose percentage ownership
is increased during the testing period. For this purpose, all stock owned by
persons who own less than 5% of a corporation's stock generally is treated as
stock owned by a single 5-Percent Shareholder.
An "owner shift involving a 5-Percent Shareholder" is defined as any change
in the respective ownership of stock of a corporation that affects the
percentage of stock held by any 5-Percent Shareholder. For purposes of this
rule, all shareholders owning less than 5% of the stock are generally
aggregated and treated as one 5-Percent Shareholder.
The period for measuring whether an ownership change has occurred is referred
to as the "testing period." The testing period is a 3-year period ending on the
day of an owner shift involving a 5-Percent Shareholder. Thus, a series of
unrelated sales in a 3-year period may cause an ownership change. Internal
Revenue Code section 382 shortens the testing period in two circumstances.
First, when an ownership change occurs, a new testing period cannot begin
before the day after that change. Thus, if a second ownership change occurs in
the future, changes that counted for the first ownership change do not count
again. Second, the testing period cannot begin prior to the first year from
which there is a loss carryforward, or in certain circumstances, a net
unrealized built-in loss.
To the Company's knowledge, its NOLs are not currently subject to a Section
382 Limitation. The exchanges anticipated to occur pursuant to the Prepackaged
Plan will cause an ownership change with respect to the NOL carryforwards of
the Company. Unless the Title 11 exception (discussed below) to the Section 382
Limitation applies, this ownership change will result in an annual Section 382
Limitation applying to the amount of taxable income of the Company that can be
offset with pre-change losses in the year of the ownership change and in all
years thereafter. Taxable income in excess of the Section 382 Limitation and,
possibly, recognized built-in gain would be subject to current federal income
tax.
Internal Revenue Code section 382 contains a special provision (the "Title 11
Exception") which provides that in a case under the jurisdiction of a
Bankruptcy Court brought under Title 11 of the United States Code (relating to
bankruptcy) (a "Title 11 Case"), the limitations of Internal Revenue Code
section 382 will not apply to any ownership change resulting from such a
proceeding if qualifying creditors and shareholders immediately before such
ownership change own, after such ownership change and as a result of being
shareholders or creditors immediately before such change, 50% of the stock of
the loss corporation (measured by vote and value). (As discussed below, the
Loss Corporation may elect not to have this exception apply.) A corporation's
shareholders are probably determined under attribution rules, including the
rule that stock owned by a corporation is deemed owned not by the corporation
but by the corporation's stockholders. Qualifying ("old and cold") creditors
generally are creditors that have held their debt for at least 18 months before
the filing of the bankruptcy case or who acquired their debt in the ordinary
course of the debtor's business and have held their beneficial interest in the
debt at all times. Treasury Regulations provide specific rules under which
persons that own less than 5% of publicly traded debt (that has been
outstanding for more than 18 months) are presumed to have held their debt for
the required 18 months.
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The regulations permit loss corporations to treat all debt held by less-than-
5-percent shareholders or 5-percent entities (i.e., entities through which a 5-
percent shareholder owns an interest in the loss corporation) on the change
date as always having been held by the same beneficial owners. This general
rule does not apply if (i) the creditor's participation in formulating the plan
of reorganization makes evident to the loss corporation that it is not an "old
and cold" creditor, (ii) the loss corporation has actual knowledge that the
exercise of an option by a less-than-5-percent shareholder would turn it into a
5-percent shareholder or entity, or (iii) the creditor is a 5-percent entity
that had an ownership change in the 18-month period, and the indebtedness
represents more than 25 percent of its gross assets (excluding cash or cash
equivalents). In addition, the regulations provide tacking rules under which a
transferee creditor is treated as having held the debt during the period it was
held by the transferor, thus adding to the category of creditors that can
qualify as "old and cold." The tacking rules apply to (i) debt transferred to
related parties, (ii) debt transferred under a syndication agreement within 90
days of origination, (iii) debt transferred by an underwriter, (iv) debt
transferred with its basis determined by Internal Revenue Code sections 1014 or
1015, or to satisfy a pecuniary bequest or divorce settlement, (v) debt
transferred pursuant to a security arrangement, (vi) debt transferred in a debt
to debt exchange with the loss corporation, and (vii) debt transferred in a
customary commercial factoring transaction within 30 days after the account
arose by a transferee that regularly engages in those transactions. These
tacking rules are not available where a abusive principal purpose exists.
If the Title 11 Exception applies, the Company's NOL carryover and specified
credits must be computed to eliminate deductions for interest paid or accrued
by the Company on that portion of the debt that is exchanged for stock, and for
which the Company previously had claimed deductions for federal income tax
purposes during (i) the three taxable years prior to the taxable year in which
the ownership change occurs and (ii) the portion of the taxable year of the
ownership change up to, but not including, the "change date." In addition, if
the debtor undergoes a second ownership change within two years, its Section
382 Limitation after that second change would be zero.
The Company is currently considering, based on projections of future income,
whether it would be more advantageous to have the Title 11 Exception apply or
to elect to have the Title 11 Exception not apply, and whether, if it
determines that it would be advantageous to have the Title 11 Exception apply,
it is eligible for that exception. The Company has tentatively concluded that
it would be advantageous for it to elect not to have the Title 11 Exception
apply.
A REIT generally may elect to use its NOLs to reduce its REIT Taxable Income
(subject to the Internal Revenue Code section 382 restrictions discussed above)
in a manner similar to that of Subchapter C corporations, subject to the
special rules discussed below. A REIT may not carryback its NOLs for use in any
taxable year preceding the taxable year in which the NOL arises. A REIT may
carryforward its NOLs up to 15 years. In computing the amount of NOL carryover
available for a REIT taxable year, available NOLs may be used to shelter REIT
Taxable Income. A REIT that distributes all of its REIT Taxable Income before
taking its NOLs into account will receive a deduction equal to the distributed
income. Unlike a regular corporation, which must use its NOLs to reduce all of
its taxable income, a REIT may elect to use only a portion of its NOLs to
reduce (but not eliminate) its REIT Taxable Income and carryforward its unused
NOLs. A REIT could use its NOLs, however, to reduce its REIT Taxable Income and
so reduce the amount of income it would be required to distribute to its
shareholders in that taxable year.
REITS are also subject to a special rule regarding the computation of NOL
carryovers and capital gain dividends. A REIT is taxed on any net capital gain
that is not distributed as capital gain dividends. A shareholder or beneficial
holder treats a capital gain dividend received from a REIT as long-term capital
gain rather than ordinary income. For purposes of the net operating loss rules,
the amount of a REIT's net capital gain for the taxable year that is paid out
as capital gain dividends is excluded in determining the amount of the REIT's
NOLs that may be carried through the taxable year to succeeding taxable years.
Thus, a REIT offsets only its undistributed capital gains by the amount of any
current or carryover NOLs.
Elimination of Tax Deductions Under Internal Revenue Code Section 269. In
addition to the limitations on the utilization of NOLs discussed above,
Internal Revenue Code section 269 grants the Internal Revenue
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Service authority to disallow all of a corporation's NOLs if control of a
corporation is acquired with the principal purpose to evade or avoid federal
income tax by securing the benefit of a tax deduction which the acquiring
person would not otherwise enjoy. The regulations make clear that Internal
Revenue Code section 269 can apply whether or not the NOLs are limited under
Internal Revenue Code section 382. In addition, there is a presumption that
Internal Revenue Code section 269 applies if the Title 11 Exception applies,
unless the loss corporation carries on more than an insignificant amount of an
active trade or business during and subsequent to its bankruptcy case. The
Company will continue its historic business. As a result, Internal Revenue
Code section 269 should not apply to the transactions contemplated by the
Prepackaged Plan.
Cancellation of Indebtedness Income. As a result of the implementation of
the Prepackaged Plan, the amount of the Company's aggregate outstanding
indebtedness will be reduced. In general, for federal income tax purposes, a
debtor will realize COD income when a Creditor accepts less than full payment
in satisfaction of its debt. Absent an exception, the amount of COD realized
must be included in taxable income. An exception to this rule under Internal
Revenue Code section 108 provides that COD will not be included in the
debtor's taxable income where the debtor is in bankruptcy and the discharge
occurs pursuant to a plan approved by the Bankruptcy Court. Pursuant to the
Internal Revenue Code section 108 exception, unless another rule under
Internal Revenue Code section 108 applies to prevent the Company from
realizing COD (e.g., where the payment of the discharged liability would have
given rise to a deduction), the Company's tax attributes (including net
operating loss carryforwards and tax basis of its assets) will be reduced or,
if the Company so elects, the basis of the Company's depreciable property and
certain property held for resale will first be reduced to zero, and then the
Company's tax attributes will be reduced. COD is not taken into account in
determining continued qualification as a REIT.
Under the Prepackaged Plan, the Company will realize COD and thus, will be
required to reduce its tax attributes as a result of discharging Creditor
Claims with Cash, New Senior Notes or New Common Shares. The amount of COD
will equal the excess of the adjusted issue price of the debt cancelled, if
any, over the sum of the Cash, the issue price of the New Senior Notes, and
the fair market value of the New Common Shares received in exchange therefor.
If debt was not issued with original issue discount, the adjusted issue price
of the debt is its face amount. For debt issued with original issue discount,
the adjusted issue price generally will equal the initial issue price of the
debt plus the amount of any original issue discount accrued to the time of the
exchange, less any payments on the debt other than payments of stated
interest.
Alternative Minimum Tax. The Tax Reform Act of 1986 imposed a comprehensive
alternative minimum tax ("AMT") on corporations. AMT liability generally
equals 20% of the corporation's alternative minimum taxable income ("AMTI")
and is payable to the extent it exceeds the regular tax for the taxable year.
AMTI is determined by making certain adjustments to regular taxable income and
adding the amount of "tax preferences" described in Internal Revenue Code
section 57. Up to 90% of AMTI can be offset with NOLs (as computed for AMT
purposes). Thus, at a minimum, a 2% tax is imposed on AMTI (i.e., AMT at a 20%
rate on the 10% of AMTI that cannot be offset with NOLs). Future income of the
Company that is offset by NOLs for regular tax purposes may not be wholly
offset by NOLs for AMT purposes. These general rules are applied to REITs by
adjusting REIT taxable income for tax preferences; a REIT claiming no tax
preferences would have no AMTI, and so no AMT liability. The limits on NOL use
to shelter AMTI would therefore affect the Company only if the Company claims
tax preferences.
One of the significant adjustments made in determining a corporation's AMTI
is an increase based on adjusted current earnings. For any taxable year
beginning after 1989, a corporation's AMTI is increased by 75% of the amount,
if any, that the adjusted current earnings of the corporation exceeds AMTI
without taking into account the adjusted current earnings adjustment, and
without regard to the alternative tax net operating loss deduction. Internal
Revenue Code section 56(g)(4)(G) provides adjusted current earnings generally
equal alternative minimum taxable income determined with a number of specific
adjustments. Internal Revenue Code section 56(g)(4)(B)(i) provides that in
determining a corporation's adjusted current earnings, amounts excluded from
income under Internal Revenue Code section 108 are also excluded for purposes
of the AMT. Accordingly, the Company's AMT should not be affected by COD
income realized by the Company pursuant to the Prepackaged Plan, but not
recognized under Internal Revenue Code section 108.
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FINANCIAL ADVISOR
The Company retained Houlihan Lokey, an investment banking firm, to advise it
with respect to the Restructuring, including the appropriate terms, from the
Company's perspective, of any modifications of the Outstanding Notes pursuant
to the Restructuring. As compensation for its services as financial advisor to
the Company in connection with the Restructuring, the Company initially agreed
to pay Houlihan a fee of $75,000 per month (the "Monthly Fee"), plus
reimbursement for reasonable and actual out-of-pocket expenses incurred by
Houlihan Lokey in connection with the Restructuring. In addition, if the
Restructuring is consummated, Houlihan Lokey will receive a fee equal to 0.5%
of the face amount of debt restructured, modified, converted or forgiven
payable upon closing of the Restructuring (the "Completion Fee"). The Company
also agreed to indemnify Houlihan Lokey for certain liabilities arising from
its participation as the Company's advisor. Pursuant to a letter agreement that
memorialized certain prior verbal modifications to the terms of Houlihan
Lokey's engagement dated March 16, 1995, effective January 1, 1994, Houlihan
Lokey had reduced its Monthly Fee to $50,000 and effective June 1, 1994,
Houlihan Lokey had reduced its Monthly Fee to $10,000. Effective November 1,
1994, the Company had agreed to resume paying Houlihan Lokey a monthly fee of
$75,000 (the "New Monthly Fee"), provided that the New Monthly Fees (beginning
November 1, 1994, and continuing through the closing of the Restructuring)
would be fully credited against the Completion Fee. Furthermore, Houlihan
Lokey's aggregate Completion Fee was set at $1,450,000 less the New Monthly
Fees paid to, and received by, Houlihan Lokey (the "Completion Fee Balance")
and pursuant to a letter agreement dated April 7, 1995, the Completion Fee
Balance was further reduced by $112,500. The Completion Fee Balance is payable
in cash only. As of the date of this Disclosure Statement, Houlihan Lokey has
been paid $450,000 in New Monthly Fees, reducing the Completion Fee Balance to
$887,500 to be paid 2 days prior to the filing of a Chapter 11 petition by the
Company.
FEES AND EXPENSES
Acceptance of the Prepackaged Plan is being solicited on behalf of the
Company. The expense of soliciting acceptances of the Prepackaged Plan will be
borne by the Company. The Company has not retained any dealer-manager or
similar agent in connection with the Solicitation and will not make any
payments to brokers, dealers or others soliciting acceptances of the
Restructuring. Thus, the Company does not anticipate any solicitation agent
fees in connection with the Solicitation. The Company will not pay the
information agent any separate consideration for its services. The principal
solicitation is being made by mail; however, additional solicitation may be
made by telegraph, telephone or in person by officers and regular employees of
the Company and its affiliates, who will not receive additional compensation.
Arrangements may also be made with brokerage houses and other custodians,
nominees and fiduciaries to forward the material regarding the Prepackaged Plan
to the beneficial owners of Outstanding Notes and Outstanding Common Shares.
The Company will reimburse such forwarding agents for reasonable out-of-pocket
expenses incurred by them, but no compensation will be paid for their services.
Management anticipates that the Company will be required to make cash
payments of approximately $50 million (less the $25 million paid on April 11,
1995 and any additional amounts paid to the holders of the Outstanding Notes
between March 1, 1995 and the Petition Date) in connection with the
consummation of the Restructuring. Cash generated from operations and
approximately $60 million (less the $25 million paid on April 11, 1995 and any
additional amounts paid to the holders of the Outstanding Notes between March
1, 1995 and the Petition Date) from cash on hand will be used to pay expenses
and fees relating to the Restructuring. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The expenses to be incurred in connection with the Restructuring, including
the fees and expenses of the Solicitation Agent and Houlihan Lokey as financial
advisor, and printing, filing, accounting and legal fees, will be paid by the
Company and are estimated to be approximately $1.9 million (a portion of which
may have been paid prior to the closing of the Restructuring). The Company
intends to use a portion of the cash on hand and funds generated from
operations, to pay such amounts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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ADDITIONAL INFORMATION CONCERNING THE COMPANY
This Disclosure Statement is accompanied by and incorporates by reference the
following documents of the Company: (i) pages 28-47 (the audited financial
statements) of the Annual Report on Form 10-K for the year ended September 30,
1994; and (ii) pages 2-16 (the unaudited financial statements) of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
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ANNEX A
IMPORTANT: A BANKRUPTCY CASE HAS NOT
BEEN FILED AS OF THE DATE OF THE
DISCLOSURE STATEMENT
Paul S. Aronzon (State Bar No. 88781)
Anne E. Wells (State Bar No. 155975)
MILBANK, TWEED, HADLEY & McCLOY
601 South Figueroa Street, 30th Floor
Los Angeles, California 90017
(213) 892-4000
Attorneys for Mortgage and Realty
Trust, a Maryland real estate
investment trust
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
In re
)
) CASE NO. LA 95-
)
MORTGAGE AND REALTY TRUST, a )
Maryland real estate investment )
trust, ) Chapter 11
)
)
) PLAN OF REORGANIZATION PROPOSED BY
) MORTGAGE AND REALTY TRUST
)
)
)
)
Debtor. )
) (Dated , 1995)
)
)
) [No Hearing Scheduled]
)
)
)
)
)
)
)
)
)
)
Tax I.D. No. 23-1862664 )
)
<PAGE>
TABLE OF CONTENTS
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ARTICLE I
DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION
1.1 Administrative Claim................................................ 1
1.2 Allowed Claim or Allowed Interest................................... 1
1.3 Amended and Restated Declaration of Trust........................... 1
1.4 Bankruptcy Code..................................................... 1
1.5 Bankruptcy Court.................................................... 1
1.6 Bankruptcy Rules.................................................... 1
1.7 Bar Date............................................................ 2
1.8 Business Day........................................................ 2
1.9 Cash................................................................ 2
1.10 Claim............................................................... 2
1.11 Class 2 Expense Claims.............................................. 2
1.12 Confirmation........................................................ 2
1.13 Confirmation Date................................................... 2
1.14 Confirmation Order.................................................. 2
1.15 Creditor............................................................ 2
1.16 Debtor.............................................................. 2
1.17 Debtor in Possession................................................ 2
1.18 Disbursing Agent.................................................... 2
1.19 Disclosure Statement................................................ 2
1.20 Disputed Claim or Disputed Interest................................. 2
1.21 Effective Date...................................................... 3
1.22 Entity.............................................................. 3
1.23 Estate.............................................................. 3
1.24 Excluded Claims..................................................... 3
1.25 File or Filed....................................................... 3
1.26 Final Order......................................................... 3
1.27 Initial Cash Distribution Fund...................................... 3
1.28 Initial Cash Reserve Fund........................................... 3
1.29 Instrument.......................................................... 3
1.30 Interest............................................................ 3
1.31 Lien................................................................ 3
1.32 New................................................................. 4
1.34 New Collateral Documents............................................ 4
1.35 New Common Shares................................................... 4
1.36 New Indenture Trustee............................................... 4
1.37 New Note Indenture.................................................. 4
1.38 New Notes........................................................... 4
1.39 New Plan Securities................................................. 4
1.40 Other Secured Claims................................................ 4
1.41 Outstanding Collateral Agreement.................................... 4
1.42 Outstanding Common Shares........................................... 4
1.43 Outstanding Equity Securities....................................... 4
1.44 Outstanding Indenture Trustee....................................... 4
1.45 Outstanding Notes................................................... 4
1.46 Outstanding Note Indenture.......................................... 4
1.47 Outstanding Pledge Agreement........................................ 4
1.48 Outstanding Securities.............................................. 5
</TABLE>
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1.49 Outstanding Stock Rights............................................ 5
1.50 Petition Date....................................................... 5
1.51 Plan................................................................ 5
1.52 Postpetition Tax Claims............................................. 5
1.53 Prior Plan.......................................................... 5
1.54 Priority Claim...................................................... 5
1.55 Pro Rata............................................................ 5
1.56 Registration Rights Agreement....................................... 5
1.57 Released Claims..................................................... 5
1.58 Reorganization Case................................................. 5
1.59 Reorganized Debtor.................................................. 5
1.60 Scheduled........................................................... 5
1.61 Schedules........................................................... 5
1.62 Senior Noteholders.................................................. 5
1.63 Shares.............................................................. 6
1.64 Unsecured Claim..................................................... 6
ARTICLE II
CLASSIFICATION OF CLAIMS AND INTERESTS
2.1 General............................................................. 6
2.2 Classification...................................................... 7
ARTICLE III
TREATMENT OF CLAIMS AND INTERESTS
3.1 Unclassified Claims (Administrative Claims)......................... 7
3.2 Class 1 (Priority Claims)........................................... 8
3.3 Class 2 (Outstanding Notes)......................................... 8
3.4 Class 3 (Other Secured Claims)...................................... 10
3.5 Class 4 (Unsecured Claims).......................................... 10
3.6 Class 5 (Outstanding Common Shares)................................. 10
3.7 Class 6 (Outstanding Stock Rights).................................. 10
ARTICLE IV
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
4.1 Assumption.......................................................... 10
4.2 Cure Payments....................................................... 11
4.3 Rejection........................................................... 11
ARTICLE V
MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN
5.1 Cancellation of Outstanding Securities and Related Agreements....... 11
5.2 New Plan Securities and New Indenture............................... 11
5.3 Distribution of Property Under the Plan............................. 12
5.4 Revesting of Assets................................................. 15
5.5 Amended and Restated Declaration of Trust; Indemnification.......... 16
5.6 Management of the Reorganized Debtor................................ 16
5.7 Objections to Claims or Interests................................... 16
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5.8 Discharge of Debtor and Injunction.................................. 16
5.9 No Liability for Solicitation or Participation...................... 17
5.10 Limitation of Liability............................................. 17
5.11 Other Documents and Actions......................................... 17
5.12 Authorized Actions.................................................. 17
5.13 Releases............................................................ 18
5.14 Retiree Benefits.................................................... 18
ARTICLE VI
CONFIRMATION
6.1 Confirmation........................................................ 18
ARTICLE VII
CONFIRMATION AND EFFECTIVE DATE CONDITIONS
7.1 Conditions to Effective Date........................................ 19
7.2 Waiver of Conditions to the Effective Date.......................... 19
ARTICLE VIII
RETENTION OF JURISDICTION
8.1 Retention of Jurisdiction........................................... 19
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 Exemption from Transfer Taxes....................................... 20
9.2 Application of Distributions........................................ 20
9.3 Dissolution of Committees........................................... 21
9.4 Modification of the Plan............................................ 21
9.5 Revocation of the Plan.............................................. 21
9.6 Successors and Assigns.............................................. 21
9.7 Saturday, Sunday or Legal Holiday................................... 21
9.8 Post-Effective Date Effect of Evidences of Claims or Interests...... 21
9.9 Governing Law....................................................... 21
9.10 Severability of Plan Provisions..................................... 22
9.11 No Admissions....................................................... 22
</TABLE>
EXHIBITS AND SCHEDULES
Exhibit A - Form of New Note Indenture
Exhibit B - Form of New Collateral Documents
Exhibit C - Form of Registration Rights Agreement
Exhibit D - Summary of Terms of Securities
Exhibit E - Schedule of Assumed Contracts and Unexpired Leases
Exhibit F - Schedule of Rejected Contracts and Leases
Exhibit G - Amended and Restated Declaration of Trust
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INTRODUCTION
Mortgage and Realty Trust, a Maryland real estate investment trust (the
"Debtor"), hereby proposes the following plan of reorganization (the "Plan")
for the resolution of all claims against and equity interests in the Debtor.
Reference is made to the "Disclosure Statement and Proxy Statement -Prospectus
for the Solicitation of Votes for the Prepackaged Plan of Reorganization of
Mortgage and Realty Trust" (the "Disclosure Statement") for a discussion of the
Debtor's history, business, properties and results of operations, and for a
summary of the Plan and certain related matters.
All holders of claims against and equity interests in the Debtor are
encouraged to read the Plan and the Disclosure Statement in their entirety
before voting to accept or reject the Plan. No materials, other than the
Disclosure Statement and any exhibits and schedules attached thereto or
referenced therein, have been approved by the Debtor for use in soliciting
acceptances or rejections of the Plan.
ARTICLE I
DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION
In addition to such other terms as are defined in other sections of the Plan,
the following terms (which appear in the Plan as capitalized terms) have the
following meanings as used in the Plan:
1.1 Administrative Claim: A Claim for costs and expenses of administration
allowed under section 503(b) of the Bankruptcy Code and referred to in section
507(a)(1) of the Bankruptcy Code, including, without limitation: (a) the actual
and necessary costs and expenses incurred after the Petition Date of preserving
the Estate and operating the business of the Debtor (such as wages, salaries or
commissions for services and payments for goods) (b) compensation for legal,
financial advisory, accounting and other services and reimbursement of expenses
allowed under section 330 of the Bankruptcy Code; and (c) all fees and charges
assessed against the Estate under 28 U.S.C. (S) 1930.
1.2 Allowed Claim or Allowed Interest: A Claim against or Interest in the
Debtor to the extent that:
(a) (i) a proof of the Claim or Interest was or is timely Filed or deemed
timely Filed under applicable law or by reason of an order of the
Bankruptcy Court or (ii) if no proof of Claim or Interest is filed, the
Claim or Interest is Scheduled as liquidated, undisputed, and
noncontingent; and
(b) (i) the Claim or Interest is not a Disputed Claim or Disputed
Interest (but only to the extent that such Claim is not a Disputed Claim or
Disputed Interest);
(ii) the Claim or Interest is allowed by a Final Order (but only to
the extent allowed); or
(iii) the Claim or Interest is allowed under the Plan, but only to the
extent allowed.
1.3 Amended and Restated Declaration of Trust: The Amended and Restated
Declaration of Trust of the Reorganized Debtor, substantially in the form of
Exhibit G.
1.4 Bankruptcy Code: Title 11 of the United States Code, as in effect on the
Petition Date or as amended, as applicable to the Reorganization Case.
1.5 Bankruptcy Court: The United States District Court having jurisdiction
over the Reorganization Case and, to the extent of any reference made pursuant
to section 157, title 28, United States Code, the unit of such District Court
constituted pursuant to section 151, title 28, United States Code.
1.6 Bankruptcy Rules: The Federal Rules of Bankruptcy Procedure, the Local
Rules of the Bankruptcy Court and the guidelines and requirements of the Office
of the United States Trustee, as applicable from time to time in the
Reorganization Case.
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1.7 Bar Date: The date, if any, fixed by the Bankruptcy Court pursuant to
Bankruptcy Rule 3003(c)(3) as the last day for filing proofs of claim in the
Reorganization Case.
1.8 Business Day: Any day other than a Saturday, Sunday or "legal holiday"
(as defined in Bankruptcy Rule 9006(a)).
1.9 Cash: Legal tender accepted in the United States of America for the
payment of public and private debts, currently United States Dollars.
1.10 Claim: A claim against the Debtor, whether or not asserted or allowed,
as defined in section 101(5) of the Bankruptcy Code.
1.11 Class 2 Expense Claims: Any unpaid fees and reasonable unpaid out-of-
pocket costs or expenses earned or incurred through the Effective Date by the
Outstanding Indenture Trustee or the attorneys for the Senior Noteholders and
Mutual Series Fund, Inc., including, without limitation, reasonable out-of-
pocket costs and expenses and reasonable fees of legal counsel to the
Outstanding Indenture Trustee.
1.12 Confirmation: The confirmation of the Plan effected by the Confirmation
Order.
1.13 Confirmation Date: The date on which the Bankruptcy Court enters the
Confirmation Order on its docket.
1.14 Confirmation Order: The order of the Bankruptcy Court confirming the
Plan pursuant to section 1129 of the Bankruptcy Code.
1.15 Creditor: Any Entity that holds on the Effective Date a Claim against
the Debtor that arose or is deemed to have arisen before the Petition Date,
including a Claim against the Debtor of a kind specified in sections 502(g),
502(h) or 502(i) of the Bankruptcy Code.
1.16 Debtor: Mortgage and Realty Trust, a Maryland real estate investment
trust.
1.17 Debtor in Possession: The Debtor, as debtor in possession in the
Reorganization Case.
1.18 Disbursing Agent: The Reorganized Debtor or any other Entities
designated by the Reorganized Debtor pursuant to section 5.3.5 to distribute
property under the Plan.
1.19 Disclosure Statement: The Disclosure Statement and Proxy Statement For
the Solicitation of Votes For the Prepackaged Plan of Reorganization of
Mortgage and Realty Trust, dated , 1995 (and all exhibits and
schedules annexed thereto or referred to therein) that relates to the Plan, as
it may have been amended or supplemented from time to time.
1.20 Disputed Claim or Disputed Interest: A Claim or Interest as to which a
proof of claim or interest, as applicable, (a) has been Filed or deemed Filed
under applicable law, or by reason of an order of the Bankruptcy Court, but as
to which an objection has been or may be timely Filed and which objection, if
timely Filed, has not been withdrawn on or before any date fixed for Filing
such objections by the Plan or order of the Bankruptcy Court and has not been
overruled or denied by a Final Order or (b) has not been timely Filed, if such
proof of Claim or Interest was required to be Filed. Prior to the time that an
objection has been or may be deemed timely Filed, a Claim or Interest shall be
considered a Disputed Claim or Disputed Interest, as applicable, in its
entirety if: (i) the amount of the Claim or Interest specified in the proof of
claim or interest exceeds the amount of any corresponding Claim or Interest
Scheduled by the Debtor in its Schedules or its List of Equity Security
Holders, as applicable; (ii) any corresponding Claim or Interest Scheduled by
the Debtor in its Schedules or its List of Equity Security Holders, as
applicable, has been Scheduled as disputed, contingent or unliquidated,
irrespective of the amount Scheduled; or (iii) no corresponding Claim or
Interest has been Scheduled by the Debtor in its Schedules or its List of
Equity Security Holders, as applicable.
A-2
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1.21 Effective Date: A Business Day, selected by the Debtor, (a) that is at
least eleven (11) calendar days after the Confirmation Date or, with the
consent of the Senior Noteholders, at least one (1) Business Day after the
Confirmation Date, if the Bankruptcy Court enters an order making Bankruptcy
Rule 7062 inapplicable to the proceedings respecting the Confirmation Order or
otherwise determining that the Effective Date may occur immediately following
Confirmation; and (b) on which: (x) no stay of the Confirmation Order is in
effect and (y) all conditions to the Effective Date set forth in section 7.1
hereof have been satisfied or waived pursuant to section 7.2 hereof.
1.22 Entity: An individual, corporation, limited liability company,
partnership, association, joint stock company, joint venture, estate, trust,
unincorporated organization, government or any political subdivision thereof,
governmental unit, Creditors' Committee, unofficial committee of creditors or
equity holders or other entity.
1.23 Estate: The estate created by the commencement of the Reorganization
Case under section 541 of the Bankruptcy Code.
1.24 Excluded Claims: Any obligations that arise under the Plan or any
document, instrument or agreement to be executed, delivered or assumed under
the Plan, including, without limitation, the obligations of the Reorganized
Debtor under the New Notes, the New Note Indenture, the New Collateral
Documents, and all documents, instruments and agreements delivered or to be
delivered in connection therewith.
1.25 File or Filed: File or filed with the clerk of the Bankruptcy Court in
the Reorganization Case.
1.26 Final Order: An order or judgment of the Bankruptcy Court or other court
of competent jurisdiction as to which the time to appeal, seek leave to appeal,
petition for certiorari or move for reargument or rehearing has expired and as
to which no appeal, petition for certiorari or other proceedings for
reargument, rehearing or leave to appeal shall be pending or as to which any
right to appeal, petition for certiorari, reargue, rehear or seek leave to
appeal shall have been waived in writing in form and substance satisfactory to
the Debtor or the Reorganized Debtor or, in the event that an appeal, writ of
certiorari, or reargument or rehearing thereof or leave to appeal has been
motioned for or sought, such order of the court shall have been affirmed by the
highest court to which such order was appealed, or certiorari has been denied
or from which reargument or rehearing or leave to appeal was motioned for or
sought, and the time to take any further appeal, petition for certiorari, move
for reargument or rehearing or seek leave to appeal shall have expired.
1.27 Initial Cash Distribution Fund: Cash in an amount not less than $50
million (less any amounts paid to the holders of the Outstanding Notes between
March 1, 1995 and the Petition Date), held by the Reorganized Debtor on the
Effective Date for distribution to holders of Allowed Class 2 Claims, in excess
of monies held by the Reorganized Debtor in the Initial Cash Reserve Fund.
1.28 Initial Cash Reserve Fund: Cash in an amount not to exceed $10 million,
held by the Reorganized Debtor on the Effective Date for use by the Reorganized
Debtor in its business operations.
1.29 Instrument: Such term has the meaning set forth in Section 5.3.8(b).
1.30 Interest: The interest of any equity security holder, as defined in
section 101(17) of the Bankruptcy Code, of the Debtor, whether or not asserted,
including an interest arising out of any Outstanding Stock Rights.
1.31 Lien: Any mortgage, deed of trust, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other, including a lien as
defined in section 101(37) of the Bankruptcy Code), security interest or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever, including any conditional sale or other title
retention agreement, the interest of a lessor under a capitalized lease
obligation, any financing lease having substantially the same economic effect
as any of the foregoing, and the filing, under the Uniform Commercial Code or
comparable law of any jurisdiction, of any financing statement naming the owner
of the asset to which such Lien relates as debtor.
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1.32 New: New or amended and restated, as the case may be.
1.33 New Collateral Agent: Wilmington Trust Company and William J. Wade, as
collateral agent under the New Collateral Documents.
1.34 New Collateral Documents: The Collateral and Security Agreement dated as
of the Effective Date by and among the Reorganized Debtor and the New
Collateral Agent, including any exhibits or schedules thereto in substantially
in the form of Exhibit B, and the Mortgages, the Assignments of Leases, the
Collateral Assignments of Mortgages, the Pledge Agreement and the Collateral
Assignments of Leases (each as defined in the New Senior Note Indenture) and
all other documents, instruments and agreements delivered or to be delivered in
connection with the New Senior Note Indenture.
1.35 New Common Shares: The common shares of beneficial interest in the
Reorganized Debtor to be distributed in accordance with the provisions of the
Plan.
1.36 New Indenture Trustee: Wilmington Trust Company, as trustee under the
New Note Indenture.
1.37 New Note Indenture: The Outstanding Note Indenture, as amended and
restated, substantially in the form of Exhibit A.
1.38 New Notes: The Senior Secured Notes due 2002 of the Reorganized Debtor
dated as of the Effective Date and issued pursuant to the New Note Indenture.
1.39 New Plan Securities: The New Common Shares and the New Notes to be
distributed in accordance with the provisions of the Plan.
1.40 Other Secured Claims: Any Claim, other than a Claim of a holder of
Outstanding Notes, or a Class 2 Expense Claim, of a Creditor secured by a Lien
on property of the Estate, to the extent of the value, as determined by the
Bankruptcy Court pursuant to section 506(a) of the Bankruptcy Code, of such
Creditor's interest in such property of the Estate.
1.41 Outstanding Collateral Agreement: The Collateral and Security Agreement
dated as of February 21, 1991 between, among others, the Debtor and Wilmington
Trust Company and William J. Wade, as Collateral Agents, relating to the
Outstanding Notes, as such agreement may have been amended or supplemented from
time to time prior to the Effective Date.
1.42 Outstanding Common Shares: The common shares of beneficial interests in
the Debtor, with a par value of $1.00 for each share, as authorized by the
declaration of trust of the Debtor, issued and outstanding prior to the
Effective Date.
1.43 Outstanding Equity Securities: The Outstanding Common Shares and the
Outstanding Stock Rights.
1.44 Outstanding Indenture Trustee: Wilmington Trust Company, as trustee
under the Outstanding Note Indenture, and any predecessor or successor trustee.
1.45 Outstanding Notes: The outstanding Senior Secured Uncertificated Notes
due 1995 issued by the Debtor under the Outstanding Note Indenture and pursuant
to the Prior Plan.
1.46 Outstanding Note Indenture: The Indenture dated as of July 15, 1992
between the Debtor and Wilmington Trust Company, as Trustee, relating to the
Outstanding Notes, as such indenture may have been amended or supplemented from
time to time prior to the Effective Date.
1.47 Outstanding Pledge Agreement: Those certain pledge agreements executed
in connection with the Outstanding Note Indenture.
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1.48 Outstanding Securities: The Outstanding Notes and the Outstanding Equity
Securities.
1.49 Outstanding Stock Rights: Any right to purchase or otherwise acquire
common shares of beneficial interests in the Debtor, and any stock appreciation
or similar rights relating to common shares of beneficial interests in the
Debtor, existing prior to the Effective Date. "Outstanding Stock Rights" does
not include any rights arising solely out of the ownership of the Outstanding
Common Shares.
1.50 Petition Date: The date on which the Debtor Filed its voluntary petition
for relief commencing the Reorganization Case.
1.51 Plan: This plan of reorganization, including the exhibits and schedules
hereto, either in its present form or as it may be amended, supplemented or
modified from time to time in accordance with the provisions of the Plan and
the Bankruptcy Code.
1.52 Postpetition Tax Claims: Such term shall have the meaning set forth in
section 3.1.3(d).
1.53 Prior Plan: The plan of reorganization of the Debtor confirmed by the
United States Bankruptcy Court for the Central District of California, in Case
No. LA 90-08976-SB, by order entered February 27, 1991, together with any and
all amendments to such plan of reorganization.
1.54 Priority Claim: Any Claim, other than an Administrative Claim, of a
Creditor to the extent such Claim is entitled to priority under section 507(a)
of the Bankruptcy Code.
1.55 Pro Rata: With respect to distributions under the Plan, proportionately
so that the ratio of (a) the amount of consideration distributed on account of
a particular Allowed Claim or Allowed Interest to (b) the amount of the Allowed
Claim or Allowed Interest is the same as the ratio of (w) the amount of
consideration distributed on account of all Allowed Claims or Allowed Interests
of the class in which a particular Allowed Claim or Allowed Interest is
included to (x) the amount of all Allowed Claims or Allowed Interests of that
class.
1.56 Registration Rights Agreement: The Registration Rights Agreement
relating to the New Plan Securities, substantially in the form of Exhibit C.
1.57 Released Claims: Any and all actions, causes of action, claims,
liabilities, demands, and obligations of any kind or nature whatsoever that are
based upon or that arise out of any act or omission that is related to the
Reorganization Case or that are made in connection with or relate to
negotiating, formulating, implementing, confirming or consummating the Plan or
the Disclosure Statement; provided, however, that the term "Released Claims"
shall not include any Excluded Claim.
1.58 Reorganization Case: The case under chapter 11 of the Bankruptcy Code
commenced by the Debtor on the Petition Date.
1.59 Reorganized Debtor: The Debtor, or any successor thereto by merger,
consolidation or otherwise, from and after the Effective Date.
1.60 Scheduled: Set forth on the Schedules.
1.61 Schedules: The schedules of assets and liabilities filed by the Debtor
with the Bankruptcy Court in accordance with section 521 of the Bankruptcy Code
and Bankruptcy Rule 1007, as the same may be amended from time to time in
accordance with Bankruptcy Rule 1009 prior to the Effective Date.
1.62 Senior Noteholders: Fidelity Management & Research Company, Angelo
Gordon & Co., Mutual Series Fund Inc., Strome--Susskind & Co., and Emerald
Partners, as holders of Outstanding Notes, acting by a vote of 66 2/3% of the
aggregate principal amount of Outstanding Notes held by them.
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1.63 Shares: The Outstanding Common Shares and the New Common Shares
outstanding immediately after consummation of the Plan.
1.64 Unsecured Claim: Any Claim, that is not an Administrative Claim, a
Priority Claim, a Claim under or evidenced by the Outstanding Notes, the
Outstanding Note Indenture, the Outstanding Collateral Agreement or the Prior
Plan, an Other Secured Claim, or a Claim based upon the Outstanding Common
Shares or Outstanding Stock Rights.
Rules of Interpretation: For the purposes of the Plan: (a) whenever from the
context it is appropriate, each term, whether stated in the singular or the
plural, shall include both the singular and the plural; (b) any reference in
the Plan to a contract, instrument, release or other agreement or document
being in a particular form or on particular terms and conditions means that
such document shall be substantially in such form or substantially on such
terms and conditions; provided, however, that any change to such form, terms or
conditions that are material to a party to such document shall not be modified
without such party's consent; (c) any reference in the Plan to an existing
document or Exhibit Filed or to be Filed means such document or Exhibit, as it
may have been or may be amended, modified or supplemented; (d) unless otherwise
specified in a particular reference, all references in the Plan to sections,
Articles and Exhibits are references to sections, Articles and Exhibits of or
to the Plan; (e) the words "herein," "hereof," "hereto," "hereunder" and others
of similar import refer to the Plan in its entirety rather than to only a
particular portion of the Plan; (f) captions and headings to Articles and
sections are inserted for convenience of reference only and are not intended to
be part of or to affect the interpretations of the Plan; and (g) any term used
in the Plan that is not defined in the Plan, either in this Article I or
elsewhere, but that is used in the Bankruptcy Code or the Bankruptcy Rules has
the meaning ascribed to such term in the Bankruptcy Code or the Bankruptcy
Rules, as applicable, and the rules of construction set forth in section 102 of
the Bankruptcy Code shall apply.
Time: In computing any period of time prescribed or allowed by the Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply.
Exhibits and Schedules: All Exhibits and Schedules to the Plan not attached
to the Plan and Disclosure Statement shall be contained in separate Exhibit
Volumes which shall be Filed not less than twenty (20) days prior to the
hearing on Confirmation. The Exhibit Volumes may be inspected in the office of
the Clerk of the Bankruptcy Court during normal Bankruptcy Court hours. On or
before the Effective Date, the Debtor shall File such agreements and other
documents as may be necessary or appropriate to effectuate and further evidence
the terms and conditions of the Plan. All Filed Exhibits are incorporated
herein by this reference and made a part hereof.
ARTICLE II
CLASSIFICATION OF CLAIMS AND INTERESTS
2.1 General.
The following is a designation of the classes of Claims and Interests under
the Plan. In accordance with section 1123(a)(1) of the Bankruptcy Code,
Administrative Claims described in section 3.1 have not been classified and are
excluded from the following classes. A Claim or Interest is classified in a
particular class only to the extent that the Claim or Interest qualifies within
the description of that class, and is classified in another class or classes to
the extent that any remainder of the Claim or Interest qualifies within the
description of such other class or classes. A Claim or Interest is classified
in a particular class only to the extent that the Claim or Interest is an
Allowed Claim or Allowed Interest in that class and has not been paid, released
or otherwise satisfied before the Effective Date; a Claim or Interest that is
not an Allowed Claim or Allowed Interest is not in any class. Notwithstanding
anything to the contrary contained in the Plan, no distribution shall be made
on account of any Claim or Interest that is not an Allowed Claim or Allowed
Interest.
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2.2 Classification.
Claims and Interests are classified for all purposes, including voting,
confirmation and distribution pursuant to the Plan, as follows:
<TABLE>
<C> <S>
CLASS 1 Priority Claims.
CLASS 2 All Claims under or evidenced by the Outstanding Notes, the
Outstanding Note Indenture, the Outstanding Collateral Agreement, the
Outstanding Pledge Agreement, or any other document, instrument or
agreement delivered in connection therewith (Impaired).
CLASS 3 All Other Secured Claims (Impaired).
CLASS 4 Unsecured Claims against the Debtor that are not classified in any
other class of Claims, including, without limitation, Claims arising
from the purchase of goods and services (Impaired).
CLASS 5 Interests of Holders of Outstanding Common Shares (Impaired).
CLASS 6 Interests of Holders of Outstanding Stock Rights (Impaired).
</TABLE>
ARTICLE III
TREATMENT OF CLAIMS AND INTERESTS
3.1 Unclassified Claims (Administrative Claims).
3.1.1 GENERAL.
Subject to the bar date provisions herein, the Reorganized Debtor shall
pay to each holder of an Administrative Claim, on account of the
Administrative Claim and in full satisfaction thereof, Cash equal to the
amount of such Administrative Claim, unless the holder agrees or shall have
agreed to other less favorable treatment of such Claim. Except as otherwise
provided herein, payment of an Administrative Claim will be made on the
later of (a) the Effective Date or (b) the date such payment would have
become due under the terms of such Claim in the absence of the
Reorganization Case.
3.1.2 PAYMENT OF STATUTORY FEES.
On or before the Effective Date, all fees payable pursuant to 28 U.S.C.
1930, as determined by the Bankruptcy Court at the hearing on Confirmation,
shall be paid in Cash equal to the amount of such Administrative Claim.
3.1.3 BAR DATE FOR ADMINISTRATIVE CLAIMS.
(A) GENERAL PROVISIONS.
Except as provided below in sections 3.1.3(c) and (d), requests for
payment of Administrative Claims must be Filed no later than sixty (60)
days after the Effective Date. Holders of Administrative Claims (including,
without limitation, professionals requesting compensation or reimbursement
of expenses and the holders of any Claims for federal, state or local
taxes) that are required to File a request for payment of such Claims and
that do not File such requests by the applicable bar date shall be forever
barred from asserting such Claims against the Debtor, the Reorganized
Debtor or any of their respective properties.
(B) PROFESSIONALS.
All professional or other Entities requesting compensation or
reimbursement of expenses pursuant to sections 327, 328, 330, 503(b) and
1103 of the Bankruptcy Code for services rendered before the Effective Date
(including, without limitation, any compensation requested by any
professional or any other Entity for making a substantial contribution in
the Reorganization Case) shall File and serve on the Reorganized Debtor an
application for final allowance of compensation and reimbursement of
expenses no later than sixty (60) days after the Effective Date. Objections
to applications of professionals for compensation or reimbursement of
expenses must be Filed and served on the Reorganized Debtor and the
professionals to whose application the objections are addressed in
accordance with an order of the Bankruptcy Court.
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(C) ORDINARY COURSE LIABILITIES.
Holders of Administrative Claims based on liabilities incurred by the
Debtor in Possession in the ordinary course of the Debtor's business (other
than Claims of governmental units for taxes or Claims and/or penalties
related to such taxes) and Claims arising under loans or advances to the
Debtor in Possession, whether or not incurred in the ordinary course of
business, shall not be required to File any request for payment of such
Claims. Such Administrative Claims shall be assumed and paid by the
Reorganized Debtor pursuant to the terms and conditions of the particular
transaction giving rise to such Administrative Claim without any further
action by the holders of such Claims.
(D) POSTPETITION TAX CLAIMS.
All requests for payment of Administrative Claims and other Claims by a
governmental unit for taxes (and for interest and/or penalties related to
such taxes) for any tax year or period, all or any portion of which occurs
or falls within the period from and including the Petition Date through and
including the Effective Date ("Postpetition Tax Claims") and for which no
bar date has otherwise been established prior to the Effective Date, must
be Filed on or before the later of (i) thirty (30) days following the
Effective Date; and (ii) 120 days following the filing of the tax return
for such taxes for such tax year or period with the applicable governmental
unit. Any holder of any Postpetition Tax Claim that is required to File a
request for payment of such taxes and does not File such a request by the
applicable bar date shall be forever barred from asserting any such
Postpetition Tax Claim against any of the Debtor, the Reorganized Debtor or
their respective properties, whether any such Postpetition Tax Claim is
deemed to arise prior to, on, or subsequent to the Effective Date.
3.2 Class 1 (Priority Claims):
3.2.1 SECTION 507(A)(8) PRIORITY CLAIMS.
Unless the applicable taxing agency agrees to less favorable treatment,
the Reorganized Debtor shall pay to each holder of an Allowed Priority
Claim entitled to priority under section 507(a)(8) of the Bankruptcy Code
deferred Cash payments, over a period not exceeding six years from the date
of assessment of such Claim, in an aggregate amount equal to the amount of
such Allowed Claim, plus interest from the Effective Date on the unpaid
portion of such Allowed Claim (without penalty of any kind) at the rate
prescribed below. The payment of the amount of each such Allowed Priority
Claim shall be made in equal semiannual installments commencing on the
latest of: (i) the Effective Date, (ii) 30 calendar days after the date on
which an Order allowing such Claim becomes a Final Order and (iii) such
other time or times as may be agreed to by the holder of such Claim and the
Reorganized Debtor. Each installment shall include simple interest on the
unpaid portion of such Allowed Claim, without penalty of any kind, at the
applicable statutory rate of interest provided for such taxes under
applicable nonbankruptcy law; provided, however, that the Reorganized
Debtor shall have the right to pay any Claim entitled to priority under
section 507(a)(8) of the Bankruptcy Code, or any remaining balance of such
Claim, in full, at any time on or after the Effective Date, without premium
or penalty of any kind.
3.2.2 OTHER PRIORITY CLAIMS.
Except as otherwise provided in the Plan and subject to compliance with
the terms of the Plan, to the extent not previously paid, each holder of an
Allowed Priority Claim entitled to priority under sections 507(a)(3),
507(a)(4), 507(a)(5) or 507(a)(6) of the Bankruptcy Code shall be paid the
full amount of its Allowed Priority Claim in Cash on the Effective Date (or
as soon as practicable after the date on which any such Claim is allowed if
the date of allowance is later than the Effective Date).
3.3 Class 2 (Outstanding Notes).
The Class 2 Claims are impaired under the Plan. The Class 2 Claims (other
than Class 2 Expense Claims) shall be Allowed Claims (whether or not a proof of
Claim is Filed) in an amount estimated not to exceed $355,000,000.
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On the Effective Date, each holder of an Allowed Class 2 Claim (other than
the Class 2 Expense Claims, which shall be treated as described in section
3.3.1) shall receive its Pro Rata share of:
(a) Cash in the Initial Cash Distribution Fund; plus
(b) New Notes in the principal amount of $110 million; plus
(c) 10,889,180 New Common Shares which shall represent 97% in the
aggregate of the Shares, (or New Common Shares which shall represent 99.5%
of the Shares if the holders of Class 5 Interests do not vote to accept the
Plan in accordance with section 1126(d) of the Bankruptcy Code, with .5% of
the New Common Shares to be distributed to charities designated by the
Senior Noteholders).
On the Effective Date or as soon thereafter as is practicable, the
Reorganized Debtor and each holder of an Allowed Class 2 Claim receiving in
excess of 5% of the New Common Shares or the New Notes shall be entitled to
enter into the Registration Rights Agreement relating to the New Plan
Securities.
3.3.1 CLASS 2 EXPENSE CLAIMS.
The Reorganized Debtor shall pay to the applicable party entitled to
payment an amount equal to the amount of the Class 2 Expense Claims.
Payment of such Class 2 Expense Claims shall constitute distributions on
account of the Allowed Claims in Class 2, in addition to the distributions
provided for such class in section 3.3; and distributions otherwise
provided under the Plan to holders of Allowed Class 2 Claims under section
3.3 shall not be reduced on account of such payment of Class 2 Expense
Claims. Notwithstanding anything in this section 3.3.1 to the contrary, the
Reorganized Debtor's obligation to pay the Class 2 Expense Claims shall be
subject to the same bar date and procedural provisions set forth in section
3.1.3(a), and the procedures regarding resolution of contested Claims and
Interests set forth in section 5.7, and, pursuant to Section 1129(a)(4) of
the Bankruptcy Code, are subject to the approval of the Bankruptcy Court as
reasonable.
3.3.2 GENERAL DESCRIPTION OF NEW PLAN SECURITIES DISTRIBUTABLE TO HOLDERS
OF CLASS 2 ALLOWED CLAIMS.
The securities to be issued and distributed to holders of Allowed Class 2
Claims under the Plan include the following:
(A) NEW NOTES.
The terms and conditions of the New Notes shall be as provided in the
form of New Notes and the New Note Indenture. By way of summary, the New
Notes (i) shall be issued by the Reorganized Debtor in denominations of
$1,000 (or integral multiples thereof) in an aggregate principal amount not
to exceed $110 million; (ii) shall be dated as of the Effective Date and
mature on the seventh (7th) anniversary of the Effective Date; (iii) shall
be guaranteed by each of the subsidiaries of the Debtor; and (iv) shall be
secured under the New Note Indenture and the New Collateral Documents by
Liens on substantially all of the assets of the Reorganized Debtor.
Interest on the New Notes shall accrue from the Effective Date at a per
annum rate of 11-1/8%. Interest on the New Notes shall be payable in Cash
semiannually in arrears on June 30 and December 31, commencing after the
Effective Date of the Plan.
(B) NEW COMMON SHARES.
Under the Plan, the Reorganized Debtor shall issue up to 10,889,180
million New Common Shares to holders of Allowed Class 2 Claims (subject to
rounding to account for fractional shares, as described in section 5.3.3).
The New Common Shares shall represent shares of beneficial interest in the
Reorganized Debtor and the terms and conditions of the New Common Shares
shall be as provided in the Amended and Restated Declaration of Trust, and
as provided by applicable law. Each New Common Share shall have a par value
of $1.00. Certain matters relating to voting rights of holders of New
Common Shares are described in section 5.5.
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3.4 Class 3 (Other Secured Claims).
The Class 3 Claims are impaired under the Plan. To the extent not previously
paid, all Allowed Class 3 Claims will be (at the option of the Reorganized
Debtor with the consent of the Senior Noteholders): (a) paid in full, in Cash
on the Effective Date (or as soon as practicable after the date on which any
such Claim is allowed if the date of allowance is later than the Effective
Date); (b) paid upon such other less favorable terms as may be mutually agreed
upon by the Reorganized Debtor and the holder of such Claim; or (c) reinstated
and paid or performed by the Reorganized Debtor in accordance with section 1124
of the Bankruptcy Code, or the legal, equitable and contractual rights to which
such Claim entitles the holder of such Claim shall be left unaltered.
3.5 Class 4 (Unsecured Claims).
The Class 4 Claims are impaired under the Plan. Each holder of a Class 4
Claim shall receive on the Effective Date, or as soon thereafter as the Claim
becomes an Allowed Claim, whichever is later, Cash equal to the amount of such
Allowed Class 4 Claim unless the holder of such Claim agrees to a less
favorable treatment.
3.6 Class 5 (Outstanding Common Shares).
The Class 5 Interests are impaired under the Plan. If holders of Allowed
Class 5 Interests vote to accept the Plan in accordance with section 1126(d) of
the Bankruptcy Code, then each holder of an Allowed Class 5 Interest shall
retain its existing Outstanding Common Shares, subject to a reverse stock split
and the issuance of New Common Shares to holders of Allowed Class 2 Claims,
after which holders of Allowed Class 5 Interests will hold shares representing
3% in the aggregate of the Shares. If holders of Class 5 Interests do not vote
to accept the Plan in accordance with section 1126(d) of the Bankruptcy Code,
no distributions shall be made under the Plan on account of Interests of
holders of Outstanding Common Shares by the Debtor or from property of the
Debtor, and all Interests in Class 5 and the Outstanding Common Shares shall be
cancelled and extinguished.
3.7 Class 6 (Outstanding Stock Rights).
The Class 6 Interests are impaired under the Plan. The Outstanding Stock
Rights will be canceled and no distributions shall be made to holders of
Outstanding Stock Rights under the Plan. Each of the holders of an Interest in
Class 6 shall receive or retain no property under the Plan on account of such
Interest.
ARTICLE IV
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
4.1 Assumption.
Unless previously assumed or rejected by order of the Bankruptcy Court
pursuant to section 365 of the Bankruptcy Code, as of the Effective Date, the
Reorganized Debtor shall assume, pursuant to section 365 of the Bankruptcy
Code, each of the executory contracts and leases of the Debtor that are not
rejected under section 4.3 including the executory contracts and leases that
are identified in Exhibit E. The Debtor reserves the right at any time prior to
the hearing on Confirmation, with the consent of the Senior Noteholders, to
amend Exhibit E either to: (a) delete any executory contract or lease listed
therein and provide for its rejection pursuant to section 4.3 hereof or (b) add
any executory contract or lease to Exhibit E, thus providing for its assumption
(or assumption and assignment) pursuant to this section 4.1. The Debtor shall
provide notice of any amendment to Exhibit E to the parties to the executory
contract or lease affected thereby. The Confirmation Order shall constitute an
order of the Bankruptcy Court approving all such assumptions described in this
section 4.1, pursuant to section 365 of the Bankruptcy Code, as of the
Effective Date.
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4.2 Cure Payments.
Any monetary defaults under each executory contract and lease to be assumed
under the Plan shall be satisfied, pursuant to section 365(b)(1) of the
Bankruptcy Code in either of the following ways: (1) by payment of the default
amount in Cash on the Effective Date; or (2) by payment of the default amount
on such other terms as agreed to by the Reorganized Debtor and the non-Debtor
parties to such executory contract or lease. In the event of a dispute
regarding (i) the amount or timing of any cure payments, (ii) the ability of
the Reorganized Debtor to provide adequate assurance of future performance
under the contract or lease to be assumed or (iii) any other matter pertaining
to assumption (or assumption and assignment) of the contract or lease to be
assumed, the cure payments required by section 365(b)(1) of the Bankruptcy Code
shall be made following the entry of a Final Order resolving the dispute and
approving assumption.
4.3 Rejection.
Unless previously assumed or rejected by order of the Bankruptcy Court
pursuant to section 365 of the Bankruptcy Code, on the Effective Date, all
documents, agreements, contracts and leases listed on Exhibit F shall be
rejected, to the extent, if any, that any of the foregoing constitute executory
contracts or unexpired leases, and without conceding or admitting that they
constitute executory contracts or unexpired leases or that the Debtor has any
liability thereunder. The Debtor reserves the right at any time prior to the
hearing on Confirmation, with the consent of the Senior Noteholders, to amend
Exhibit F either to: (a) delete any contract or lease listed therein and
provide for its assumption pursuant to section 4.1 or (b) add any contract or
lease to Exhibit F, thus providing for its rejection pursuant to this section
4.3. The Debtor shall provide notice of any amendment of Exhibit F to the
parties to the contract or lease affected thereby.
The Confirmation Order shall constitute an Order of the Bankruptcy Court
approving all such rejections pursuant to section 365 of the Bankruptcy Code as
of the Effective Date. Any Claim for damages arising from the rejection under
the Plan of an executory contract or unexpired lease must be Filed within
thirty (30) days after the mailing of notice of the entry of the Confirmation
Order or be forever barred and unenforceable against the Debtor, its Estate,
the Reorganized Debtor and its properties and barred from receiving any
distribution under the Plan on account of such Claim.
ARTICLE V
MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN
5.1 Cancellation of Outstanding Securities and Related Agreements.
Except as expressly provided in the Plan or in the Confirmation Order, on the
Effective Date, the Outstanding Securities, the Outstanding Note Indenture, the
Outstanding Collateral Agreement, the Outstanding Pledge Agreement, the Prior
Plan, the Outstanding Stock Rights and all obligations of the Debtor under any
of the foregoing, shall be terminated and canceled.
5.2 New Plan Securities and New Indenture.
On or before the Effective Date, the Reorganized Debtor, the New Indenture
Trustee, and the New Collateral Agent shall have executed the New Note
Indenture and the New Collateral Documents, as applicable. On the Effective
Date or as soon as practicable thereafter, the Reorganized Debtor and each
holder of Allowed Class 2 Claims receiving 5% or more of the New Common Shares
or the New Notes shall be entitled to execute and deliver the Registration
Rights Agreement. All of the documents described in this paragraph shall become
effective and binding on the Reorganized Debtor on and as of the Effective
Date. On and after the Effective Date, the Reorganized Debtor shall issue the
New Plan Securities in accordance with this Article V.
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5.3 Distribution of Property Under the Plan.
5.3.1 DISTRIBUTION DATE.
Subject to the provisions of this section 5.3, and except as otherwise
provided herein, property to be distributed to an impaired class (a) shall
be distributed on or as soon as practicable after the Effective Date to
each holder of an Allowed Claim or an Allowed Interest of that class that
is an Allowed Claim or Allowed Interest as of the Effective Date, and (b)
shall be distributed to each holder of an Allowed Claim or an Allowed
Interest of that class that is allowed after the Effective Date, to the
extent allowed, as soon as practicable after such Claim or Interest becomes
an Allowed Claim or Allowed Interest. Property to be distributed under the
Plan to a class that is not impaired or on account of a Claim of a kind
described in Bankruptcy Code section 507(a)(1) or Class 2 Expense Claims
shall be distributed on the latest of (i) the later of the two dates
specified in the preceding sentence and (ii) the date on which the
distribution to the holder of the Allowed Claim would have been due and
payable under the terms of the Allowed Claim in the absence of the
Reorganization Case.
5.3.2 HOLDERS OF OUTSTANDING SECURITIES ENTITLED TO RECEIVE
DISTRIBUTIONS.
Any distribution under the Plan on account of an Allowed Claim under or
evidenced by Outstanding Notes shall be made to the holders of record of
such Outstanding Notes as of the Effective Date. At the close of business
on the Effective Date, the transfer ledgers for the Outstanding Notes shall
be closed, and there shall be no further changes in the record holders of
the Outstanding Notes. The Debtor, the Reorganized Debtor, the Outstanding
Indenture Trustee shall have no obligation to recognize any transfer of the
Outstanding Notes occurring on or after the Effective Date. The Debtor, the
Reorganized Debtor, and the Outstanding Indenture Trustee shall be entitled
instead to recognize and deal for all purposes hereunder with only those
record holders stated on the transfer ledgers for the Outstanding Notes, as
of the close of business on the Effective Date.
5.3.3 FRACTIONAL INTERESTS.
The calculation of the percentage distribution of New Plan Securities to
be made to holders of certain Allowed Claims as provided elsewhere in the
Plan may mathematically entitle the holder of such an Allowed Claim to a
fractional interest in one or more of such New Plan Securities.
Notwithstanding such entitlement, New Notes to be issued under the Plan
shall be issued and distributed only in denominations of $1,000 and
integral multiples thereof, and only whole New Common Shares shall be
issued and distributed. For purposes of applying the following two
paragraphs, the holders of Allowed Claims under or evidenced by Outstanding
Notes shall, in the case of Outstanding Notes held in street name, mean the
beneficial holders thereof as of the Effective Date.
(A) NEW NOTES.
All New Notes that would have been distributed under the Plan in
denominations of less than $1,000 but for the preceding paragraph, shall be
aggregated into New Notes having denominations of $1,000 or integral
multiples thereof. On the Effective Date or as soon thereafter as is
practicable, the Disbursing Agent shall sell for Cash such aggregated New
Notes in such manner and over such period of time as the Disbursing Agent
considers appropriate to reasonably assure the maximization of the sale
value of such New Notes. Upon the completion of such sales, the Disbursing
Agent shall distribute the net proceeds thereof to the holders of the
respective Allowed Claims ratably, in direct proportion to their respective
interests in the New Notes to be sold. Notwithstanding the foregoing
provisions of this section 5.3.3, if the aggregation (in accordance with
this section 5.3.3) of New Notes results in a principal amount that is not
$1,000 or an integral multiple thereof, such principal amount shall be
rounded up to the next such integral multiple of $1,000 of New Notes and
the principal amount of such New Notes so rounded up shall be sold by the
Disbursing Agent as provided in this section 5.3.3.
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(B) NEW COMMON SHARES.
The number of New Common Shares to be received by a holder of an Allowed
Claim shall be rounded to the next greater or lower integer of shares as
follows: (a) fractions of 1/2 or greater shall be rounded to the next
greater whole number and (b) fractions of less than 1/2 shall be rounded to
the next lower integer. The total number of New Common Shares to be
distributed to a class of Claims shall be adjusted as necessary to account
for the rounding provided for in this section 5.3.3(b). No consideration
shall be paid in lieu of fractional shares that are rounded down.
5.3.4 PRO RATA DISTRIBUTION.
Except as otherwise provided herein, the property to be distributed to
Class 2 under the Plan shall be divided Pro Rata among the holders of
Allowed Claims of such class. Solely for the purpose of applying the
definition of "Pro Rata" to the distributions within such class, the amount
of the Allowed Claims in Class 2 shall be determined as of the Effective
Date, based on outstanding principal amounts of the Outstanding Notes,
without including any accrued and unpaid interest and shall exclude the
Class 2 Expense Claims.
5.3.5 DISBURSING AGENT.
The Reorganized Debtor, or such other Entity or Entities as the
Reorganized Debtor may employ, subject to the reasonable consent of the
Senior Noteholders, shall act as Disbursing Agents under the Plan and make
all distributions required under the Plan. Any Disbursing Agent may employ
or contract with other Entities to assist in or perform the distribution of
property under the Plan. Unless otherwise determined by the Reorganized
Debtor, each Disbursing Agent shall serve without bond. Each third party
Disbursing Agent shall receive, without further Bankruptcy Court approval,
reasonable compensation for distribution services rendered pursuant to the
Plan and reimbursement of reasonable out-of-pocket expenses incurred in
connection with such services from the Reorganized Debtor on terms agreed
to with the Reorganized Debtor.
5.3.6 DISPUTED CLAIMS OR INTEREST.
Notwithstanding any other provisions of the Plan, no payments or
distributions shall be made on account of any Disputed Claim or Interest
until such Claim or Interest becomes an Allowed Claim or Interest, and then
only to the extent that it becomes an Allowed Claim or Interest.
5.3.7 MANNER OF PAYMENT UNDER THE PLAN.
Cash payments made pursuant to the Plan shall be in U.S. dollars by
checks drawn on a domestic bank selected by the Reorganized Debtor, or by
wire transfer from a domestic bank, at the Reorganized Debtor's option,
except that payments made to foreign trade creditors holding Allowed Claims
may be paid, at the option of the Reorganized Debtor in such funds and by
such means as are necessary or customary in a particular foreign
jurisdiction. Distributions of Cash pursuant to section 3.3.1.(a) shall be
made by mail as set forth above or, upon request of a holder of an Allowed
Class 2 Claim, by wire transfer in accordance with written instructions
received therefrom.
5.3.8 SURRENDER OF INSTRUMENTS.
(A) REQUIREMENTS TO SURRENDER OR DELIVER INSTRUMENTS OR DOCUMENTS.
As a condition to the receipt of any distribution under the Plan: (i) a
holder of an Outstanding Note shall deliver to the Outstanding Indenture
Trustee or its designee such transaction instructions or other documents of
transfer or exchange as the Outstanding Indenture Trustee shall request;
and (ii) a holder of a document or instrument of the Debtor other than an
Outstanding Note shall surrender the document or instrument to the
Disbursing Agent or its designee. However, holders of the Outstanding
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Common Shares are not required to surrender such document or instrument.
Prior to the Effective Date, each holder of a document or instrument will
receive specific instructions regarding the time and manner in which the
document or instrument is to be surrendered or delivered. Immediately upon
the Effective Date and until such surrender or delivery, such document or
instrument will be deemed canceled and represent only the right to receive
the distributions to which the holder is entitled under the Plan.
(B) LOST, STOLEN, MUTILATED OR DESTROYED INSTRUMENTS.
Any bond, debenture, share of stock, other security or note, whether or
not a security (collectively "Instruments"), or transaction instruction,
that is lost, stolen, mutilated or destroyed shall be deemed surrendered
when the holder of a Claim or Interest based thereon delivers to the
Outstanding Indenture Trustee, or Disbursing Agent or their respective
designee, (i) evidence satisfactory to the Outstanding Indenture Trustee,
Disbursing Agent or designee of the loss, theft, mutilation or destruction
of such Instrument or (ii) such security or indemnity as may be required by
the Outstanding Indenture Trustee, Disbursing Agent or designee to save
each of them harmless with respect thereto.
(C) EFFECT OF FAILURE TO SURRENDER OR DELIVER INSTRUMENTS OR
DOCUMENTS.
Any holder of an Instrument of the Debtor that fails to surrender or
deliver or be deemed to have surrendered or delivered the Instrument or
relevant transaction instruction or other document within two years after
the Effective Date shall be forever barred from receiving any distribution
under the Plan. In such cases, any property held for distribution on
account of a Claim or Interest based on such Instrument shall become
property of the Reorganized Debtor in the manner provided in section
5.3.10(b)(2) for unclaimed distributions. To the extent that any such
property is held by a Disbursing Agent other than the Reorganized Debtor,
such Disbursing Agent shall return such property to the Reorganized Debtor.
5.3.9 DELIVERY OF DISTRIBUTIONS AND UNDELIVERABLE OR UNCLAIMED
DISTRIBUTIONS.
(A) DELIVERY OF DISTRIBUTIONS IN GENERAL.
Except as provided below in this section 5.3.9 for undeliverable
distributions, distributions to holders of Allowed Claims and Allowed
Interests shall be distributed by mail as follows: (a) except in the case
of the holder of an Instrument for which there is an indenture trustee or
stock transfer agent, (1) to the addresses set forth on the respective
proof of claim or interest filed by such holders; (2) to the addresses set
forth in any written notices of address changes delivered to the Disbursing
Agent(s) after the date of any related proof of claim or interest; or (3)
to the address reflected on the Schedules if no proof of claim or interest
is Filed and the Disbursing Agent(s) have not received a written notice of
a change of address; and (b) in the case of the holder of an Instrument for
which there is an indenture trustee or stock transfer agent, to the latest
mailing address maintained of record by the pertinent indenture trustee,
security registrar or stock transfer agent, or, if no mailing address is
maintained of record, to the pertinent indenture trustee, security
registrar or stock transfer agent.
(B) UNDELIVERABLE DISTRIBUTIONS.
(1) HOLDING AND INVESTMENT OF UNDELIVERABLE PROPERTY.
If the distribution to the holder of a Claim or Interest is returned to a
Disbursing Agent as undeliverable, no further distribution shall be made to
such holder unless and until the Reorganized Debtor or the applicable
Disbursing Agent is notified in writing of such holder's then current
address. Subject to section 5.3.9(b)(2), undeliverable distributions shall
remain in the possession of the applicable Disbursing Agent pursuant to
this section 5.3.9 until such times as a distribution becomes deliverable.
Unclaimed Cash (including interest, dividends and other consideration, if
any, distributed on or received for undeliverable New Plan Securities)
shall be held in trust in a segregated bank account in the name of the
applicable Disbursing Agent for the benefit of the potential claimants of
such funds, and
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shall be accounted for separately. Such funds shall be held in interest-
bearing accounts to the extent practicable, and the parties entitled to
such funds shall be entitled to any interest earned on such funds.
Undeliverable New Plan Securities shall be held in trust for the benefit of
the potential claimants of such securities by the applicable Disbursing
Agent in principal amount of notes and in number of shares sufficient to
fund the unclaimed amounts of such securities, and shall be accounted for
separately.
(2) DISTRIBUTION OF UNDELIVERABLE PROPERTY AFTER IT BECOMES
DELIVERABLE AND FAILURE TO CLAIM UNDELIVERABLE PROPERTY.
Within thirty (30) days after the end of each calendar quarter following
the Effective Date, the applicable Disbursing Agents shall make
distributions of property that has become deliverable during the preceding
quarter. Each such distribution shall include any dividends, interest
payments or other distributions made on account of the distributed
property.
Any holder of an Allowed Claim or Allowed Interest who does not assert a
claim for an undeliverable distribution held by a Disbursing Agent within
one (1) year after the Effective Date shall no longer have any claim to or
interest in such undeliverable distribution, and shall be forever barred
from receiving any distributions under the Plan. In such cases any property
held for distribution on account of such Allowed Claims or Allowed
Interests shall be returned to and/or retained by the Reorganized Debtor,
as follows: (1) any Cash shall be the property of the Reorganized Debtor,
free from any restrictions thereon; (2) any New Notes shall be canceled;
and (3) any New Common Shares reserved for issuance shall be held by the
Reorganized Debtor as unrestricted treasury shares. Nothing contained in
the Plan shall require the Debtor, the Reorganized Debtor or any Disbursing
Agent to attempt to locate any holder of an Allowed Claim or an Allowed
Interest.
5.3.10 COMPLIANCE WITH TAX REQUIREMENTS.
In connection with the Plan, to the extent applicable, each Disbursing
Agent shall comply with all withholding and reporting requirements imposed
on it by any governmental unit, and all distributions pursuant to the Plan
shall be subject to such withholding and reporting requirements.
5.3.11 SETOFFS.
The Reorganized Debtor may, but shall not be required to, setoff against
any Allowed Claim and the distributions to be made pursuant to the Plan on
account of such Allowed Claim, claims of any nature that the Debtor or the
Reorganized Debtor may have against the holder of such Allowed Claim;
provided, however, that neither the failure to effect such a setoff nor the
allowance of any Claim against the Debtor or the Reorganized Debtor shall
constitute a waiver or release by the Debtor or the Reorganized Debtor of
any claim that the Debtor or the Reorganized Debtor may possess against
such holder.
5.4 Revesting of Assets.
Except as otherwise provided in any provision of the Plan, on the Effective
Date, all property of the Estate of the Debtor shall revest in the Reorganized
Debtor, free and clear of all Claims, liens, encumbrances and other interests
of holders of Claims and Interests. From and after the Effective Date, the
Reorganized Debtor may operate its business and use, acquire and dispose of
property and settle and compromise Claims or Interests without supervision by
the Bankruptcy Court and free of any restrictions of the Bankruptcy Code or
Bankruptcy Rules, other than those restrictions expressly imposed by the Plan,
the Confirmation Order, the New Note Indenture and the New Collateral
Documents, and any document, agreement or instrument delivered in connection
therewith.
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5.5 Amended and Restated Declaration of Trust; Indemnification.
On the Effective Date, the Reorganized Debtor shall adopt the Amended and
Restated Declaration of Trust pursuant to section 8-501 of title 8 of the
Corporations and Associations Law article of the Annotated Code of Maryland and
section 1123(a)(5)(I) and (b)(5) of the Bankruptcy Code. The Amended and
Restated Declaration of Trust will, inter alia: (i) authorize the issuance of
the New Common Shares; (ii) continue to prohibit the issuance of nonvoting
equity securities to the extent required by section 1123(a)(6) of the
Bankruptcy Code. Pursuant to the Amended and Restated Declaration of Trust and
other relevant agreements, and notwithstanding any other term or provision of
the Plan to the contrary, the Reorganized Debtor shall indemnify and hold
harmless its current and former officers, trustees and employees to the fullest
extent permitted by applicable law with respect to any such officer's,
trustee's or employee's acts, conduct and omissions whether arising before or
after the Petition Date; and (iii) impose certain transfer restrictions. Upon
(i) Confirmation of the Plan, (ii) the occurrence of the Effective Date and
(iii) the filing with the Maryland Secretary of State of the Amended and
Restated Declaration of Trust, the Amended and Restated Declaration of Trust
will become effective.
5.6 Management of the Reorganized Debtor.
5.6.1 OFFICERS AND TRUSTEES.
The initial Board of Trustees of the Reorganized Debtor shall consist of
seven members, including (a) the Chief Executive Officer of the Reorganized
Debtor, (b) one member designated by Mutual Series Fund, Inc., and (c) five
members designated by the Senior Noteholders. The members of the initial
Board of Trustees shall be identified at or prior to the hearing on
Confirmation of the Plan. Such persons shall be deemed elected to the Board
of Trustees, and such elections shall be deemed effective as of the
Effective Date, without any requirement of further action by shareholders
or trustees of the Debtor or the Reorganized Debtor. The persons identified
as such in the Disclosure Statement will serve as the initial officers of
the Reorganized Debtor as of the Effective Date. Subject to any requirement
of Bankruptcy Court approval under section 1129(a)(5) of the Bankruptcy
Code, those persons designated as trustees and officers of the Reorganized
Debtor shall assume their offices as of the Effective Date and shall
continue to serve in such capacities thereafter, pending further action of
the Board of Trustees or shareholders of the Reorganized Debtor in
accordance with the Amended and Restated Declaration of Trust and
applicable state law.
5.7 Objections to Claims or Interests.
Except as otherwise provided, applications of professionals for compensation
and reimbursement of expenses under section 3.1.3(b), and except as otherwise
ordered by the Bankruptcy Court after notice and a hearing, objections to
Claims or Interests, including Administrative Claims, or to requests for
payment of Class 2 Expense Claims, shall be Filed and served upon the holder of
such Claim, Interest or Administrative Claim, the Outstanding Indenture
Trustee, or other relevant party as applicable, not later than the later of (a)
ninety (90) days after the Effective Date, and (b) ninety (90) days after a
proof of claim or interest or request for payment of such Claim, Interest,
Administrative Claim or Class 2 Expense Claims is timely Filed, unless this
period is extended by the Bankruptcy Court. After the Effective Date, the
Reorganized Debtor shall have the exclusive right to object to Claims,
Interests or Class 2 Expense Claims.
5.8 Discharge of Debtor and Injunction.
Except as otherwise provided in this Plan, the rights afforded in the Plan
and the treatment of all Claims and Interests herein shall be in exchange for
and in complete satisfaction, discharge and release of all Claims and Interests
of any nature whatsoever, including any interest accrued on such Claims from
and after the Petition Date, against the Debtor and the Debtor in Possession,
or any of their assets or properties. Except as otherwise provided in the Plan
or the Confirmation Order: (i) on the Effective Date, the Debtor shall be
deemed discharged and released to the fullest extent permitted by section 1141
of the Bankruptcy Code from all Claims and Interests, including, but not
limited to, demands, liabilities, Claims and Interests that arose
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before the Confirmation Date and all debts of the kind specified in sections
502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not: (a) a proof of
claim or proof of interest based on such debt or Interest is Filed or deemed
Filed pursuant to section 501 of the Bankruptcy Code, (b) a Claim or Interest
based on such debt or Interest is allowed pursuant to section 502 of the
Bankruptcy Code or (c) the holder of a Claim or Interest based on such debt or
Interest has accepted the Plan; and (ii) all Entities shall be precluded from
asserting against the Reorganized Debtor, its successors or its assets or
properties any other or further Claims or Interests based upon any act or
omission, transaction or other activity of any kind or nature that occurred
prior to the Confirmation Date. Except as otherwise provided in the Plan or the
Confirmation Order, the Confirmation Order shall act as a discharge of any and
all Claims against and all debts and liabilities of the Debtor, as provided in
sections 524 and 1141 of the Bankruptcy Code, and such discharge shall void any
judgment against the Debtor at any time obtained to the extent that it relates
to a Claim discharged.
Except as otherwise provided in the Plan or the Confirmation Order, on and
after the Effective Date, all Entities who have held, currently hold or may
hold a debt, Claim or Interest discharged pursuant to the terms of the Plan are
permanently enjoined from taking any of the following actions on account of any
such discharged debt, Claim or Interest: (1) commencing or continuing in any
manner any action or other proceeding against the Debtor, the Reorganized
Debtor, their successors or their respective property; (2) enforcing,
attaching, collecting or recovering in any manner any judgment, award, decree
or order against the Debtor, the Reorganized Debtor, their successors or their
respective property; (3) creating, perfecting or enforcing any lien or
encumbrance against the Debtor, the Reorganized Debtor, their successors or
their respective property; (4) asserting any setoff, right of subrogation or
recoupment of any kind against any obligation due to the Debtor, the
Reorganized Debtor, their successors or their respective property; and (5)
commencing or continuing any action, in any manner, in any place that does not
comply with or is inconsistent with the provisions of the Plan or the
Confirmation Order. Any Entity injured by any willful violation of such
injunction shall recover actual damages, including costs and attorneys' fees,
and, in appropriate circumstances, may recover punitive damages, from the
willful violator.
5.9 No Liability for Solicitation or Participation.
As specified in section 1125(e) of the Bankruptcy Code, Entities that solicit
acceptances or rejections of the Plan and/or that participate in the offer,
issuance, sale or purchase of securities offered or sold under the Plan, in
good faith and in compliance with the applicable provisions of the Bankruptcy
Code, are not liable, on account of such solicitation or participation, for
violation of any applicable law, rule or regulation governing the solicitation
of acceptances or rejections of the Plan or the offer, issuance, sale or
purchase of securities.
5.10 Limitation of Liability.
To the extent permitted by applicable law, neither the Debtor, the Debtor in
Possession, the Reorganized Debtor, the Senior Noteholders, the creditors'
committee under the Prior Plan, nor any of their employees, officers, trustees,
members, agents or representatives, nor any professional Entities employed by
any of them shall have or incur any liability to any Entity for any act taken
or omission made in good faith in connection with or related to formulating,
implementing, confirming or consummating the Plan, the Disclosure Statement or
any contract, instrument, release or other agreement or document created in
connection with the Plan.
5.11 Other Documents and Actions.
The Debtor, the Debtor in Possession and the Reorganized Debtor may execute
such documents and take such other action as is necessary to effectuate the
transactions provided for in the Plan.
5.12 Authorized Actions.
The issuance of New Common Shares and New Notes, the adoption of the Amended
and Restated Declaration of Trust, the selection of the persons who will serve
as the initial trustees and officers of the Reorganized Debtor as of the
Effective Date, the execution of the New Note Indenture, the New Collateral
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Documents, the adoption of the other matters under the Plan involving the
corporate structure of the Debtor or the Reorganized Debtor or corporate action
by the Debtor or the Reorganized Debtor shall be deemed to have occurred and be
effective on and after the Effective Date without any requirement of further
action by shareholders or trustees of the Debtor or the Reorganized Debtor.
Without limiting the foregoing, upon entry of the Confirmation Order by the
clerk of the Bankruptcy Court, the filing by the Debtor or the Reorganized
Debtor of the Amended and Restated Declaration of Trust shall be authorized and
approved in all respects. On the Effective Date or as soon thereafter as is
practicable, pursuant to applicable state law, the Reorganized Debtor shall
file with the applicable state governmental agencies or offices the Amended and
Restated Declaration of Trust.
5.13 Releases.
In consideration for the distributions to be made under the Plan and the
releases provided for herein, and in order to protect the Reorganized Debtor
from Claims for contribution or indemnity relating to pre-Effective Date acts
or omissions, as of the Effective Date: (i) the creditors' committee formed
under the Prior Plan, each holder of a Claim or Interest, and each of the
officers, directors, employees, members and professionals of such committee or
holder, shall be released to the extent permitted by applicable law from any
Released Claims that the Debtor may have against any of them (the "Debtor
Release"); (ii) the Debtor, the Reorganized Debtor, the creditors' committee
under the Prior Plan, the Senior Noteholders, and their respective officers,
directors, employees, members and professionals (collectively, the "Debtor
Releasees") shall be released to the extent permitted by applicable law from
any Released Claims that any holder of a Claim or Interest may have against any
of the Debtor Releasees; and (iii) the Debtor Releasees shall be released to
the extent permitted by applicable law from any and all actions, causes of
action, claims, liabilities, demands and obligations of any kind or nature
whatsoever that the Debtor, the Reorganized Debtor, the Debtor's Estate or any
holder of a Claim or Interest may have against any of the Debtor Releasees that
is based upon or that arises out of any alleged act or omission by any of the
Debtor Releasees that is related to the Debtor, including, without limitation,
the Reorganization Case, the Outstanding Notes, the Outstanding Collateral
Agreement, the Prior Plan, the Outstanding Common Shares, the Outstanding Stock
Rights or any of the Claims or Interests in the Reorganization Case, provided,
however, that this release shall not apply to Excluded Claims against the
Debtor (the release described in subparagraphs (ii) and (iii) is hereinafter
referred to as the "Creditor/Shareholder Release") and no holder of a Claim
shall be released until such Claim is allowed. Notwithstanding the foregoing,
to the extent that a holder of a Claim or Interest elects not to grant a
Creditor/Shareholder Release and receive a Debtor Release, such holder may make
such election by indicating its election to opt out of such releases in the
space provided for such election on the ballot for accepting or rejecting the
Plan. If a holder makes such election, the Creditor/Shareholder Release shall
not be enforceable against such holder, and such holder shall not be released
under the Debtor Release.
5.14 Retiree Benefits.
On and after the Effective Date, to the extent required by section
1129(a)(13) of the Bankruptcy Code, the Reorganized Debtor shall continue to
pay all retiree benefits (if any), as the term "retiree benefits" is defined in
section 1114(a) of the Bankruptcy Code, maintained or established by the Debtor
prior to the Confirmation Date.
ARTICLE VI
CONFIRMATION
6.1 Confirmation.
The Debtor requests Confirmation of the Plan under section 1129(a) and
section 1129(b) of the Bankruptcy Code if any impaired class does not accept
the Plan pursuant to section 1126 of the Bankruptcy Code, subject to the
consent of the Senior Noteholders. The Debtor reserves the right to modify the
Plan, subject to the consent of the Senior Noteholders, to the extent, if any,
that Confirmation of the Plan under section 1129(b) of the Bankruptcy Code
requires modification.
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ARTICLE VII
CONFIRMATION AND EFFECTIVE DATE CONDITIONS
7.1 Conditions to Effective Date.
The Plan shall not be consummated and the Effective Date shall not occur
unless and until each of the following conditions has been satisfied or duly
waived as specified below:
7.1.1 The Plan has been accepted by the requisite holders of Claims in
Class 2 pursuant to section 1126 of the Bankruptcy Code;
7.1.2 The Clerk of the Bankruptcy Court has entered the Confirmation
Order, in form and substance satisfactory to the Debtor and to the Senior
Noteholders and unless otherwise agreed to by the Senior Noteholders, such
order shall have become a Final Order;
7.1.3 No court shall have entered an order modifying or staying the
enforcement of the Confirmation Order or any such stay shall have been
vacated;
7.1.4 The New Note Indenture shall have been qualified under the Trust
Indenture Act of 1939, as amended, and no stop order shall have been issued
with respect thereto; and
7.1.5 The New Note Indenture and the New Collateral Documents shall have
been executed and delivered by the Reorganized Debtor and each of its
subsidiaries, and the New Indenture Trustee.
7.1.6 All other material documents, instruments or agreements including,
without limitation, the Amended and Restated Declaration of Trust shall
have been executed and delivered by the parties thereto and become
effective.
7.2 Waiver of Conditions to the Effective Date.
The Debtor, with the consent of the Senior Noteholders, may waive any of the
conditions to the Effective Date.
ARTICLE VIII
RETENTION OF JURISDICTION
8.1 Retention of Jurisdiction.
Notwithstanding the entry of the Confirmation Order or the occurrence of the
Effective Date, the Bankruptcy Court shall retain such jurisdiction over the
Reorganization Case after the Effective Date as is legally permissible,
including, without limitation, jurisdiction to:
8.1.1 Allow, disallow, determine, liquidate, classify or establish the
priority or secured or unsecured status of or estimate any Claim or
Interest, including, without limitation, the resolution of any request for
payment of any Administrative Claim or Class 2 Expense Claim and the
resolution of any and all objections to the allowance or priority of Claims
or Interests;
8.1.2 Grant or deny any and all applications for allowance of
compensation or reimbursement of expenses authorized pursuant to the
Bankruptcy Code or the Plan, for periods ending on or before the Effective
Date;
8.1.3 Resolve any motions pending on the Effective Date to assume, assume
and assign or reject any executory contract or unexpired lease to which the
Debtor is a party or with respect to which the Debtor may be liable and to
hear, determine and, if necessary, liquidate, any and all Claims arising
therefrom;
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8.1.4 Ensure that distributions to holders of Allowed Claims and Allowed
Interests are accomplished pursuant to the provisions of the Plan;
8.1.5 Decide or resolve any and all applications, motions, adversary
proceedings, contested or litigated matters and any other matters or grant
or deny any applications involving the Debtor that may be pending on the
Effective Date;
8.1.6 Enter such orders as may be necessary or appropriate to implement
or consummate the provisions of the Plan and all contracts, instruments,
releases and other agreements or documents created in connection with the
Plan or the Disclosure Statement;
8.1.7 Resolve any and all controversies, suits or issues that may arise
in connection with consummation of the Plan;
8.1.8 Modify the Plan before or after the Effective Date pursuant to
section 1127 of the Bankruptcy Code, or to modify the Disclosure Statement
or any contract, instrument, release or other agreement or document created
in connection with the Plan or the Disclosure Statement in accordance with
section 1127 of the Bankruptcy Code; or remedy any defect or omission or
reconcile any inconsistency in any Bankruptcy Court order, the Plan, the
Disclosure Statement or any contract, instrument, release or other
agreement or document created in connection with the Plan or the Disclosure
Statement, in such manner as may be necessary or appropriate to consummate
the Plan, to the extent authorized by the Bankruptcy Code;
8.1.9 Issue injunctions, enter and implement other orders or take such
other actions as may be necessary or appropriate to restrain interference
by any entity with consummation or enforcement of the Plan;
8.1.10 Enter and implement such orders as are necessary or appropriate if
the Confirmation Order is for any reason modified, stayed, reversed,
revoked or vacated; and
8.1.11 Enter an Order on a Final decree closing the Reorganization Case.
If the Bankruptcy Court abstains from exercising jurisdiction or is otherwise
without jurisdiction over any matter arising out of the Reorganization Case,
including without limitation the matters set forth in this Article VIII, this
Article VIII shall have no effect upon and shall not control, prohibit or limit
the exercise of jurisdiction by any other court having competent jurisdiction
with respect to such matter.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 Exemption from Transfer Taxes.
Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer or
exchange of notes or equity securities under the Plan, the creation of any
mortgage, deed of trust or other security interest or collateral assignment of
mortgage, deed of trust or other security interest, the making or assignment of
any lease or sublease, the amendment of any of the foregoing that may exist
prior to the date hereof, or the making or delivery of any deed or other
instrument of transfer under, in furtherance of, or in connection with the Plan
or in connection with any of the transactions contemplated under the Plan shall
not be subject to any stamp, real estate transfer, mortgage recording or other
similar tax.
9.2 Application of Distributions.
If the distributions of property and interests in property hereunder on
account of any Allowed Claim are less than the aggregate amount of principal
and accrued but unpaid interest payable under the agreement governing,
instrument evidencing or other document relating to such Allowed Claim, such
distributions shall be applied first to principal and then to accrued but
unpaid interest.
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<PAGE>
9.3 Dissolution of Committees.
On the Effective Date, any statutory committees of Creditors or Interest
holders shall dissolve and the members of such committees shall be released and
discharged from all further rights and duties arising from or related to the
Reorganization Case. The professionals retained by any such committee and the
members thereof shall not be entitled to compensation or reimbursement of
expenses for any services rendered after the Effective Date, except for
services rendered and expenses incurred in connection with any applications for
allowance of compensation and reimbursement of expenses pending on the
Effective Date or Filed after the Effective Date pursuant to section 3.1.
9.4 Modification of the Plan.
Subject to the restrictions on modifications to the Plan set forth in section
1127 of the Bankruptcy Code, the Debtor, subject to the approval of the Senior
Noteholders, reserves the right to alter, amend or modify the Plan before its
substantial consummation.
9.5 Revocation of the Plan.
The Debtor reserves the right to revoke or withdraw the Plan prior to the
Confirmation Date, with the consent of the Senior Noteholders. If the Debtor
revokes or withdraws the Plan, or if Confirmation does not occur or if the Plan
does not become effective, then the Plan shall be null and void, and nothing
contained in the Plan shall: (1) constitute a waiver or release of any Claims
by or against, or any interests in, the Debtor; (2) constitute an admission of
any fact or legal conclusion by the Debtor, the Debtor in Possession or any
other Entity; or (3) prejudice in any manner the rights of the Debtor, the
Debtor in Possession or any other Entity in any further proceedings involving
the Debtor, the Debtor in Possession, or any other Entity.
9.6 Successors and Assigns.
The rights, benefits and obligations of any Entity named or referred to in
the Plan shall be binding on, and shall inure to the benefit of, any heir,
executor, administrator, successor or assign of such Entity.
9.7 Saturday, Sunday or Legal Holiday.
If any payment or act under the Plan is required to be made or performed on a
date that is not a Business Day, then the making of such payment or the
performance of such act may be completed on the next succeeding Business Day,
but shall be deemed to have been completed as of the required date.
9.8 Post-Effective Date Effect of Evidences of Claims or Interests.
Except as otherwise expressly provided in the Plan, notes, bonds, stock
certificates and other evidences of Claims against or Interests in the Debtor
shall, effective upon the Effective Date, represent only the right to
participate in the distributions contemplated by the Plan.
9.9 Governing Law.
Unless a rule of law or procedure is supplied by (i) federal law (including
the Bankruptcy Code and Bankruptcy Rules), (ii) an express choice of law
provision in any agreement, contract, instrument or document provided for, or
executed in connection with, the Plan, or (iii) the Corporations and
Associations Law article of the Annotated Code of Maryland, the rights and
obligations arising under the Plan and any agreements, contracts, documents and
instruments executed in connection with the Plan shall be governed by, and
construed and enforced in accordance with, the laws of the State of California
without giving effect to the principles of conflict of laws thereof.
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<PAGE>
9.10 Severability of Plan Provisions.
If prior to Confirmation any term or provision of the Plan that does not
govern the treatment of Claims or Interests or the conditions to the Effective
Date is held by the Bankruptcy Court to be invalid, void or unenforceable, the
Bankruptcy Court shall have the power, subject to the consent of the Senior
Noteholders, to alter and interpret such term or provision to make it valid or
enforceable to the maximum extent practicable, consistent with the original
purpose of the term or provision held to be invalid, void or unenforceable, and
such term or provision shall then be applicable as altered or interpreted.
Notwithstanding any such holding, alteration or interpretation, the remainder
of the terms and provisions of the Plan will remain in full force and effect
and will in no way be affected, impaired or invalidated by such holding,
alteration or interpretation. The Confirmation Order shall constitute a
judicial determination and shall provide that each term and provision of the
Plan, as it may have been altered or interpreted in accordance with the
foregoing, is valid and enforceable pursuant to its terms.
9.11 No Admissions.
Notwithstanding anything herein to the contrary, nothing contained in the
Plan shall be deemed as an admission by the Debtor with respect to any matter
set forth herein including, without limitation, liability on any Claim or the
propriety of any Claims classification.
Dated: , 1995
Respectfully submitted,
MORTGAGE AND REALTY TRUST
By: _________________________________
C.W. Strong, Jr., President
A-22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNEX B
MORTGAGE AND REALTY TRUST
----------------
AMENDED AND RESTATED
DECLARATION OF TRUST
AS AMENDED AND RESTATED THROUGH [ , 1995]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX TO DECLARATION OF TRUST
<TABLE>
<CAPTION>
PAGE
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ARTICLE 1
THE TRUST; DEFINITIONS
<C> <S> <C>
1.1 Name................................................................. 1
1.2 Places of Business................................................... 1
1.3 Nature of Trust...................................................... 1
1.4 Definitions.......................................................... 1
ARTICLE 2
TRUSTEES
2.1 Number, Term and Qualifications of Trustees.......................... 3
2.2 Compensation and Other Remuneration.................................. 4
2.3 Resignation, Removal and Death of Trustees........................... 4
2.4 Vacancies............................................................ 4
2.5 Successor and Additional Trustees.................................... 4
2.6 Action by Trustees................................................... 4
2.7 Non-Affiliated Trustees.............................................. 4
ARTICLE 3
TRUSTEES' POWERS
3.1 Power and Authority of Trustees...................................... 5
3.2 Specific Powers and Authorities...................................... 5
3.3 By-Laws.............................................................. 8
ARTICLE 4
ADVISORY AGREEMENT
4.1 Employment of Adviser................................................ 8
4.2 Term................................................................. 8
4.3 No Restrictions on Adviser........................................... 8
4.4 Duties of Adviser.................................................... 8
4.5 Agreement with Affiliate of Adviser.................................. 9
ARTICLE 5
INVESTMENT POLICY
5.1 General Statement of Policy.......................................... 9
5.2 REIT Provisions of the Internal Revenue Code......................... 9
5.3 Additional Investments............................................... 9
5.4 Other Permissible Investments........................................ 10
5.5 Prohibited Investments and Activities................................ 10
5.6 Additional Limitations............................................... 11
5.7 Obligor's Default.................................................... 11
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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ARTICLE 6
THE SHARES AND SHAREHOLDERS
<C> <S> <C>
6.1 Shares............................................................. 11
6.2 Common Shares...................................................... 12
6.3 Preferred Shares................................................... 12
6.4 Legal Ownership of Trust Estate.................................... 12
6.5 Shares Deemed Personal Property.................................... 12
6.6 Share Record; Issuance and Transferability of Shares............... 13
6.7 Dividends or Distributions to Shareholders......................... 13
6.8 Transfer Agent, Dividend Disbursing Agent and Registrar............ 13
6.9 Shareholders' Meetings............................................. 13
6.10 Proxies............................................................ 14
6.11 Reports to Shareholders............................................ 14
6.12 Fixing Record Date................................................. 14
6.13 Notice to Shareholders............................................. 14
Restrictions on Transfer to Preserve Tax Benefit; Designation of
6.14 Shares-in-Trust.................................................... 14
6.15 Legend............................................................. 21
6.16 Shares-in-Trust.................................................... 22
6.17 Exchange Transactions.............................................. 24
ARTICLE 7
LIABILITY OF TRUSTEES, SHAREHOLDERS AND OFFICERS, AND OTHER MATTERS
7.1 Exculpation of Trustees and Officers............................... 24
7.2 Limitation of Liability of Shareholders, Trustees and Officers..... 24
7.3 Express Exculpatory Clauses in Instruments......................... 24
7.4 Indemnification of Trustees and Officers........................... 24
7.5 Right of Trustees and Officers to Own Shares or Other Property and
to Engage in Other Business........................................ 25
7.6 Transactions Between the Trustees and the Trust.................... 25
7.7 Restriction of Duties and Liabilities.............................. 26
7.8 Persons Dealing with Trustees or Officers.......................... 26
7.9 Reliance........................................................... 26
ARTICLE 8
DURATION, AMENDMENT, TERMINATION AND QUALIFICATION OF TRUST
8.1 Duration of Trust.................................................. 26
8.2 Termination of Trust............................................... 26
8.3 Amendment Procedure................................................ 27
ARTICLE 9
MISCELLANEOUS
9.1 Applicable Law..................................................... 27
9.2 Index and Headings for Reference Only.............................. 27
9.3 Successors in Interest............................................. 27
9.4 Counterparts....................................................... 27
9.5 Provisions of the Trust in Conflict with Law or Regulations........ 27
9.6 Certifications..................................................... 28
9.7 Recording and Filing............................................... 28
9.8 Resident Agent..................................................... 28
9.9 Names and Addresses of Trustees.................................... 28
</TABLE>
ii
<PAGE>
DECLARATION OF TRUST
The below-named Trustees have agreed to hold in trust as Trustees, any and
all property, real, personal or otherwise, tangible or intangible, which is
transferred, conveyed, or paid to them as such Trustees and all rents, income,
profits, and gains therefrom for the benefit of Shareholders hereunder subject
to the terms and conditions and for the uses and purposes hereinafter set
forth.
ARTICLE 1
THE TRUST; DEFINITIONS
1.1 Name. The name of the Trust shall be "Mortgage and Realty Trust". As far
as practicable and except as otherwise provided in this Declaration, the
Trustees shall conduct the Trust's activities, execute all documents and sue or
be sued in the name of the Trust or in their names as Trustees of the Trust.
1.2 Places of Business. The registered office of the Trust in the State of
Maryland shall be c/o The Corporation Trust, Incorporated, 32 South Street,
Baltimore, Maryland 21202. However, the Trustees may from time to time change
such location and maintain other offices or places of business.
1.3 Nature of Trust. The Trust is a real estate investment trust organized
under Article 78C of the Annotated Code of the State of Maryland. It is
intended that the Trust shall carry on business as a "real estate investment
trust" as described in the REIT Provisions of the Internal Revenue Code (as
defined herein). The Trust is not intended to be, shall not be deemed to be,
and shall not be treated as, a general partnership, limited partnership, joint
venture, corporation, joint stock company or association (but nothing herein
shall preclude the Trust from being taxable as an association under the REIT
Provisions of the Internal Revenue Code), nor shall the Trustees or
Shareholders or any of them for any purpose be, or be deemed or be treated in
any way whatsoever to be, liable or responsible hereunder as partners or joint
venturers. The relationship of the Shareholders to the Trustees shall be solely
that of beneficiaries of the Trust and their rights shall be limited to those
conferred upon them by this Declaration.
1.4 Definitions. The terms defined in this Section 1.4 whenever used in this
Declaration shall, unless the context otherwise requires, have the respective
meanings hereinafter specified in this Section 1.4. In this Declaration, words
in the singular number include the plural and in the plural number include the
singular.
(1) Adviser. "Adviser" shall mean any person employed by the Trustees
under the provisions of Section 4.1 to manage and administer the affairs of
the Trust.
(2) Affiliate. "Affiliate" shall mean as to any Person, any other Person
which controls, is controlled by or under common control with, such Person
or is an officer, director, employee, partner or trustee of such Person or
of any other Person which controls, is controlled by, or under common
control with, such Person.
(3) Appraisal. "Appraisal" shall mean a determination of the market
value, as of the date of such determination, of Real Property in its
existing state or in a state to be created, taking into consideration
existing or available financing where appropriate, (i) by any disinterested
independent appraiser who in the judgment of the Trustees is properly
qualified to make such a determination, or (ii) by an employee of the
Adviser or of an Affiliate of the Adviser if such employee has no economic
interest in such Real Property and (A) if such determination is relied upon
by the permanent lender (other than the Trust) on the same property or (B)
if such employee's appraisals are customarily accepted by institutional
customers of the Adviser or an Affiliate of the Adviser which is engaged in
the mortgage banking business or (C) if the property to be appraised is a
one-to-four family residential property. For purposes of clause (i) above,
no person who is a director, officer or employee of the Adviser or of any
Affiliate of the Adviser shall be deemed to be a disinterested independent
appraiser.
(4) Appraised Value. "Appraised Value" shall mean the market value of
Real Property as of the date of determination as determined by an
Appraisal.
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<PAGE>
(5) Book Value. "Book Value" of an asset or assets shall mean the value
of such asset or assets on the books of the Trust, before provision for
amortization, depreciation or depletion and before deducting any
indebtedness or other liability in respect of such asset or assets, except
that no asset shall be valued at more than its fair market value as
determined by the Trustees.
(6) By-Laws. "By-Laws" shall mean the regulations referred to in Section
3.3.
(7) Capital Funds. "Capital Funds" shall mean Shareholders' Equity plus
Long Term Debt less undistributed Net Income of the Trust.
(8) Construction Loans. "Construction Loans" shall mean Mortgage loans to
finance all or part of the cost of acquiring and improving land and the
construction or improvement of buildings thereon.
(9) Declaration. "Declaration" shall mean this Declaration of Trust and
all amendments or modifications thereof. References in this Declaration to
"herein" and "hereunder" shall be deemed to refer to this Declaration and
shall not be limited to the particular text, article or section in which
such words appear.
(10) Development Loans. "Development Loans" shall mean Mortgage loans to
finance all or part of the cost of developing vacant land into a site or
sites suitable for the construction of buildings thereon or suitable for
other residential, commercial, industrial or public uses, including the
cost of acquiring land for such purpose.
(11) First Mortgage. "First Mortgage" shall mean a Mortgage which takes
priority or precedence over all other charges or encumbrances upon the same
Real Property and which must be satisfied before such other charges or
encumbrances are entitled to participate in the proceeds of any sale or
disposition. Such Mortgage may be upon a lessee's interest in Real
Property. Such priority shall not be deemed as abrogated by liens for
taxes, assessments which are not delinquent or remain payable without
penalty, contracts (other than contracts for repayment of borrowed moneys),
leases, mechanic's and materialman's liens for work performed and materials
furnished which are not in default or are in good faith being contested,
and other claims and interests normally deemed in the local jurisdiction
not to abrogate the priority of a first mortgage.
(12) Indebtedness. "Indebtedness" shall mean the amount as shown on the
balance sheet of the Trust of all obligations of the Trust for money
borrowed and all obligations issued or assumed by the Trust as full or
partial payment for property, in each case except to the extent money shall
have been set aside or deposited for the payment thereof.
(13) Junior Mortgage. "Junior Mortgage" shall mean any Mortgage other
than a First Mortgage.
(14) Long Term Debt. "Long Term Debt" shall mean Indebtedness with
original final maturities of more than three years from the date of
incurring such Indebtedness.
(15) Mortgage. "Mortgage" shall mean a mortgage, deed of trust or other
security interest in Real Property.
(16) Net Assets. "Net Assets" shall mean Total Assets less all
Indebtedness of the Trust.
(17) Person. "Person" shall mean an individual, a corporation, a
partnership, an association, a joint stock company, a trust, a joint
venture, any unincorporated organization, or a government or political
subdivision thereof.
(18) Real Property. "Real Property" shall mean and include land,
interests in land, leasehold interests (including but not limited to
interests of a lessor or lessee therein), and any buildings, structures,
improvements and fixtures located on or used in connection with land,
leasehold interests and rights in land or interests therein, but does not
include Mortgages, Mortgage loans, or interests therein.
(19) REIT Provisions of the Internal Revenue Code. "REIT Provisions of
the Internal Revenue Code" shall mean Part II, Subchapter M of Chapter 1,
of the Internal Revenue Code of 1954, as now enacted or hereafter amended,
or similar provisions of successor statutes, and regulations promulgated
thereunder.
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<PAGE>
(20) Securities. "Securities" shall mean any note, stock, treasury stock,
bond, debenture, evidence of indebtedness, certificate of interest or
participation in any profit-sharing agreement, collateral-trust
certificate, preorganization certificate or subscription, transferable
share, investment contract, voting-trust certificate, certificate of
deposit for a security, fractional undivided interest in oil, gas, or other
mineral rights, or, in general, any interest or instrument commonly known
as a "security," or any certificate of interest or participation in,
temporary or interim certificate for, receipt for, guarantee of, or warrant
or right to subscribe to or purchase, any of the foregoing.
(21) Shareholders. "Shareholders" shall mean as of any particular time
the holders of record of outstanding Shares at such time.
(22) Shareholders' Equity. "Shareholders' Equity" shall mean the amount
of Shareholders' equity as shown on the books of the Trust.
(23) Shares. "Shares" shall mean the Common Shares and Preferred Shares
in the Trust as described in Section 6.1.
(24) Short Term Borrowings. "Short Term Borrowings" shall mean
Indebtedness with original final maturities of three years or less from the
date of incurring such Indebtedness.
(25) Total Assets. "Total Assets" shall mean the total assets of the
Trust as shown on its balance sheet, without deducting therefrom any
liabilities of the Trust and including depreciable assets therein at the
lesser of either (i) the cost of such assets on the books of the Trust less
depreciation thereof determined in accordance with generally accepted
accounting principles on a straight-line basis over the useful life of such
assets used as the basis of depreciation in preparing the Trust's federal
income tax returns, or (ii) the fair market value of such assets in the
judgment of the Trustees.
(26) Trust. "Trust" shall mean the Trust created by this Declaration.
(27) Trust Estate. "Trust Estate" shall mean, as of any particular time
any and all property, real, personal or otherwise, tangible or intangible,
transferred, conveyed or paid to the Trust or Trustees, and all rents,
income, profits and gains therefrom, which at such time is owned or held by
the Trust or the Trustees.
(28) Trustees. "Trustees" shall mean as of any particular time, Trustees
holding office under this Declaration at such time, whether they be the
Trustees named herein or additional or successor Trustees and shall not
include the officers, representatives or agents of the Trust or the
Shareholders, but nothing herein shall be deemed to preclude the Trustees
from also serving as officers, representatives or agents of the Trust or
owning Shares.
ARTICLE 2
TRUSTEES
2.1 Number, Term and Qualifications of Trustees. There shall be not less than
five nor more than fourteen Trustees, at least a majority of whom shall at all
times be persons who are not Affiliates of the Adviser. The names of the
Trustees are set forth in Section 9.9. Within the limits set forth in this
Section 2.1, and subject to the provisions of any series of Preferred Shares
which may at the time be outstanding, the number of Trustees may be increased
or decreased from time to time by the Trustees. Subject to the provisions of
Section 2.3, each Trustee shall hold office for one year and until the election
and qualification of his successor. At each Annual Meeting of Shareholders, the
Shareholders entitled to vote for the election of Trustees shall elect Trustees
to serve until the next Annual Meeting of Shareholders. There shall be no
cumulative voting in the election of Trustees. Trustees may be reelected. A
Trustee shall be an individual at least 21 years of age who is not under legal
disability. Such individual shall qualify as a Trustee when he has either
signed this Declaration or agreed in writing to be bound by it. Unless
otherwise required by law, no Trustee shall be required to give bond, surety or
security in any jurisdiction for the performance of any duties or obligations
hereunder. The Trustees in their capacity as Trustees shall not be required to
devote their entire time to the business and affairs of the Trust.
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<PAGE>
2.2 Compensation and Other Remuneration. The Trustees shall be entitled to
receive such reasonable compensation for their services as Trustees as they may
determine from time to time. The Trustees shall also be entitled to receive,
directly or indirectly, remuneration for services rendered to the Trust in any
other capacity, including, without limitation, services as an officer of the
Trust, legal, accounting or other professional services, or services as a
transfer agent, or underwriter, or otherwise. The Trustees shall be reimbursed
for their reasonable expenses incurred in connection with their services as
Trustees. Notwithstanding the foregoing, except as provided in Article 7, no
Trustee shall receive any fee or other remuneration, directly or indirectly, as
a result of any sale of property to or purchase of property from the Trust.
2.3 Resignation, Removal and Death of Trustees. A Trustee may resign at any
time by giving written notice to the remaining Trustees at the principal office
of the Trust. Such resignation shall take effect on the date such notice is
given or at any later time specified in the notice without need for prior
accounting. A Trustee may be removed at any time with or without cause by a
vote or consent of holders of two-thirds of the outstanding Shares entitled to
vote thereon or with cause by two-thirds of the Trustees in office. Upon the
resignation or removal of any Trustee, or his otherwise ceasing to be a
Trustee, he shall execute and deliver such documents as the remaining Trustees
shall require for the conveyance of any Trust property held in his name, shall
account to the remaining Trustee or Trustees as they require for all property
which he holds as Trustee and shall thereupon be discharged as Trustee. Upon
the incapacity or death of any Trustee, his legal representative shall perform
the acts set forth in the preceding sentence and the discharge mentioned
therein shall run to such legal representative and to the incapacitated Trustee
or the estate of the deceased Trustee as the case may be. Notwithstanding
failure of any Trustee or his legal representative to execute and deliver
documents and to render an accounting as aforesaid, said Trustee shall cease to
hold legal title to the Trust Estate as of the time of his resignation,
removal, incapacity, death or his otherwise ceasing to be a Trustee.
2.4 Vacancies. If any or all of the Trustees cease to be Trustees hereunder,
whether by reason of resignation, removal, incapacity, death or otherwise, such
event shall not terminate the Trust or affect its continuity. Until vacancies
are filled, the remaining Trustee or Trustees (even though less than three) may
exercise the powers of the Trustees hereunder. Except as may otherwise be
required by the provisions of any series of Preferred Shares then outstanding,
vacancies (including vacancies created by increases in the number of Trustees)
may be filled by the remaining Trustee or by a majority of the remaining
Trustees even though less than a quorum. If at any time there shall be no
Trustees in office, successor Trustees shall be elected by the Shareholders
entitled to vote as provided in Section 6.9.
2.5 Successor and Additional Trustees. The right, title and interest of the
Trustees in and to the Trust Estate shall also vest in successor and additional
Trustees upon their qualification, and they shall thereupon have all the rights
and obligations of Trustees hereunder. Such right, title and interest shall
vest in the Trustees whether or not conveyancing documents have been executed
and delivered pursuant to Section 2.3 or otherwise.
2.6 Action by Trustees. A quorum for all meetings of the Trustees shall be a
majority of the Trustees. Unless specifically provided otherwise in this
Declaration or in the provisions of any series of Preferred Shares then
outstanding, any action of the Trustees may be taken at a meeting by vote of a
majority of the Trustees present at such meeting if a quorum is present, or
without a meeting by unanimous written consent of the Trustees. The Trustees
may participate in meetings by means of conference telephone or similar means
of communications equipment. Any agreement, deed, mortgage, lease or other
instrument or writing executed by any one or more of the Trustees or by any one
or more authorized persons shall be valid and binding upon the Trustees and
upon the Trust when authorized by action of the Trustees or as provided in the
By-Laws.
2.7 Non-Affiliated Trustees. In order that a majority of the Trustees shall
at all times be Persons who are not Affiliates of the Adviser, if at any time,
by reason of one or more vacancies, there shall not be such a majority, then
within 60 days after such vacancy occurs, the continuing Trustee or Trustees
then in office
B-4
<PAGE>
shall appoint, pursuant to Section 2.4, a sufficient number of other Persons
who are not such Affiliates so that there shall be such a majority.
ARTICLE 3
TRUSTEES' POWERS
3.1 Power and Authority of Trustees. The Trustees, subject only to the
specific limitations contained in this Declaration or in the provisions of any
series of Preferred Shares which may be outstanding, shall have, without
further or other authorization, and free from any power or control on the part
of the Shareholders, full, absolute and exclusive power, control and authority
over the Trust Estate and over the business and affairs of the Trust to the
same extent as if the Trustees were the sole owners thereof in their own right,
and to do all such acts and things as in their sole judgment and discretion are
necessary or incidental to, or desirable for, the carrying out of any of the
purposes of the Trust or conducting the business of the Trust. Any
determination made in good faith by the Trustees of the purposes of the Trust
or the existence of any power or authority hereunder shall be conclusive. In
construing the provisions of this Declaration, presumption shall be in favor of
the grant of powers and authority to the Trustees. The enumeration of any
specific power or authority herein shall not be construed as limiting the
general powers or authority or any other specified power or authority conferred
herein upon the Trustees.
3.2 Specific Powers and Authorities. Subject only to the express limitations
contained in this Declaration or in the provisions of any series of Preferred
Shares which may be outstanding, and in addition to any powers and authorities
conferred by this Declaration or which the Trustees may have by virtue of any
present or future statute or rule of law, the Trustees without any action or
consent by the Shareholders shall have and may exercise at any time and from
time to time the following powers and authorities which may or may not be
exercised by them in their sole judgment and discretion and in such manner and
upon such terms and conditions as they may from time to time deem proper:
(1) To retain, invest and reinvest the capital or other funds of the
Trust and, for such consideration as they deem proper, to purchase or
otherwise acquire for cash or other property or through the issuance of
Shares or other Securities of the Trust and hold for investment real or
personal property of any kind, tangible or intangible, in entirety or in
participation, all without regard to whether any such property is
authorized by law for the investment of trust funds and to possess and
exercise all the rights, powers and privileges appertaining to the
ownership of the Trust Estate with respect thereto.
(2) To increase the capital of the Trust by the issuance of additional
Shares at such time or times and for such consideration as may be deemed
appropriate by the affirmative vote of a majority of the Trustees,
including a majority of the Trustees who are not Affiliates of the Adviser.
(3) To sell, rent, lease, hire, exchange, release, partition, assign,
mortgage, pledge, hypothecate, grant security interests in, encumber,
negotiate, convey, transfer or otherwise dispose of or grant interests in
all or any portion of the Trust Estate by deeds, trust deeds, assignments,
bills of sale, transfers, leases, mortgages, financing statements, security
agreements and other instruments for any of such purposes.
(4) To issue other Securities, which may be secured or unsecured and may
be subordinated to any indebtedness of the Trust and may be convertible
into Shares, all without vote of or other action by the Shareholders, to
such Persons for such cash, property or other consideration (including
Securities issued or created by, or interests in, any Person) at such time
or times and on such terms as may be deemed appropriate by the affirmative
vote of a majority of the Trustees, including a majority of the Trustees
who are not Affiliates of the Adviser, and to purchase or otherwise
acquire, hold, cancel, reissue, sell and transfer any of such Securities;
provided, however, that the Trust shall not (i) issue "redeemable
securities" as defined in Section 2(a)(32) of the Investment Company Act of
1940; or (ii) issue Long Term Debt unless the historical cash flow of the
Trust or the estimated future cash flow of the Trust excluding
extraordinary non-recurring items, is sufficient to cover interest payments
on such debt securities.
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(5) To issue Share Purchase Warrants ("Warrants") which entitle the
holders thereof to subscribe for Preferred or Common Shares (which Shares
shall be reserved at the time of issuance of such Warrants by the Trustees
for issuance upon exercise of such Warrants) at such time or times and on
such terms as the Trustees may prescribe. Warrants may be issued to such
Persons and for such consideration as the Trustees may from time to time
determine, and may be issued in detachable or nondetachable form in
conjunction with the issuance of debt securities or as an inducement to
those acquiring or underwriting Securities of the Trust, and may be
redeemable at the option of the Trust. Warrants shall be evidenced by
certificates in such form as the Trustees may approve.
(6) To enter into leases, indentures, contracts, obligations, and other
agreements for a term extending beyond the term of office of the Trustees
and beyond the possible termination of the Trust or for a lesser term.
(7) To borrow money, incur indebtedness and issue Securities of the Trust
therefor; to guarantee, indemnify or act as surety with respect to payment
or performance of obligations of third parties; to enter into other
obligations on behalf of the Trust; and to assign, convey, transfer,
mortgage, subordinate, pledge, grant security interests in, encumber or
hypothecate the Trust Estate to secure any of the foregoing; provided,
however, that in no event shall the Trust incur Long Term Debt if after
giving effect thereto the total amount of Long Term Debt would exceed 400%
of Net Assets or incur any Short Term Borrowings if after giving effect
thereto the total amount of Short Term Borrowings would exceed 400% of Net
Assets and provided further that the aggregate Long Term Debt and Short
Term Borrowings shall not exceed 500% of Net Assets prior to December 31,
1972. Compliance with the provisions of the foregoing proviso shall be
determined on the basis of the latest available balance sheet of the Trust
(which shall be as of a date not more than 90 days prior to the date of
incurring such Indebtedness) adjusted on a pro forma basis to give effect
to the incurring of such Indebtedness.
(8) To lend money, whether secured or unsecured.
(9) To create reserve funds for any purpose.
(10) To incur and pay out of the Trust Estate any charges or expenses,
and disburse any funds of the Trust, which charges, expenses or
disbursements are, in the opinion of the Trustees, necessary or incidental
to or desirable for the carrying out of any of the purposes of the Trust or
conducting the business of the Trust, including without limitation taxes
and other governmental levies, charges and assessments, of whatever kind or
nature, imposed upon or against the Trustees in connection with the Trust
or the Trust Estate or upon or against the Trust Estate or any part thereof
and for any of the purposes herein.
(11) To deposit funds of the Trust in banks, trust companies, savings and
loan associations and other depositories, whether or not such deposits will
draw interest, the same to be subject to withdrawal on such terms and in
such manner and by such Person or Persons (including any one or more
Trustees, officers, agents or representatives) as the Trustees may
determine.
(12) To possess and exercise all the rights, powers and privileges
appertaining to the ownership of any or all Mortgages or Securities issued
or created by, or interests in, any Person, forming part of the Trust
Estate, to the same extent that an individual might, and, without limiting
the generality of the foregoing, to vote or give any consent, request or
notice, or waive any notice, either in person or by proxy or power of
attorney, with or without power of substitution, to one or more Persons,
which proxies and powers of attorney may be for meetings or action
generally or for any particular meeting or action, and may include the
exercise of discretionary powers.
(13) After approval by the holders of two-thirds of the outstanding
Shares entitled to vote, by vote of two-thirds of the Trustees, to cause a
corporation or other entity to be organized under the laws of Maryland or
any other jurisdiction and transfer the assets of the Trust to it in
exchange for its shares or other Securities (which Securities shall then be
distributed to the Shareholders) and terminate the Trust; provided that,
such new corporation or entity and its shareholders would then be entitled
to federal income tax treatment substantially equal to that enjoyed by a
qualified real estate investment trust and
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its shareholders, and the resulting investment received by Preferred or
Common Shareholders would be substantially equal in quality and
substantially the same in type as an investment in the Preferred or Common
Shares of the Trust, as the case may be.
(14) To enter into joint ventures, general or limited partnerships and
any other lawful combinations or associations.
(15) To elect, appoint, engage or employ officers for the Trust, who may
be removed or discharged at the discretion of the Trustees, such officers
to have such titles, powers and duties, and to serve such terms, as may be
prescribed by the Trustees or by the By-Laws; subject to the provisions of
Sections 7.5 and 7.6, to engage or employ any Persons as agents,
representatives, employees, or independent contractors (including without
limitation real estate advisers, investment advisers, transfer agents,
registrars, underwriters, accountants, attorneys at law, real estate
agents, managers, appraisers, brokers, architects, engineers, construction
managers, general contractors or otherwise) in one or more capacities, and
to pay compensation from the Trust for services in as many capacities as
such Person may be so engaged or employed; and, except as prohibited by
law, to delegate any of the powers and duties of the Trustees to any one or
more Trustees, agents, representatives, officers, employees, independent
contractors or other Persons except as provided in Article 4 hereof,
provided, however, that no such delegation shall be made to an Affiliate of
the Adviser except with the approval of a majority of the Trustees who are
not Affiliates of the Adviser.
(16) To appoint from among the Trustees an executive committee and other
committees composed of two or more Trustees, and to delegate to such
committees, in the intervals between meetings of the Trustees, any or all
of the powers of the Trustees in the management of the business and affairs
of the Trust, except the power to declare dividends, issue Shares or
recommend to Shareholders any action requiring Shareholders' approval.
(17) To determine from time to time the value of all or any part of the
Trust Estate and of any services, Securities, property or other
consideration to be furnished to or acquired by the Trust, and from time to
time to revalue all or any part of the Trust Estate in accordance with such
appraisals or other information as the Trustees, in their sole judgment,
may deem necessary.
(18) To collect, sue for, and receive all sums of money coming due to the
Trust, and to engage in, intervene in, prosecute, join, defend, compound,
compromise, abandon or adjust, by arbitration or otherwise, any actions,
suits, proceedings, disputes, claims, controversies, demands or other
litigation relating to the Trust, the Trust Estate or the Trust's affairs,
to enter into agreements therefor, whether or not any suit is commenced or
claim accrued or asserted and, in advance of any controversy, to enter into
agreements regarding arbitration, adjudication or settlement thereof.
(19) To renew, modify, release, compromise, extend, consolidate, or
cancel, in whole or in part, any obligation to or of the Trust.
(20) To extend, renew or reissue outstanding rights, warrants or options
to purchase Shares of the Trust.
(21) To purchase and pay for out of the Trust Estate insurance contracts
and policies insuring the Trust Estate against any and all risks and
insuring the Trust, the Trustees, the Shareholders or the officers of the
Trust, or any or all of them, against any and all claims and liabilities of
every nature asserted by any Person arising by reason of any action alleged
to have been taken or omitted by the Trust or by the Trustees,
Shareholders, or officers.
(22) To cause legal title to any of the Trust Estate to be held by or in
the name of the Trustees or, except as prohibited by law, by or in the name
of the Trust or one or more of the Trustees or any other Person, on such
terms, in such manner, with such powers in such Person as the Trustees may
determine, and with or without disclosure that the Trust or Trustees are
interested therein.
(23) To adopt a fiscal year for the Trust, and from time to time to
change such fiscal year.
(24) To adopt and use a seal (but the use of a seal shall not be required
for the execution of instruments or obligations of the Trust).
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(25) To file any and all documents and take any and all such other action
as the Trustees, in their sole judgment, may deem necessary in order that
the Trust may lawfully conduct its business in any jurisdiction.
(26) To change the name of the Trust.
(27) To adopt a plan for reinvestment by Shareholders of distributions of
the Trust containing provision for the sale of Shares by the Trust at book
value in the event market value is higher and such other provisions as the
Trustees may determine.
(28) To do all other such acts and things as are incident to the
foregoing, and to exercise all powers which are necessary or useful to
carry on the business of the Trust, to promote and attain any of the
purposes for which the Trust is formed, and to carry out the provisions of
this Declaration.
3.3 By-Laws. The Trustees may make, adopt, amend or repeal By-Laws containing
provisions relating to the government of the Trust, and the administration of
its affairs, including its rights or powers and the rights or powers of its
Shareholders, Trustees or officers not inconsistent with law or with this
Declaration or the provisions of any series of Preferred Shares which may then
be outstanding.
ARTICLE 4
ADVISORY AGREEMENT
4.1 Employment of Adviser. The Trustees are responsible for the general
policies of the Trust and for such general supervision of the business of the
Trust conducted by all officers, agents, employees, advisers, managers or
independent contractors of the Trust as may be necessary to insure that such
business conforms to the provisions of this Declaration. However, the Trustees
shall not be required personally to conduct the business of the Trust, and,
consistent with their ultimate responsibility as stated above, the Trustees
shall have the power to appoint, employ or contract with any Person or Persons
(including one or more of themselves or any Person in which one or more of them
may be directors, officers, shareholders, partners or trustees) as the Trustees
may deem necessary or proper for the transaction of the business of the Trust,
and for such purpose may grant or delegate such authority to any such Person as
the Trustees may in their sole discretion deem necessary or desirable without
regard to whether such authority is normally granted or delegated by Trustees;
provided, however, that any determination to employ or contract with the
Adviser or an Affiliate of a Trustee or the Adviser shall be valid only if made
or ratified with the approval of a majority of the Trustees who are not such
Affiliates.
The Trustees shall have the power to determine the terms and compensation of
the Adviser or any other Person whom they may employ or with whom they may
contract. The Trustees may exercise broad discretion in allowing the Adviser to
administer and regulate the operations of the Trust, to act as agent for the
Trust, to execute documents on behalf of the Trustees, and to take action which
conforms to general policies and general principles previously established by
the Trustees.
4.2 Term. The Trustees shall not enter into any contract with an Adviser
unless such contract has an initial term of not more than two years and
provides that it may be terminated by the Trust on not more than 60 days notice
by the affirmative vote of a majority of the Trustees who are not Affiliates of
the Adviser.
4.3 No Restrictions on Adviser. Nothing contained in this Declaration shall
limit or restrict the right of any director, officer, employee or shareholder
of the Adviser, whether or not also a Trustee, officer or employee of the
Trust, to engage in any other business or to render services of any kind to any
other Person.
4.4 Duties of Adviser. The Adviser shall: (i) administer the Trust's day-to-
day investment operations; (ii) serve as the Trust's investment adviser and
consultant on policy decisions to be made by the Trustees; (iii) present to the
Trust opportunities for investment within the Trust's investment policies; (iv)
investigate, select and recommend to the Trustees, and conduct relations with,
accountants, mortgage loan originators and
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correspondents, lenders, builders, developers and others as necessary in
connection with the Trust's mortgage and other investments, and enter into
appropriate contracts with such persons in its own name or the Trust's; and (v)
generally take such other action as the Trustees may request in connection with
the conduct of the business of the Trust.
4.5 Agreement with Affiliate of Adviser. In the event that the Adviser shall
be an Affiliate of a Person engaged in the mortgage banking business, the
employment of the Adviser by the Trust shall be conditioned upon an undertaking
by such Affiliate that such Affiliate shall consult with the Adviser and
present to the Adviser, for presentation to the Trust, opportunities to acquire
mortgage loans and other investments which are consistent with the investment
policies of the Trust and which are generally representative of comparable
investments of similar quality being made or placed by such Affiliate with
other institutional investors and shall furnish the Adviser and the Trust with
information as to any investments within the Trust's investment policies made
or placed by such Affiliate with other institutions. The Trust may also enter
into agreements with Affiliates of the Adviser for servicing any or all of the
Trust's loans or for any other purposes, subject to the provisions of Section
7.6 hereof.
ARTICLE 5
INVESTMENT POLICY
5.1 General Statement of Policy. It is the general investment policy of the
Trust to invest in long term investments consisting principally of permanent
First Mortgage loans, Junior and wrap-around Mortgage loans, net lease
financings, sale leaseback transactions, leasehold Mortgage loans and ownership
or other interests in Real Property or in Persons involved in owning,
operating, leasing, developing, financing or dealing in Real Property, which
investments shall ordinarily be made in connection with properties having
proven or projected income-producing capabilities and in short term and
intermediate term Mortgage loans, warehouse loans, and installment contracts.
The Trustees may make commitments to make investments consistent with the
foregoing policies and may also participate in investments with other investors
on the same or different terms, including investors to whom the Adviser may
also act as adviser. The Trustees shall endeavor to invest the Trust's assets
in accordance with the investment policies set forth in this Article 5, but the
failure so to invest its assets shall not affect the validity of any investment
made or action taken by the Trustees.
5.2 REIT Provisions of the Internal Revenue Code. The Trustees intend at all
times to make investments in such a manner as to comply with the requirements
of the REIT Provisions of the Internal Revenue Code with respect to the
composition of the Trust's investments and the derivation of its income;
provided, however, that no Trustee, officer, employee, agent, investment
adviser or independent contractor of the Trust shall be liable for any act or
omission resulting in the loss of tax benefits under the Internal Revenue Code,
except as provided in Section 7.1 hereof.
5.3 Additional Investments. The Trustees may also invest the Trust Estate in
the ownership of or participation in the ownership of:
(1) Shares of other real estate investment trusts to the extent permitted
by the REIT Provisions of the Internal Revenue Code and which do not hold
investments or engage in the activities prohibited by Section 5.5;
(2) Securities, including but not limited to convertible or subordinated
bonds, other than those referred to in Section 5.4; and
(3) Office and other equipment leased to tenants of Real Property owned
by the Trust or subject to the lien of a Mortgage securing a Mortgage loan
owned by the Trust, if the Trustees in good faith determine that the making
of such investments will not disqualify the Trust as a real estate
investment trust under the REIT Provisions of the Internal Revenue Code.
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5.4 Other Permissible Investments. To the extent that the Trust has assets
not invested in accordance with the foregoing Sections of this Article 5, the
Trustees may employ such assets by investing them in:
(1) Obligations of the United States Government or agencies thereof;
(2) Obligations of any state or territory of the United States of America
or any political subdivision thereof or any agencies of any thereof;
(3) Evidences of deposits in or obligations of banking institutions and
savings institutions which are members of the Federal Deposit Insurance
Corporation or of the Federal Home Loan Bank System;
(4) Commercial paper; and
(5) Financial futures, forward and standby contracts for the deferred or
future delivery of the obligations and securities described in Subsections
(1) through (4) of this Section 5.4.
5.5 Prohibited Investments and Activities. The Trustees shall not engage in
any of the following investment practices or activities:
(1) Invest in any Mortgage loan (except those insured by the Federal
Housing Administration) if immediately thereafter and as a result thereof
any one borrower on any one project shall be obligated to the Trust, either
primarily or secondarily, in an amount exceeding 15% of Total Assets;
provided, however, that in the calculation of any obligor's obligation to
the Trust for the purpose of this limitation there shall not be included
any payments which any obligor may be required to make to the Trust on
account of senior Mortgages held by other creditors in connection with
wrap-around loans made by the Trust;
(2) Purchase (which shall not be deemed to include the receipt of equity
interests in connection with loans made by the Trust) Real Property at a
price in excess of its Appraised Value determined by a disinterested
independent appraiser as of a date not more than 90 days prior to the date
of such purchase;
(3) Invest more than 10% of the Total Assets of the Trust Estate in the
ownership of, participation in the ownership of, or loans on, unimproved
non-income-producing Real Property, other than Real Property which is
expected to be improved within a reasonable period of time;
(4) Make warehousing loans secured by the pledge of First Mortgage loans
to the Adviser or any Affiliate of the Adviser;
(5) Invest in commodities, bullion or chattels except such chattels as
are required in the day-to-day business of the Trust or in connection with
its Mortgage loans or Real Property;
(6) Invest in any contracts for the sale of real estate; provided,
however, that nothing herein shall prevent the holding of contracts of sale
as additional security for Mortgage loans made by the Trust and the
ownership of such contracts of sale upon the foreclosure of or realization
upon such security interests;
(7) Engage in any short sale, except that the Trustees may purchase or
sell financial futures, forward and standby contracts for the deferred or
future delivery of the obligations and securities described in Section 5.4;
(8) Engage in trading as compared with investment activities or engage in
underwriting or agency distribution of securities issued by others, but
this prohibition shall not prevent the Trustees from selling participation
in Mortgage loans or interests in Real Property or from purchasing or
selling financial futures, forward and standby contracts as permitted in
Section 5.4(5) and 5.5(7);
(9) Invest in any Real Property which is subject to a Mortgage to any
person other than a bank, insurance company, pension fund, other
institutional lender, or corporation or trust engaged in the business of
mortgage investments except in the case of a purchase money Mortgage;
(10) Hold property primarily for sale to customers in the ordinary course
of the trade or business of the Trust, but this prohibition shall not be
construed to deprive the Trust of the power to sell any property which it
owns at any time;
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(11) Invest in companies for the purpose of exercising control or
management, but freedom of action is reserved with respect to exercise of
voting rights in respect of securities in the portfolio of the Trust;
(12) Invest in equity securities (except equity securities related to
long term mortgage loans made by the Trust or leases of real property owned
by the Trust) issued by any Person which to the actual knowledge of the
Trustees is holding investments or engaging in activities prohibited to the
Trust, if, after giving effect to the investment, the aggregate amount of
such investment exceeds 5% of Total Assets.
Compliance with the provisions of paragraphs (1) and (4) shall be determined on
the basis of the latest available balance sheet of the Trust (which need not be
audited but which shall be as of a date not more than 90 days prior to the date
of making such investment) adjusted on a pro forma basis to give effect to the
making of such investment.
5.6 Additional Limitations. The By-Laws may contain additional limitations on
the investments of the Trust, which limitations may be changed from time to
time by amendment of the By-Laws as provided therein.
5.7 Obligor's Default. Notwithstanding any provision in any Article of this
Declaration, when an obligor to the Trust is in default under the terms of any
obligation to the Trust, the Trustees shall have the power to pursue any
remedies permitted by law which in their sole judgment are in the interest of
the Trust and the Trustees shall have the power to enter into any necessary
investment, commitment, or obligation of the Trust resulting from the pursuit
of such remedies or necessary or desirable to dispose of property acquired in
the pursuit of such remedies.
ARTICLE 6
THE SHARES AND SHAREHOLDERS
6.1 Shares.
(1) The units into which the beneficial interests in the Trust will be
divided shall be designated as Shares, which Shares shall be of two
classes, one of which shall be designated Common Shares and one of which
shall be designated Preferred Shares. All such Shares shall have a par
value of $1.00 per share. The certificates evidencing the Shares shall
specify the class and series of such Shares and shall be in such form and
signed (manually or by facsimile) on behalf of the Trust in such a manner
as the Trustees may from time to time prescribe or as may be prescribed in
the By-Laws. The certificates shall be negotiable and title thereto and to
the Shares represented thereby shall be transferable by assignment and
delivery thereof, subject, however, to the provisions of Section 6.15. The
number of Common Shares which may be issued is limited to 20,000,000 and
the number of Preferred Shares which may be issued is limited to 3,500,000.
The Shares may be issued for such consideration as the Trustees shall
determine or by way of share dividend or share split in the discretion of
the Trustees; provided, however, that except in the case of a share
dividend or share split, the Shares shall be issued for a consideration of
at least $1.00 value per share. The Shares shall be held by at least 100
Persons. Shares reacquired by the Trust shall no longer be deemed
outstanding and shall have no voting or other rights unless and until
reissued. Shares reacquired by the Trust may be cancelled by action of the
Trustees. All Shares shall be fully paid and nonassessable by or on behalf
of the Trust upon receipt of full consideration for which they have been
issued or without additional consideration if issued by way of share
dividend or share split.
(2) Upon the Effective Date (as hereinafter defined in Section 6.14),
every 33.33 shares of outstanding Common Shares shall be automatically
reclassified, changed and converted into 1 share of Common Shares and the
authorized number of Common Shares will be limited to 20,000,000. No
fractional shares of Common Shares shall be issued upon such conversion,
but in lieu thereof, fractions of 1/2 or greater shall be rounded to the
next greater whole number and fractions of less than 1/2 shall
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be rounded to the next lower whole number. No consideration will be paid in
respect of such fractional interests that are rounded down. Unless
otherwise required or requested by the holders thereof, the share
certificates representing the Common Shares outstanding prior to the
Effective Date shall represent such Common Shares as reclassified, changed
and converted following the Effective Date.
6.2 Common Shares. All of the Common Shares shall be of the same class and
shall have equal voting, dividend or distribution, liquidation and other
rights. Subject to the provisions of any series of Preferred Shares which may
at the time be outstanding, the holders of Common Shares shall be entitled to
receive, when and as declared by the Trustees out of any funds legally
available for the purpose, such dividends or distributions as may be declared
from time to time by the Trustees in accordance with Section 6.7. In the event
of the termination of the Trust pursuant to Section 12.3, or upon the
distribution of its assets, after the payment in full or the setting apart for
payment of such preferential amounts, if any, as the holders of Preferred
Shares at the time outstanding shall be entitled, the remaining assets of the
Trust available for payment and distribution to Shareholders shall, subject to
any participating or similar rights of Preferred Shares at the time
outstanding, be distributed ratably among the holders of Common Shares at the
time outstanding in accordance with Section 8.2. Common Shares shall not
entitle the holder to preference, conversion, exchange or preemptive rights of
any kind.
6.3 Preferred Shares. The Trustees shall have power by resolution or
resolutions, to the extent not inconsistent with the provisions of this
Declaration, to divide and issue Preferred Shares in series, to fix the number
of Preferred Shares constituting any such series and to set or change the
preferences, conversion or other rights, voting powers, restrictions, including
restrictions on transferability, limitations as to dividends, qualifications or
terms or conditions of redemption of such Preferred Shares or any series
thereof. The Trustees shall have power, unless otherwise provided in such
resolution or resolutions as may be adopted pursuant to this Section 6.3 and to
the extent not inconsistent with the provisions of this Declaration, to
increase or decrease by resolution (but not below the number of Preferred
Shares thereof then outstanding) the number of Preferred Shares of any series
subsequent to the issue of Preferred Shares of that series. Except as provided
by the provisions of a series of Preferred Shares, Preferred Shares of that
series shall not entitle the holder to preference, conversion, exchange or
preemptive rights of any kind. Before the Trust issues any Preferred Shares or
any series thereof, or sets or changes the preferences, conversion or other
rights, voting powers, restrictions, including restrictions on transferability,
limitations as to dividends, qualifications or terms or conditions of
redemption with respect to Preferred Shares or any series thereof, the Trustees
shall file Articles Supplementary for record with the Department of Assessments
and Taxation of the State of Maryland which shall set forth a description of
the Preferred Shares or series thereof including the preferences, conversion
and other rights, voting powers, restrictions, including restrictions on
transferability, limitations as to dividends, qualifications and terms and
conditions of redemption, as set or changed by the Trustees and which shall
state that such Preferred Shares or series thereof have been classified or
reclassified under the authority contained in this Declaration of Trust.
6.4 Legal Ownership of Trust Estate. The legal ownership of the Trust Estate
and the right to conduct the business of the Trust are vested exclusively in
the Trustees, and the Shareholders shall have no interest therein other than
the beneficial interest in the Trust conferred by their Shares issued hereunder
and, subject to the provisions of Section 8.2, they shall have no right to
compel any partition, division, dividend or distribution of the Trust or any of
the Trust Estate.
6.5 Shares Deemed Personal Property. The Shares shall be personal property.
The Common Shares shall confer upon the holders thereof only the interest and
rights specifically set forth in this Declaration. The Preferred Shares shall
confer upon the holders thereof only the interest and rights specifically set
forth in this Declaration and in the resolution or resolutions adopted by the
Trustees pursuant to Section 6.3. The death, insolvency or incapacity of a
Shareholder shall not dissolve or terminate the Trust or affect its continuity
nor give his legal representative any rights whatsoever, whether against or in
respect of other Shareholders, the Trustees or the Trust Estate or otherwise
except the sole right to demand and, subject to the provisions of this
Declaration, the By-Laws and any requirements of law, to receive a new
certificate for Shares registered in the name of such legal representative, in
exchange for the certificate held by such Shareholder.
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6.6 Share Record; Issuance and Transferability of Shares. Records shall be
kept by or on behalf of and under the direction of the Trustees, which shall
contain the names and addresses of the Shareholders, the class, series and
number of Shares held by them respectively, and the numbers of the certificates
representing the Shares, and in which there shall be recorded all transfers of
Shares. The Persons in whose names certificates are registered on the records
of the Trust shall be deemed the absolute owners of the Shares represented
thereby for all purposes of this Trust; but nothing herein shall be deemed to
preclude the Trustees or officers, or their agents or representatives, from
inquiring as to the actual ownership of Shares. Until a transfer is duly
registered on the records of the Trust, the Trustees shall not be affected by
any notice of such transfer, either actual or constructive. The payment thereof
to the Person in whose name any Shares are registered on the records of the
Trust or to the duly authorized agent of such Person (or if such Shares are so
registered in the names of more than one Person, to any one of such Persons or
to the duly authorized agent of such Person), shall be a sufficient discharge
for all dividends or distributions payable or deliverable in respect of such
Shares and from all liability to see to the application thereof. The By-Laws
may provide for the regulation of the transfer of Share certificates and the
Shares represented thereby.
6.7 Dividends or Distributions to Shareholders. The Trustees may from time to
time declare and pay to holders of Preferred and Common Shares such dividends
or distributions in cash or other property, out of current or accumulated
income, capital, capital gains, principal, surplus, proceeds from the increase
or refinancing of Trust obligations, or from the sale of portions of the Trust
Estate or from any other source as the Trustees in their discretion shall
determine, subject to the provisions of any series of Preferred Shares which
may at the time be outstanding. Holders of Preferred and Common Shares shall
have no right to any dividend or distribution unless and until declared by the
Trustees. The Trustees shall furnish the holders of Preferred and Common Shares
at the time of each such distribution with a statement in writing advising as
to the source of the funds so distributed or that the source thereof has not
then been determined, in which event a statement in writing as to such source
shall be sent to each Shareholder who received the distribution not later than
90 days after the close of the fiscal year in which the distribution was made.
6.8 Transfer Agent, Dividend Disbursing Agent and Registrar. The Trustees
shall have power to employ one or more transfer agents, dividend disbursing
agents and registrars and to authorize them on behalf of the Trust to keep
records, to hold and disburse any dividends and distributions, and to have and
perform in respect of all original issues and transfers of Shares, dividends
and distributions and reports and communications to Shareholders, such powers
and duties customarily had and performed by transfer agents, dividend
disbursing agents and registrars as may be conferred upon them by the Trustees.
6.9 Shareholders' Meetings. There shall be an annual meeting of the
Shareholders at such time and at such convenient place within or without the
State of Maryland as provided in or pursuant to the By-Laws at which Trustees
shall be elected and any other proper business may be conducted. The Annual
Meeting of Shareholders shall be held after delivery to the Shareholders of the
report specified in Section 6.11 and within six months after the end of each
fiscal year. Special meetings of Shareholders may be called by the Trustees and
such other Persons as shall be provided in the By-Laws and shall be called upon
the written request of Shareholders holding not less than 25% of the
outstanding Shares of the Trust entitled to vote, in the manner provided in or
pursuant to the By-Laws. If there shall be no Trustees, a special meeting of
the Shareholders shall be held promptly for the election of successor Trustees.
Notice of any special meeting shall state the purposes of the meeting. At each
Shareholders' meeting each Shareholder of record of a Common Share shall be
entitled to one vote for each Common Share standing in his name on the books of
the Trust. The holders of Preferred Shares of any series shall be entitled to
vote upon any matter at any Shareholders' meeting only to the extent specified
in the resolution or resolutions providing for such series adopted by the
Trustees. A majority of the outstanding Shares entitled to vote at any meeting
represented in person or by proxy shall constitute a quorum at such meeting.
The vote or consent of the holders of two-thirds of the outstanding Shares
entitled to vote shall be required to approve the nature and amount of the
consideration and the other principal terms of any transaction involving the
sale, lease, exchange or other disposition of substantially all of the Trust
Estate as a whole. Whenever Shareholders are required or permitted to take any
action, such
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action may be taken, except as otherwise provided by this Declaration or the
provisions of any series of Preferred Shares which may be outstanding or
required by law, by a majority of the votes cast at a meeting of Shareholders
at which a quorum is present by holders of Shares entitled to vote thereon, or
without a meeting by written consent setting forth the action so taken signed
by the holders of a majority of the outstanding Shares entitled to vote thereon
or such larger proportion thereof as would be required for a vote of
Shareholders at a meeting. Written notice of any action taken by written
consent shall be given all Shareholders who have not signed such consent at
least ten days prior to the effective date of such action. The vote or consent
of Shareholders shall not be required for the pledging, hypothecating, granting
security interests in, mortgaging, or encumbering of all or any of the Trust
Estate, or for the sale, lease, exchange or other disposition of less than
substantially all of the Trust Estate as a whole.
6.10 Proxies. Whenever the vote or consent of Shareholders is required or
permitted under this Declaration, such vote or consent may be given either
directly by the Shareholder or by a proxy in the form provided in or pursuant
to the By-Laws. The Trustees may solicit such proxies from the Shareholders or
any of them in any matter requiring or permitting the Shareholders' vote or
consent.
6.11 Reports to Shareholders.
(1) Not later than 120 days after the close of each fiscal year of the
Trust, the Trustees shall mail a report of the business and operation of
the Trust during such fiscal year to the Shareholders, which report shall
constitute the accounting of the Trustees for such fiscal year. The report
shall be in such form and have such content as the Trustees deem proper.
Each Annual Report shall include a balance sheet and statement of surplus
of the Trust as of the close of the preceding fiscal year and a statement
of income of the Trust for such preceding fiscal year together with a
comparable statement of income for the preceding fiscal year. Such
financial statements shall be accompanied by a report of an independent
certified public accountant. A manually signed copy of the accountant's
report shall be filed with the Trustees.
(2) Within 90 days after the close of each of the first three quarters of
each fiscal year, the Trustees shall send interim reports containing
summary financial statements (which may be unaudited) to the Shareholders,
having such form and content as the Trustees deem proper.
6.12 Fixing Record Date. The By-Laws may provide for fixing or, in the
absence of such provision, the Trustees may fix, in advance, a date as the
record date for determining the Shareholders entitled to notice of or to vote
at any meeting of Shareholders or to express consent to any proposal without a
meeting, or for the purpose of determining Shareholders entitled to receive
payment of any dividend or distribution (whether before or after a termination
of the Trust) or any report or other communication from the Trustees; or for
any other purpose. The record date so fixed shall be not less than ten days nor
more than 60 days prior to the date of the meeting or event for the purposes of
which it is fixed.
6.13 Notice to Shareholders. Any notice of meeting or other notice,
communication or report to any Shareholders shall be deemed duly delivered to
such Shareholder when such notice, communication or report is deposited, with
postage thereon prepaid, in the United States mail, addressed to such
Shareholder at his address as it appears on the records of the Trust or is
delivered in person to such Shareholder.
6.14 Restrictions on Transfer to Preserve Tax Benefit; Designation of Shares-
in-Trust.
(1) Definitions. For the purposes of this Declaration of Trust, the
following terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Capital Stock, either
directly or constructively, through the application of Section 544 of the
Code, as modified by Section 856(h)(1)(B) and Section 856(h)(3) of the
Code. The terms "Beneficial Owner," "Beneficially Owns," and "Beneficially
Owned" shall have the correlative meanings.
"Beneficiary" shall mean, with respect to any Special Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) and (viii) thereof) and Section 170(c)(2) of the Code
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which are named by the Special Trustee as the beneficiary or beneficiaries
of such Special Trust, in accordance with the provisions of Section
6.16(1), provided that the selection of such beneficiary or beneficiaries
would not cause any of the restrictions set forth in Section 6.14(2) to be
violated.
"Capital Stock" shall mean Common Shares or Preferred Shares and shall
include all Preferred Shares or Common Shares that are held as Shares-in-
Trust in accordance with the provisions of Section 6.16(1).
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time, or any successor thereto.
"Constructive Ownership" shall mean ownership, either directly or
constructively, through the application of Section 318 of the code, as
modified by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns," and "Constructively Owned" shall have the
correlative meanings.
"Constructive Ownership Limit" shall mean 9.9% of the value of the
outstanding Capital Stock of the Trust.
"Effective Date" shall mean the "Effective Date" as defined in the Plan
of Reorganization of Mortgage and Realty Trust under Chapter 11 of the
Bankruptcy Code, as filed with the United States Bankruptcy Court for the
Central District of California during the Company's fiscal year ended
September 30, 1995, as the same may be amended from time to time.
"Equity Shares" shall mean either Common Shares or Preferred Shares that
are not held as Shares-in-Trust in accordance with the provisions of
Section 6.16(1).
"Existing Constructive Holder" shall mean any Person that is an Existing
Holder.
"Existing Holder" shall mean (i) Heine Securities Corporation, and any
entity for which it may hold shares of Capital Stock as agent, including
without limitation, Mutual Series Fund, Inc., Broadway Ventures, Mutual
Beacon Fund, Mutual Discovery Fund, The Common Fund, Orion Fund Ltd. and
each entity on behalf of which any of the foregoing may hold shares of
Capital Stock as agent (collectively, the "Mutual Group"), (ii) Fidelity
Management & Research Company, any entity for which it may hold shares of
Capital Stock as agent, including without limitation, Fidelity Capital &
Income Fund, Inc. and Belmont Capital Partners II, L.P. and any entity for
which any of the foregoing may hold shares of Capital Stock as agent
(collectively, the "Fidelity Group"), (iii) Angelo Gordon & Co., L.P., any
entity for which it may hold shares of Capital Stock as agent, including
without limitation, GAM Arbitrage Investments, Inc., GAM Special
Situations, L.P., AG Arb Partners, L.P., AG Eleven Partners, L.P., Common
Fund 103-70700-2-8, Common Fund 103-70600-2-9, A.G.C.P., L.P., 40153
Partnership, 40154 Partnership, Montrose Corporation, AG Super Fund, L.P.,
AG Super Fund International Partners, L.P., Treetop Partners, L.P., and
Nutmeg Partners, L.P., and any entity for which any of the foregoing may
hold shares of Capital Stock as agent (collectively, the "Angelo Gordon
Group") and (iv) Intermarket Corporation. Each individual entity or other
member of the Mutual Group, Fidelity Group or Angelo Gordon Group together
with Intermarket Corporation shall be an Existing Holder.
"Existing Holder Limit" (i) for Belmont Capital Partners II, L.P.
initially shall mean the greater of the Ownership Limit and 15% of the
value of the outstanding Capital Stock of the Trust, (ii) for Fernwood
Associates, L.P. initially shall mean the greater of the Ownership Limit
and 12% of the value of the outstanding Capital Stock of the Trust, (iii)
for Fernwood Restructurings, Ltd. initially shall mean the greater of the
Ownership Limit and 12% of the value of the outstanding Capital Stock of
the Trust, (iv) for Fidelity Capital & Income Fund, Inc. initially shall
mean the greater of the Ownership Limit and 12% of the value of the
outstanding Capital Stock of the Trust, (v) for Mutual Beacon Fund
initially shall mean the greater of the Ownership Limit and 40% of the
value of the outstanding Capital Stock of the Trust, (vi) for Mutual
Discovery Fund initially shall mean the greater of the Ownership Limit and
12% of the value of the outstanding Capital Stock of the Trust, (vii) for
the Intermarket Corporation initially shall mean the greater of the
Ownership Limit and 15% of the Value of the Outstanding Capital
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Stock of the Trust, and (viii) for any other member of the Mutual Group,
Fidelity Group or Angelo Gordon Group initially shall mean 9.9% of the
value of the outstanding Capital Stock of the Trust; provided, however,
that the Existing Holder Limit shall mean 100% of the outstanding Capital
Stock of the Trust for any Existing Holder for the period during which the
Existing Holder is described in Section 6.14(11). From and after the
Effective Date, the secretary of the Trust shall maintain and, upon
request, make available to each Existing Holder a schedule which sets forth
the then current Existing Holder Limits for each Existing Holder.
"Existing Holder Shares" shall have the meaning assigned to such term in
Section 6.14(12).
"Market Price" on any date shall mean the average of the Closing Price
for the five consecutive Trading Days ending on such date. The "Closing
Price" on any date shall mean the last sale price, regular way, or, in case
no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed
or admitted to trading on the New York Stock Exchange or, if the Equity
Shares are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national
securities exchange on which the Equity Shares are listed or admitted to
trading, or, if the Equity Shares are not listed or admitted to trading on
any national securities exchange, the last quoted price, or if not so
quoted, the average of the high bid and low asked prices in the over-the-
counter market, as reported by the NASDAQ National Market system, or, if
such system is no longer in use, the principal other automated quotations
system that may then be in use or, if the Equity Shares are not quoted by
any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the Equity
Shares selected by the Trustees. "Trading Day" shall mean a day on which
the principal national securities exchange on which the Equity Shares are
listed or admitted to trading is open for the transaction of business or,
if the Equity Shares are not listed or admitted to trading on any national
securities exchange, shall mean any day other than a Saturday, a Sunday, or
a day on which banking institutions in the State of New York are authorized
or obligated by law or executive order to close.
"Non-Transfer Event" shall mean an event other than a purported Transfer
that would cause (i) any Person to Beneficially Own Capital Stock in excess
of the Ownership Limit (in the case of any Person other than an Existing
Holder) or the applicable Existing Holder Limit (in the case of an Existing
Holder) or (ii) any Person, other than an Existing Constructive Holder, to
Constructively Own Capital Stock in excess of the Constructive Ownership
Limit.
"Ownership Limit" shall mean 5.0% of the value of the outstanding Capital
Stock of the Trust.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 6.16(5).
"Person" shall mean an individual, corporation, partnership, estate,
limited liability company, unincorporated organization, joint venture,
state or political subdivision, governmental agency, trust, a portion of a
trust permanently set aside for or to be used exclusively for the purposes
described in Section 642(c) of the Code, an association, a private
foundation within the meaning of Section 509(a) of the Code, a joint stock
company, other entity, or a group as that term is used for purposes of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
"Prohibited Owner" shall mean, with respect to any purported Transfer
described in Section 6.14(2) or Non-Transfer Event, any Person who, but for
the provisions of Section 6.14(2), would own record title to Capital Stock.
"REIT" shall mean a real estate investment trust under the REIT
Provisions.
"REIT Provisions" shall mean Sections 856 through 860 of the Code, and
the regulations thereunder.
"Restriction Termination Date" shall mean the first day after the
Effective Date on which the Trustees determine that it is no longer in the
best interests of the Trust to attempt to continue to qualify as a REIT.
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"Shares-in-Trust" shall mean any Capital Stock designated as Shares-in-
Trust pursuant to Section 6.14(3).
"Special Trust" shall mean any separate trust created pursuant to Section
6.16(1) and administered in accordance with the terms of Section 6.16, for
the exclusive benefit of any Beneficiary.
"Special Trustee" shall mean any person or entity unaffiliated with the
Trust, any Prohibited Owner (and, if different, any purported beneficial
transferee for whom the Prohibited Owner would have acquired Capital Stock
but for Section 6.14(2)) and any Beneficiary, such Special Trustee to be
designated by the Trust to act as trustee of any Special Trust, or any
successor trustee thereof.
"Transfer" shall mean any issuance, sale, transfer, gift, hypothecation,
pledge, assignment devise, or other disposition of Capital Stock
(including, without limitation, (i) the granting of any option or entering
into any agreement for the sale, transfer, assignment, or other disposition
of Capital Stock or (ii) the sale, transfer, assignment or other
disposition of any securities or rights convertible into or exchangeable
for Capital Stock), whether voluntary or involuntary, whether of record,
constructively, or beneficially and whether by operation of law or
otherwise.
"Transfer Violation" shall have the meaning assigned to such term in
Section 6.14(3).
"Underwriter" shall mean a securities firm or similar entity solely in
its capacity as a party to an underwriting agreement with the Trust entered
into with the intent of such firm or other entity of acquiring securities
of the Trust for resale, but only to the extent any Capital Stock is held
by it in its capacity as an Underwriter (and then, only for a period not to
exceed ninety days).
"Unrecovered Excess Dividends" shall mean, with respect to a Prohibited
Owner, the dollar amount of any dividends or distributions received by such
Prohibited Owner which are described in the second sentence of Section
6.16(2), but only to the extent such amount has not been recovered by the
Trust and paid over to the Special Trustee or for the benefit of the
Beneficiary in accordance with Section 6.16(2).
(2) Restrictions on Ownership and Transfers. The following restrictions
on ownership and transfers are subject to Sections 6.14(11) and 6.14(13) of
this Declaration of Trust:
(i) Except as otherwise provided in Section 6.14(10), from and after
the Effective Date and prior to the Restriction Termination Date, no
Person (other than an Existing Holder) shall Beneficially Own Capital
Stock in excess of the Ownership Limit, and no Existing Holder shall
Beneficially Own Capital Stock in excess of the Existing Holder Limit
for such Existing Holder.
(ii) Except as otherwise provided in Section 6.14(10), from and after
the Effective Date and prior to the Restriction Termination Date, no
Person (other than an Existing Constructive Holder) shall
Constructively Own Capital Stock in excess of the Constructive
Ownership Limit.
(iii) Except as otherwise provided in Section 6.14(10), from and
after the Effective Date and prior to the Restriction Termination Date,
any Transfer that, if effective, would result in any Person other than
an Existing Holder Beneficially Owning Capital Stock in excess of the
Ownership Limit shall be void ab initio as to the Transfer of that
number of shares of Capital Stock which would be otherwise Beneficially
Owned by such Person in excess of the Ownership Limit, and the intended
transferee shall acquire no rights or interest whatsoever in such
excess shares of Capital Stock.
(iv) Except as otherwise provided in Section 6.14(10), from and after
the Effective Date and prior to the Restriction Termination Date, any
Transfer that, if effective, would result in any Existing Holder
Beneficially Owning Capital Stock in excess of the applicable Existing
Holder Limit shall be void ab initio as to the Transfer of that number
of shares of Capital Stock which would be otherwise Beneficially Owned
by such Person in excess of the applicable Existing Holder Limit, and
such Existing Holder shall acquire no rights or interest whatsoever in
such excess shares of Capital Stock.
(v) Except as otherwise provided in Section 6.14(10), from and after
the Effective Date and prior to the Restriction Termination Date, any
Transfer that, if effective, would result in any Person (other than an
Existing Constructive Holder) Constructively Owning Capital Stock in
excess of the Constructive Ownership Limit shall be void ab initio as
to the Transfer of that number of shares of Capital Stock which would
be otherwise Constructively Owned in excess of the Constructive
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Ownership Limit, and the intended transferee shall acquire no rights or
interest whatsoever in such excess shares of Capital Stock.
(vi) Except as otherwise provided in Section 6.14(10), from and after
the Effective Date and prior to the Restriction Termination Date, any
Transfer or Non-Transfer Event that, if effective, would result in the
shares of Capital Stock being beneficially owned by fewer than 100
Persons (determined without reference to any rules of attribution)
shall be void ab initio as to the Transfer of that number of shares of
Capital Stock which would be otherwise beneficially owned (determined
without reference to any rules of attribution) by the transferee, and
the intended transferee shall acquire no rights or interest whatsoever
in such shares of Capital Stock.
(vii) From and after the Effective Date and prior to the Restriction
Termination Date, any Transfer that, if effective, would result in the
Trust being "closely held" within the meaning of Section 856(h) of the
code, shall be void ab initio as to the Transfer of that number of
shares of Capital Stock which would cause the Trust to be "closely
held" within the meaning of Section 856(h) of the Code, and the
intended transferee shall acquire no rights or interest whatsoever in
such excess shares of Capital Stock.
(3) Transfer in Trust.
(i) If, notwithstanding the other provisions contained in Sections
6.14 through 6.16 and subject to Section 6.17 hereof, at any time on or
after the Effective Date and prior to the Restriction Termination Date,
there is a purported Transfer or Non-Transfer Event such that any
Person would Beneficially Own shares of Capital Stock in excess of the
Ownership Limit (in the case of any Person other than an Existing
Holder) or Existing Holder Limit (in the case of an Existing Holder),
then, except as otherwise provided in Sections 6.14(10), (11), (12) or
(13), (A) the purported transferee shall acquire no right or interest
(or, in the case of a Non-Transfer Event, the person holding record
title to the shares of Capital Stock Beneficially Owned by such
Beneficial Owner shall cease to own any right or interest) in such
number of shares of Capital Stock which would cause such Beneficial
Owner to Beneficially Own shares of Capital Stock in excess of the
Ownership Limit or the Existing Holder Limit, as the case may be; (B)
such number of shares of Capital Stock in excess of the Ownership Limit
or the Existing Holder Limit (rounded up to the nearest whole share)
shall be designated Shares-in-Trust and, in accordance with Section
6.16(1), transferred automatically and by operation of law to a Special
Trust; and (C) such purported transferee or record holder (as the case
may be) shall submit to the Trust certificates for such number of
shares of Capital Stock to be transferred to the Special Trust for
registration in the name of the Special Trustee. Such transfer to a
Special Trust and the designation of the Shares-in-Trust shall be
effective as of the close of business on the business day prior to the
date of the purported Transfer or Non-Transfer Event, as the case may
be. Subject to Section 6.14(12), in determining which shares of Capital
Stock are so transferred and so designated in the case of a Non-
Transfer Event, shares of Capital Stock directly owned by any Person
who caused the Non-Transfer Event to occur shall be so transferred and
so designated before any shares of Capital Stock not so held are so
transferred and so designated. Subject to Section 6.14(12), where
several Persons are similarly situated, such transfer and such
designation shall be pro rata.
(ii) If, notwithstanding the other provisions contained in Sections
6.14 through 6.16 and subject to Section 6.17 hereof, at any time on or
after the Effective Date and prior to the Restriction Termination Date,
there is a purported Transfer or Non-Transfer Event such that any
Person would Constructively Own shares of Capital Stock in excess of
the Constructive Ownership Limit (other than an Existing Constructive
Holder), then, except as otherwise provided in Sections 6.14(10), (11),
(12) or (13), (A) the purported transferee shall acquire no right or
interest (or, in the case of a Non-Transfer Event, the person holding
record title to the shares of Capital Stock Constructively Owned by
such Constructive Owner shall cease to own any right or interest) in
such number of shares of Capital Stock which would cause such
Constructive Owner to Constructively Own shares of Capital Stock in
excess of the Constructive Ownership limit; (B) such number of shares
of Capital Stock in
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excess of the Constructive Ownership Limit (rounded up to the nearest
whole share) shall be designated Shares-in-Trust and, in accordance
with Section 6.16(1), transferred automatically and by operation of law
to a Special Trust; and (C) such purported transferee or record holder
(as the case may be) shall submit to the Trust certificates for such
number of shares of Capital Stock to be transferred to the Special
Trust for registration in the name of the Special Trustee. Such
transfer to a Special Trust and the designation of the Shares-in-Trust
shall be effective as of the close of business on the business day
prior to the date of the purported Transfer or Non-Transfer Event, as
the case may be. Subject to Section 6.14(12), in determining which
shares of Capital Stock are so transferred and so designated in the
case of a Non-Transfer Event, shares of Capital Stock directly owned by
any Person who caused the Non-Transfer Event to occur shall be so
transferred and so designated before any shares of Capital Stock not so
held are so transferred and so designated. Subject to Section 6.14(12),
where several Persons are similarly situated, such transfer and such
designation shall be pro rata.
(iii) If, notwithstanding the other provisions contained in Sections
6.14 through 6.16 and subject to Section 6.17 hereof, at any time on or
after the Effective Date and prior to the Restriction Termination Date,
there is a purported Transfer or Non-Transfer Event that, if effective,
would cause the Trust to (x) be beneficially owned by fewer than 100
Persons (determined without reference to any rules of attribution) or
(y) become "closely held" within the meaning of Section 856(h) of the
Code (each, a "Transfer Violation"), then, except as otherwise provided
in Sections 6.14(10), (11), (12), or (13), (A) the purported transferee
shall not acquire any right or interest (or, in the case of a Non-
Transfer Event, the person holding record title of the shares of
Capital Stock with respect to which such Non-Transfer Event occurred,
shall cease to own any right or interest) in such number of shares of
Capital Stock, the ownership of which by such purported transferee or
record holder would result in a Transfer Violation; (B) such number of
shares of Capital Stock (rounded up to the nearest whole share) shall
be designated Shares-in-Trust and, in accordance with the provisions of
Section 6.16(1), transferred automatically and by operation of law to
one or more Special Trusts to be held in accordance with that Section
6.16; and (C) such purported transferee or record holder (as the case
may be) shall submit to the Trust certificates for such number of
shares of Capital Stock to be transferred to the Special Trust or
Special Trusts for registration in the name of the Special Trustee.
Such transfer to a Special Trust and the designation of shares as
Shares-in-Trust shall be effective as of the close of business on the
business day prior to the date of the Transfer or Non-Transfer Event,
as the case may be. Subject to Section 6.14(12), in determining which
shares of Capital Stock are so transferred and so designated in the
case of a Non-Transfer Event, shares of Capital Stock directly owned by
any Person who caused the Non-Transfer Event to occur shall be so
transferred and so designated before any shares of Capital Stock not so
held are so transferred and so designated. Subject to Section 6.14(12),
where several Persons are similarly situated, such transfer and such
designation shall be pro rata.
(4) Remedies For Breach. If the Trustees or their designees shall at any
time determine in good faith that a Transfer has taken place in violation
of Section 6.14 or that a Person intends to acquire or has attempted to
acquire Beneficial Ownership or Constructive Ownership of any shares of
Capital Stock of the Trust in violation of Section 6.14, or that any such
Transfer or acquisition, intended or attempted, would jeopardize the status
of the Trust as a REIT under the Code, the Trustees or their designees
shall take such actions as it or they deem advisable to refuse to give
effect or to prevent such Transfer or acquisition, including, but not
limited to, refusing to give effect or to prevent such Transfer or
acquisition on the books of the Trust or instituting proceedings to enjoin
such Transfer or acquisition; provided, however, that, except as provided
in Section 6.14(10), (11), (12) or (13), any Transfers, attempted Transfers
or acquisitions in violation of Section 6.14(2) shall be void ab initio and
automatically result in the designation described in Section 6.14(3)
hereof, irrespective of any action (or non-action) by the Trustees or their
designees.
(5) Notice of Restricted Transfer. Any Person who acquires or attempts to
acquire shares of Capital Stock in violation of Section 6.14(2), or any
Person who owned shares of Capital Stock that were
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transferred to a Special Trust pursuant to the provisions of Section
6.14(3), shall immediately give written notice to the Trust of such event,
shall submit to the Trust certificates for such number of shares of Capital
Stock to be transferred to the Special Trust, and shall provide to the
Trust such other information as the Trust may request in order to determine
the effect, if any, of such Transfer or Non-Transfer Event, as the case may
be, on the Trust's status as a REIT.
(6) Remedies Not Limited. Nothing contained in this Section 6.14 through
Section 6.16 shall limit the authority of the Trustees to take such other
action as it deems necessary or advisable to protect the Trust and the
interests of its shareholders by preservation of the Trust's status as a
REIT and to ensure compliance with the Ownership Limit, the Existing Holder
Limit, the Constructive Ownership Limit, and the REIT Provisions.
(7) Ambiguity. In the case of an ambiguity in the application of any of
the provisions of Section 6.14, including any definition contained in
Section 6.14(1), the Trustees shall have the power to determine the
application of the provisions of this Section 6.14 with respect to any
situation based on the facts known to it.
(8) Modification of Ownership Limit. Subject to the limitations provided
in Section 6.14(9), the Trustees may from time to time increase the
Existing Holder Limit for an Existing Holder.
(9) Limitations on Modifications. Notwithstanding any other provision of
Sections 6.14 through 6.16:
(i) The Existing Holder Limit may not be increased if, after giving
effect to such increase, five or fewer Beneficial Owners that are (i)
individuals for purposes of Section 542(a)(2) of the Code, or (ii)
trusts to which the provisions of Section 856(h)(3)(A)(i) of the Code
apply, could Beneficially Own, in the aggregate, more than 49.9% in
value of the outstanding shares of Capital Stock.
(ii) Prior to the modifications of the Existing Holder Limit pursuant
to Section 6.14(8), the Trustees may require such opinions of counsel,
affidavits, undertakings, or agreements as they may deem necessary or
advisable in order to determine or ensure the Trust's status as a REIT.
(10) Exception. The Trustees, upon receipt of a ruling from the Internal
Revenue Service, an opinion of counsel, or such other evidence that the
Trustees deem satisfactory, in each case to the effect that the restriction
contained in Section 6.14(2)(vii) will not be violated, shall, subject to
such terms and conditions as the Trustees deem appropriate, exempt a Person
from the Ownership Limit, the Existing Holder Limit, or the Constructive
Ownership Limit if (x) in the case of any exemption from the Ownership
Limit or an Existing Holder Limit, such Person is (i) not an individual for
purposes of Section 542(a)(2) of the Code, or (ii) a trust to which the
provisions of Section 856(h)(3)(A)(i) of the Code apply, (y) the Trustees
obtain such representations, undertakings or other arrangements from such
Person as the Trustees deem necessary or appropriate to ensure that the
granting of the exemption will not jeopardize the Trust's status as a REIT,
and (z) such Person agrees that any violation or attempted violation of the
terms or conditions of the exemption, the Ownership Limit, an Existing
Holder Limit, or the Constructive Ownership Limit will result in a transfer
to a Special Trust of Equity Shares in accordance with Section 6.14(3).
(11) Exception for Certain Existing Holders. Notwithstanding any
provision of Section 6.14 of this Declaration of Trust to the contrary, the
restrictions on ownership and transfers contained in Section 6.14(2) shall
not apply to an Existing Holder that is (i) a regulated investment company
(within the meaning of the Investment Company Act of 1940), so long as no
more than 9.9% of the value of the outstanding equity interests therein is
Beneficially Owned by a Person who is treated as an individual for purposes
of Section 542(a)(2) of the Code, (ii) a mutual life insurance company, or
(iii) a trust described in Section 401(a) of the Code, so long as the
actuarial interest of any individual in such trust does not exceed 9.9% of
the total actuarial interests in such trust.
(12) Ordering Rule for Shares-in-Trust. Notwithstanding any provision of
Section 6.14 of this Declaration of Trust to the contrary, any shares of
Capital Stock held or acquired by an Existing Holder as record or
beneficial owner (without applying any rules of attribution under the Code)
shall not be
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considered to violate the restrictions on ownership and Transfer in Section
6.14(2) or be designated as Shares-in-Trust pursuant to Section 6.14(3)
unless the shares of Capital Stock held or acquired by the Existing Holder
as record or beneficial owner (without applying any rules of attribution
under the Code) exceed the Existing Holder Limit for such Existing Holder
and such Existing Holder is not described in clauses (i), (ii) or (iii) of
Section 6.14(11). This Section 6.14(12) is to be interpreted and applied so
that if (A) any shares of Capital Stock held or acquired by an Existing
Holder as record or beneficial owner (without applying any rules of
attribution under the Code) are treated as being Beneficially Owned or
Constructively Owned by another Person ("Existing Holder Shares") and (B)
that Person Beneficially Owns shares of Capital Stock in excess of the
Constructive Ownership Limit, then no Existing Holder Shares may be deemed
to violate the restrictions of Section 6.14(2) or be designated Shares-in-
Trust pursuant to Section 6.14(3) until all of the shares of Capital Stock
Beneficially Owned or Constructively Owned by such Person (other than
Existing Holder Shares) have been so designated, and then only to the
extent the Existing Holder Shares held or acquired by the Existing Holder
as record or beneficial owner (without applying any attribution rules of
the Code) violate the Existing Holder Limit for such Existing Holder and
such Existing Holder is not described in clauses (i), (ii) or (iii) of
Section 6.14(11).
(13) Exception for Certain Underwriters. Unless an exception is otherwise
provided pursuant to Section 6.14(10), the restrictions on ownership and
transfers contained in Section 6.14(2) shall not apply to an Underwriter
unless the ownership of Capital Stock by the Underwriter would result in
the Trust being "closely held" (within the meaning of Section 856(h) of the
Code) or otherwise would result in the Trust failing to qualify as a REIT.
6.15 Legend. Each certificate for Capital Stock shall bear the following
legend:
"THE SHARES OF CAPITAL STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON OWNERSHIP AND TRANSFER FOR THE PURPOSE OF THE TRUST'S
MAINTENANCE OF ITS STATUS AS A REAL ESTATE INVESTMENT TRUST UNDER THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). SUBJECT TO CERTAIN PROVISIONS OF
THE TRUSTS DECLARATION OF TRUST, NO PERSON MAY (A) BENEFICIALLY OWN SHARES OF
CAPITAL STOCK IN EXCESS OF THE OWNERSHIP LIMIT UNLESS SUCH PERSON IS AN
EXISTING HOLDER (IN WHICH CASE, THE EXISTING HOLDER LIMIT SHALL BE APPLICABLE);
(B) TRANSFER SHARES OF CAPITAL STOCK IF SUCH TRANSFER WOULD RESULT IN THE
SHARES OF CAPITAL STOCK BEING OWNED BENEFICIALLY BY FEWER THAN 100 PERSONS; (C)
BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK WHICH WOULD
RESULT IN THE TRUST BEING "CLOSELY HELD" UNDER SECTION 856(H) OF THE CODE OR
(D) CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK IN EXCESS OF 9.9% OF THE VALUE
OF THE OUTSTANDING CAPITAL STOCK OF THE TRUST (UNLESS SUCH PERSON IS AN
EXISTING CONSTRUCTIVE HOLDER). ANY PERSON WHO ATTEMPTS TO BENEFICIALLY OWN OR
CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK IN EXCESS OF THE ABOVE LIMITATIONS
MUST IMMEDIATELY NOTIFY THE TRUST. FOR PURPOSES OF THE OWNERSHIP RESTRICTION
DESCRIBED IN CLAUSE (A) ABOVE, THE "OWNERSHIP LIMIT" MEANS 9.9% OF THE VALUE OF
THE OUTSTANDING SHARES OF CAPITAL STOCK OF THE TRUST. CERTAIN TRANSACTIONS NOT
INVOLVING THE DIRECT TRANSFER OF CAPITAL STOCK OF THE TRUST MAY RESULT IN THE
APPLICATION OF THE RESTRICTIONS REFERRED TO ABOVE. ALL DEFINED TERMS IN THIS
LEGEND HAVE THE MEANINGS DEFINED IN THE TRUSTS DECLARATION OF TRUST, AS THE
SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE
RESTRICTIONS ON TRANSFER, WILL BE SENT WITHOUT CHARGE TO EACH SHAREHOLDER WHO
SO REQUESTS IN WRITING WITHIN FIVE (5) DAYS AFTER RECEIPT OF THE WRITTEN
REQUEST. IF THE RESTRICTIONS ABOVE ARE VIOLATED, THE SHARES OF CAPITAL STOCK
REPRESENTED HEREBY WILL BE TRANSFERRED AUTOMATICALLY AND BY OPERATION OF LAW TO
A SPECIAL TRUST AND SHALL BE DESIGNATED SHARES-IN-TRUST."
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6.16 Shares-in-Trust.
(1) Special Trust. Any shares of Capital Stock transferred to a Special
Trust and designated Shares-in-Trust pursuant to Section 6.14(3) shall be
held for the exclusive benefit of the Beneficiary or Beneficiaries. The
Special Trustee shall name a Beneficiary or Beneficiaries of each Special
Trust within five (5) days after discovery of the existence thereof Any
transfer to a Special Trust, and subsequent designation of shares of
Capital Stock as Shares-in-Trust, pursuant to Section 6.14(3) shall be
effective as of the close of business on the business day prior to the date
of the Transfer or Non-Transfer event that results in the transfer to the
Special Trust. Shares-in-Trust shall remain issued and outstanding shares
of Capital Stock of the Trust and shall be entitled to the same rights and
privileges on the identical terms and conditions as are all other issued
and outstanding shares of Capital Stock of the same class and series. When
transferred to the Permitted Transferee in accordance with the provisions
of Section 6.16(5), such Shares-in-Trust shall cease to be designated as
Shares-in-Trust.
(2) Dividend Rights. The Special Trustee, as record holder of Shares-in-
Trust, shall be entitled to receive all dividends and distributions as may
be declared by the Trustees on such shares of Capital Stock and shall hold
such dividends or distributions in trust for the benefit of the Beneficiary
or Beneficiaries. The Prohibited Owner with respect to Shares-in-Trust
shall repay to the Special Trustee the amount of any dividends or
distributions received by it (i) that are attributable to any shares of
Capital Stock designated Shares-in-Trust and (ii) the record date of which
was on or after the effective date of the designation of such shares as
Shares-in-Trust. The Trust shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend or
distribution paid to a Prohibited Owner, including, if necessary,
withholding any portion of future dividends or distributions payable on
shares of Capital Stock of the Person who, but for the provisions of
Section 6.14(3), would Constructively Own or Beneficially Own the Shares-
in-Trust; and, as soon as reasonably practicable following the Trust's
receipt or withholding thereof, shall pay over to the Special Trustee for
the benefit of the Beneficiary or Beneficiaries the dividends so received
or withheld, as the case may be.
(3) Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the Trust, each holder of
Shares-in-Trust shall be entitled to receive, ratably with each other
holder of shares of Capital Stock of the same class or series, that portion
of the assets of the Trust which is available for distribution to the
holders of such class and series of shares of Capital Stock. The Special
Trustee shall distribute to the Prohibited Owner the amounts received upon
such liquidation, dissolution, or winding up; provided, however, that (i)
the Prohibited Owner shall not be entitled to receive amounts pursuant to
this subsection (3) in excess of, (x) in the case of a purported Transfer
in which the Prohibited Owner gave value for shares of Capital Stock and
which Transfer resulted in the transfer of the shares to the Special Trust,
the price per share, if any, such Prohibited Owner paid for the shares of
Capital Stock and, (y) in the case of a Non-Transfer Event or Transfer in
which the Prohibited Owner did not give value or such shares (e.g., if the
shares were received through a gift or devise) and which Non-Transfer Event
or Transfer, as the case may be, resulted in the transfer of shares to the
Special Trust, the price per share equal to the Market Price on the date of
such Non-Transfer Event or Transfer; and (ii) that any amount otherwise
payable to the Prohibited Owner pursuant to this subsection (3) shall be
reduced by any Unrecovered Excess Dividends of such Prohibited Owner, but
only to the extent the amount thereof has been specified in a written
notice by the Trust to the Special Trustee. Any remaining amount in such
Special Trust shall be distributed to the Beneficiary or Beneficiaries.
(4) Voting Rights. The Special Trustee shall be entitled to vote all
Shares-in-Trust. The Trustees shall take all measures that they determine
to be reasonably necessary and in the best interests of the Trust, subject
to applicable law, to invalidate or rescind any vote case by a Prohibited
Owner as a holder of shares of Capital Stock prior to the discovery by the
Trust that the shares of Capital Stock are Shares-in-Trust. In the event
that the Trustees take action to invalidate or rescind any vote case by a
Prohibited Owner in accordance with the preceding sentence, subject to
applicable law, the Prohibited Owner shall be deemed to have given, as of
the close of business on the business day prior to the date of the
purported
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Transfer or Non-Transfer Event that results in the transfer to the Special
Trust of the shares of Capital Stock under Section 6.14(3), an irrevocable
proxy to the Special Trustee to vote the Shares-in-Trust, in which case
such Shares-in-Trust shall be deemed to have voted by the Special Trustee
in the same proportions as the votes cast by holders of shares of Capital
Stock other than Shares-in-Trust.
(5) Designation of Permitted Transferee. The Special Trustee shall have
the exclusive and absolute right to designate a Permitted Transferee of any
and all Shares-in-Trust. To the extent reasonably practicable, and in an
orderly fashion so as not to materially adversely affect the Market Price
of the Shares-in-Trust, the Special Trustee shall designate any Person as a
Permitted Transferee, provided, however, that (i) the Permitted Transferee
so designated purchases for valuable consideration (whether in a public or
private sale) the Shares-in-Trust, (ii) the Permitted Transferee so
designated may acquire such Shares-in-Trust without such acquisition
resulting in a transfer to a Special Trust and the redesignation of such
shares of Capital Stock so acquired as Shares-in-Trust under Section
6.14(3) and (iii) the Trust shall have waived its right, pursuant to
Section 6.16(7), to repurchase such Shares-in-Trust or such right shall
have expired. Upon the designation by the Special Trustee of a Permitted
Transferee in accordance with the provisions of this subsection (5) (and
the payment by the Permitted Transferee of the consideration provided in
clause (i) above), the Special Trustee of a Special Trust shall (A) cause
to be transferred to the Permitted Transferee that number of Shares-in-
Trust acquired by the Permitted Transferee; (B) cause to be recorded on the
books of the Trust that the Permitted Transferee is the holder of record of
such number of shares of Capital Stock; and (C) distribute to the
Beneficiary any and all amounts held with respect to the Shares-in-Trust
after making the payment to the Prohibited Owner provided for pursuant to
Section 6.16(6).
(6) Compensation to Record Holder of Equity Shares that Become Shares-In-
Trust. Any Prohibited Owner shall be entitled (following discovery by the
Trust that shares of Capital Stock owned by such Prohibited Owner are
Shares-in-Trust and subsequent designation of the Permitted Transferee in
accordance with Section 6.16(5)) to receive from the Special Trustee the
lesser of (i) in the case of (A) a purported Transfer in which the
Prohibited Owner gave value for shares of Capital Stock and which Transfer
resulted in the transfer of the shares to the Special Trust, the price per
share, if any, such Prohibited Owner paid for the shares of Capital Stock,
or (B) a Non-Transfer Event or Transfer in which the Prohibited Owner did
not give value for such shares (e.g., if the shares were received through a
gift or devise) and which Non-Transfer Event or Transfer, as the case may
be, resulted in the transfer of shares to the Special Trust, the price per
share equal to the Market Price on the date of such Non-Transfer Event or
Transfer, and (ii) the price per share received by the Special Trustee of
the Special Trust from the sale or other disposition of such Shares-in-
Trust in accordance with Section 6.16(5); provided, however, that any
amount otherwise payable to the Prohibited Owner pursuant to this
subsection (6) shall be reduced by any Unrecovered Excess Dividends of such
Prohibited Owner, but only to the extent the amount hereof has been
specified in a written notice by the Trust to the Special Trustee. Any
amounts received by the Special Trustee in respect of such Shares-in-Trust
in excess of such amounts to be paid to the Prohibited Owner pursuant to
this Section 6.16(6) shall be distributed to the Beneficiary in accordance
with the provisions of Section 6.16(5). Each Beneficiary and Prohibited
Owner waives any and all claims that such Beneficiary or Prohibited Owner
may have against the Special Trustee and the Trust arising out of the gross
negligence or willful misconduct of, or any failure to make payments in
accordance with misconduct of, or any failure to make payments in
accordance with Section 6.16 by, such Special Trustee or the Trust.
(7) Purchase Right in Shares-in-Trust. Shares-in-Trust shall be deemed to
have been offered for sale to the Trust, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction
that created such Shares-in-Trust (or, in case of devise, gift, or Non-
Transfer Event, the Market Price at the time of such device, gift, or Non-
Transfer Event) and (ii) the Market Price on the date the Trust, or its
designee, accepts such offer. The Trust shall have the right to accept such
offer for a period of ninety (90) days after the later of (A) the date of
the Non-Transfer Event or purported Transfer which resulted in such Shares-
in-Trust and (B) the date the Trust determines in good faith that
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a Transfer or Non-Transfer Event resulting in Shares-in-Trust has occurred,
if the Trust does not receive a notice of such Transfer or Non-Transfer or
Non-Transfer Event pursuant to Section 6.14(5).
6.17 Exchange Transactions. Nothing in this Declaration of Trust shall
preclude the settlement of any transaction with respect to the Capital Stock of
the Trust entered into through the facilities of the New York Stock Exchange.
As set forth in Sections 6.14 through 6.16, certain transactions may be settled
by designating shares of Capital Stock Beneficially Owned or Constructively
Owned by a Person in violation of the Ownership Limit, the Existing Holder
Limit, or the Constructive Ownership Limit, as the case may be, as Shares-in-
Trust.
ARTICLE 7
LIABILITY OF TRUSTEES, SHAREHOLDERS AND OFFICERS, AND OTHER MATTERS
7.1 Exculpation of Trustees and Officers.
(1) No Trustee or officer of the Trust shall be liable to the Trust or to
any Trustee for any act or omission of any other Trustee, Shareholder,
officer or agent of the Trust or be held to any personal liability
whatsoever in tort, contract or otherwise in connection with the affairs of
the Trust except only that arising from his own willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
(2) To the maximum extent that the laws of the State of Maryland in
effect from time to time permit limitation of the liability of Trustees and
Officers, no Trustee or Officer of the Trust shall be liable to the Trust
or its Shareholders for money damages. Neither the amendment nor appeal of
this Section, nor the adoption or amendment of any other provision of the
Declaration of Trust or By-laws inconsistent with this Section, shall apply
to or affect in any respect the applicability of the preceding sentence
with respect to any act or failure to act which occurred prior to such
amendment, repeal or adoption.
(3) The provisions of subsection (a) shall be applicable to any act or
omission by a Trustee or officer of the Trust occurring prior to the filing
of Articles of Amendment adopting subsections (b) and (c) hereof with the
State Department of Assessments and Taxation of Maryland (the "Effective
Date"). For acts or omissions occurring on or after the Effective Date, the
provisions of subsection (b) shall also be applicable.
7.2 Limitation of Liability of Shareholders, Trustees and Officers. The
Trustees and officers of the Trust in incurring any debts, liabilities or
obligations, or in taking or omitting any other actions for or in connection
with the Trust are, and shall be deemed to be, acting as Trustees or officers
of the Trust and not in their own individual capacities. Except to the extent
provided in Section 7.1, no Trustee or officer of the Trust shall, nor shall
any Shareholder, be liable for any debt, claim, demand, judgment, decree,
liability or obligation of any kind of, against or with respect to the Trust,
arising out of any action taken or omitted for or on behalf of the Trust and
the Trust shall be solely liable therefor and resort shall be had solely to the
Trust Estate for the payment or performance thereof. Each Shareholder shall be
entitled to pro rata indemnity from the Trust Estate if, contrary to the
provisions hereof, such Shareholder shall be held to any such personal
liability.
7.3 Express Exculpatory Clauses in Instruments. As far as practicable, the
Trustees shall cause any written instrument creating an obligation of the Trust
to include a reference to this Declaration and to provide that neither the
Shareholders nor the Trustees nor the officers of the Trust shall be liable
thereunder and that the other parties to such instrument shall look solely to
the Trust Estate for the payment of any claim thereunder or for the performance
thereof; provided, however, that the omission of such provision from any such
instrument shall not render the Shareholders or any Trustee or officer of the
Trust liable nor shall the Trustees or any officer of the Trust be liable to
anyone for such omission.
7.4 Indemnification of Trustees and Officers. The Trust shall indemnify the
Trustees and officers of the Trust to the full extent permitted by the general
laws of the State of Maryland now or hereafter in force with
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respect to the indemnification of directors of a Maryland corporation,
including the advance of expenses under the procedures provided by such laws.
Any reference in such laws to directors shall be deemed to refer to Trustees of
the Trust and to the corporation shall be deemed to refer to the Trust. The
foregoing shall not limit the authority of the Trust to indemnify officers who
are not Trustees and other employees and agents of the Trust consistent with
law.
7.5 Right of Trustees and Officers to Own Shares or Other Property and to
Engage in Other Business.
(1) Any Trustee or officer of the Trust may acquire, own, hold and
dispose of Shares and other Securities of the Trust for his individual
account, and may exercise all rights of a Shareholder to the same extent
and in the same manner as if he were not a Trustee or officer. Any Trustee
or officer of the Trust may have personal business interests and may engage
in personal business activities, which interests and activities may include
the acquisition, syndication, holding, management, operation or
disposition, for his own account or for the account of others, of interests
in Mortgages, interests in Real Property, or interests in Persons engaged
in the real estate business, provided the same do not (except as permitted
in subsection 7.5(2)) directly compete with the actual business being
conducted by the Trust. Subject to the provisions of Article 4, any Trustee
or officer of the Trust may be interested as trustee, officer, director,
stockholder, partner, member, adviser or employee, or otherwise have a
direct or indirect interest in any Person who may be engaged to render
advice or services to the Trust, and may receive compensation from such
Person as well as compensation as Trustee, officer or otherwise hereunder
and no such activities shall be deemed to conflict with his duties and
powers as Trustee or officer.
(2) Nothing in this Declaration shall be deemed:
(i) to prohibit a Trustee or officer of the Trust who is also engaged
in rendering professional services from rendering such professional
services to any Person or from acting as trustee, director, member,
adviser, officer or representative of any such Person to whom he
renders or has rendered such services; or
(ii) to prohibit a Trustee or officer of the Trust from having
personal business interests or engaging in personal business activities
which:
(A) the Trustees (by vote or consent sufficient for such purpose
without counting the vote of the interested Trustee) have decided
should not be acquired or engaged in by the Trust; or
(B) the Trust could not have acquired or engaged in without
violating any provision of this Declaration or applicable law,
even though any such Person, interests or activities are or could be in
competition, in any way, with the Trust, or any such Person is in the
same or similar business as that of the Trust.
7.6 Transactions Between the Trustees and the Trust. Notwithstanding any
other provisions of this Declaration, the Trust shall not knowingly, directly
or indirectly, (i) acquire any property from, or sell, lend, or otherwise
transfer any property to, any Trustee, or (ii) make any such transaction with
any Affiliate of any Trustee or any Person of which a Trustee owns more than 1%
of the voting securities, unless such transaction has been approved by the
affirmative vote of a majority of the Trustees who are not Affiliates of such
Trustee or any Person of which a Trustee owns more than 1% of the voting
securities, after full disclosure as to the interest of the Trustee or his
Affiliate or such Person in such transaction, is on terms not less favorable to
the Trust than those then prevailing for comparable transactions at arm's
length, is fair and reasonable to the Shareholders, and relates to (i)
acquisition by the Trust from Affiliates of a Trustee or the Adviser or any
Person of which a Trustee owns more than 1% of the voting securities, of
participation in any Mortgage loans if such Affiliate or Person retains, on no
more favorable terms than the Trust, at least a 25% participation therein,
provided that no such participation need be retained by an Affiliate which is
principally engaged in the mortgage banking business and has undertaken to
provide the Trust with investment opportunities within the Trust's investment
policies, (ii) acquisition or disposition of assets at the formation of the
Trust or within 120 days thereafter or when purchased with the proceeds of
subsequent
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offerings of securities of the Trust, (iii) repayment of Construction Loans at
maturity or upon completion of the construction, or (iv) acquisition of
properties by the Trust at prices not exceeding fair value as determined by
independent appraisal. The Trustees are not restricted by this Section 7.6 from
forming a corporation, partnership, trust or other business association owned
by the Trustees or by their nominees for the purpose of holding title to
property of the Trust or managing property of the Trust provided the Trustees'
motive for the formation of such business association is not their own
enrichment.
7.7 Restriction of Duties and Liabilities. To the extent that the nature of
this Trust will permit, the duties and liabilities of Shareholders, Trustees
and officers shall in no event be greater than the duties and liabilities of
shareholders, directors and officers of a Maryland corporation. The
Shareholders, Trustees and officers shall in no event have any greater duties
or liabilities than those imposed by applicable law as shall be in effect from
time to time.
7.8 Persons Dealing with Trustees or Officers. Any act of the Trustees or
officers purporting to be done in their capacity as such shall, as to any
Persons dealing with such Trustees or officers, be conclusively deemed to be
within the purposes of this Trust and within the powers of the Trustees and
officers. No Person dealing with the Trustees or any of them, or with the
authorized officers, agents or representatives of the Trust, shall be bound to
see to the application of any funds or property passing into their hands or
control. The receipt of the Trustees or any of them, or of authorized officers,
agents, or representatives of the Trust, for moneys or other consideration,
shall be binding upon the Trust.
7.9 Reliance. The Trustees and officers may consult with counsel (which may
be a firm in which one or more of the Trustees or officers is or are members)
and the advice or opinion of such counsel shall be full and complete personal
protection to all of the Trustees and officers in respect of any action taken
or suffered by them in good faith and in reliance on or in accordance with such
advice or opinion. In discharging their duties, Trustees and officers, when
acting in good faith, may rely upon financial statements of the Trust
represented to them to be correct by the President or the officer of the Trust
having charge of its books of account, or stated in a written report by an
independent certified public accountant fairly to present the financial
position of the Trust. The Trustees may rely, and shall be personally protected
in acting, upon any instrument or other document believed by them to be
genuine.
ARTICLE 8
DURATION, AMENDMENT, TERMINATION AND QUALIFICATION OF TRUST
8.1 Duration of Trust. Unless terminated as provided herein, the Trust
created hereby shall have perpetual existence; provided, however, anything
herein to the contrary notwithstanding, if at any time prior to the first date
on which the Shares of the Trust shall be owned beneficially by more than 100
Persons all of the Trustees named in Section 9.9 shall have ceased to be
living, the Trust created hereby shall terminate immediately upon the death of
the last survivor of such Trustees.
8.2 Termination of Trust.
(1) The Trust may be terminated by the vote or consent of the holders of
two-thirds of the outstanding Shares entitled to vote thereon. Upon the
termination of the Trust:
(i) The Trust shall carry on no business except for the purpose of
winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust
and all of the powers of the Trustees under this Declaration shall
continue until the affairs of the Trust shall have been wound up,
including the power to fulfill or discharge the contracts of the Trust,
collect its assets, sell, convey, assign, exchange, transfer or
otherwise dispose of all or any part of the remaining Trust Estate to
one or more persons at public or private sale for consideration which
may consist in whole or in part of cash, Securities or other property
of any kind, discharge or pay its liabilities, and do all
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other acts appropriate to liquidate its business; provided that any
sale, conveyance, assignment, exchange, transfer or other disposition
of substantially all of the Trust Estate as a whole shall require
approval of the principal terms of the transaction and the nature and
amount of the consideration by vote or consent of the holders of a
majority of the outstanding Shares entitled to vote thereon.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and
refunding agreements, as they deem necessary for their protection, the
Trustees shall, subject to the provisions of any Preferred Shares which
may then be outstanding, distribute the remaining Trust Estate, in cash
or in kind or partly each, among the Shareholders pro rata according to
the number of Common Shares held by each.
(2) After termination of the Trust and distribution to the Shareholders
as herein provided, the Trustees shall execute and lodge among the records
of the Trust an instrument in writing setting forth the fact of such
termination, and the Trustees shall thereupon be discharged from all
further liabilities and duties hereunder and the rights and interests of
all Shareholders hereunder shall thereupon cease.
8.3 Amendment Procedure.
(1) This Declaration may be amended by the vote or consent of the holders
of a majority of the outstanding Shares entitled to vote thereon, except
that Section 7.2 and the prohibition against assessment upon Shareholders
in Section 6.1 shall be amended only by the vote or consent of the holders
of all outstanding Shares entitled to vote thereon. The Trustees may also
amend this Declaration without the vote or consent of Shareholders if they
deem it necessary to conform this Declaration to the requirements of the
REIT Provisions of the Internal Revenue Code or to other applicable federal
laws or regulations, but the Trustees shall not be liable for failing to do
so.
(2) A certification in recordable form signed by a majority of the
Trustees setting forth an amendment and reciting that it was duly adopted
by the Shareholders or by the Trustees as aforesaid or a copy of the
Declaration, as amended, in recordable form, and executed by a majority of
the Trustees, shall be conclusive evidence of such amendment when lodged
among the records of the Trust.
ARTICLE 9
MISCELLANEOUS
9.1 Applicable Law. This Declaration and the rights of all parties and the
construction and effect of every provision hereof shall be subject to and
construed according to the statutes and laws of Maryland.
9.2 Index and Headings for Reference Only. The index and headings preceding
the text, articles and sections hereof have been inserted for convenience and
reference only and shall not be construed to affect the meaning, construction
or effect of this Declaration.
9.3 Successors in Interest. This Declaration and the By-Laws shall be binding
upon and inure to the benefit of the undersigned Trustees and their successors,
assigns, heirs, distributees and legal representatives, and every Shareholder
and his successors, assigns, heirs, distributees and legal representatives.
9.4 Counterparts. This Declaration may be simultaneously executed in several
counterparts, each of which when so executed shall be deemed to be an original
and such counterparts together shall constitute one and the same instrument,
which shall be sufficiently evidenced by any such original counterpart.
9.5 Provisions of the Trust in Conflict with Law or Regulations.
(1) The provisions of this Declaration are severable, and if the Trustees
shall determine, with the advice of counsel, that any one or more of such
provisions (the "Conflicting Provisions") would have the effect of
preventing the Trust from qualifying as a "real estate investment trust"
under the REIT Provisions of the Internal Revenue Code or are in conflict
with other applicable federal laws and
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regulations, the Conflicting Provisions shall be deemed never to have
constituted a part of the Declaration; provided, however, that such
determination by the Trustees shall not affect or impair any of the
remaining provisions of this Declaration or render invalid or improper any
action taken or omitted (including but not limited to the election of
Trustees) prior to such determination. A certification in recordable form
signed by a majority of the Trustees setting forth any such determination
and reciting that it was duly adopted by the Trustees, or a copy of this
Declaration, with the Conflicting Provisions removed pursuant to such a
determination, in recordable form, signed by a majority of the Trustees,
shall be conclusive evidence of such determination when lodged in the
records of the Trust. The Trustees shall not be liable for failure to make
any determination under this Section 9.5(1). Nothing in this Section 9.5(1)
shall in any way limit or affect the right of the Trustees to amend this
Declaration provided in Section 8.3(1).
(2) If any provision of this Declaration shall be held invalid or
unenforceable, such invalidity or unenforceability shall attach only to
such provision and shall not in any manner affect or render invalid or
unenforceable any other provision of this Declaration, and this Declaration
shall be carried out as if any such invalid or unenforceable provision were
not contained herein.
9.6 Certifications. The following certifications shall be final and
conclusive as to any persons dealing with the Trust:
(1) A certification of a vacancy among the Trustees by reason of
resignation, removal, increase in the number of Trustees, incapacity, death
or otherwise, when made in writing by a majority of the remaining Trustees;
(2) A certification as to the persons holding office as Trustees or
officers at any particular time, when made in writing by the Secretary of
the Trust or by any Trustee;
(3) A certification that a copy of this Declaration or of the By-Laws is
a true and correct copy thereof as then in force, when made in writing by
the Secretary of the Trust or by any Trustee;
(4) The certifications referred to in Sections 8.3(2) and 9.5(1) hereof;
(5) A certification as to any action by Trustees, other than those
referred to in paragraph (4) above, or the Shareholders when made in
writing by the Secretary of the Trust or by any Trustee.
9.7 Recording and Filing. A copy of this instrument and any amendments to the
Declaration shall be filed with the Department of Assessments and Taxation of
Maryland. This Declaration and any amendments may also be filed or recorded in
such other places as the Trustees deem appropriate.
9.8 Resident Agent. The name and post office address of the resident agent of
the Trust in the State of Maryland is The Corporation Trust, Incorporated, 32
South Street, Baltimore, Maryland 21202. Said resident is a citizen of the
State of Maryland actually residing therein. The resident agent may be removed
and a vacancy existing in such office for any reason may be filled by a
majority of the Trustees.
9.9 Names and Addresses of Trustees. [The names and addresses of the Trustees
shall be inserted as they are determined as of the Effective Date.]
B-28
<PAGE>
ANNEX C
[Paste-up Logo of Kenneth Leventhal & Company]
Mortgage and Realty Trust
Elkins Park, Pennsylvania
This report sets forth a summary of the work performed by Kenneth Leventhal &
Company ("KL") at the request of Mr. C. W. Strong, Jr., President, Mortgage and
Realty Trust ("MRT"). The work performed included the procedures outlined in
our engagement letter dated April 12, 1995 (Exhibit A). It is our understanding
that the work performed by KL as summarized herein will be utilized by MRT in
connection with a judicial restructuring of MRT. Accordingly, this report is
intended solely for your use in connection with such judicial restructuring
transaction and is not to be otherwise used, circulated, quoted or referred to
in any manner. In addition, our letter of April 12, 1995 contains specific
limitations with respect to the analytical procedures performed in connection
with this engagement and is incorporated in its entirety by reference herein.
ENGAGEMENT APPROACH
We obtained selected financial information prepared by MRT as of March 31,
1995. Utilizing this information, we selected 26 assets representing mortgage
loans, investments, in substance foreclosure assets, and real estate equities
owned. The selection was divided between the "West Coast" and "East Coast"
portfolios and generally represented the assets with the highest dollar values
in the portfolio. In addition, as summarized in Exhibit B to this report, the
selection of assets included different portfolio classifications.
For the assets selected as outlined above, the following procedures were
performed:
. We obtained the most recent "Argus" property cash flow projections.
. We obtained, where applicable, the most recent operating rent roll and
other financial information.
. We obtained the most recent appraisals, where applicable and available.
. We obtained the previous KL analytical procedures performed as of March
1993 and July 1994.
. We discussed the current status of each selected asset with the
respective MRT asset manager to determine loan status, property
characteristics, current occupancy, existing market rental rates, new
leases, current payoff discussions, asset sales, etc.
. We reviewed limited market information including selected submarket
information, if available.
. We modified the MRT assumptions, as necessary, to conform to certain
known current market conditions and our understanding of the assets.
. We updated the valuation model prepared by KL in 1993 and 1994 utilizing
current market and/or assumption modifications determined from the
procedures outlined above. The valuation model utilizes a monthly
discounting methodology whereby NOI and capital expenses are discounted
on a monthly basis. This monthly methodology approximates a "mid-year"
discounting convention.
. We calculated estimated asset values on a going concern basis (as
defined below).
We believe that the procedures outlined above, when applied to 26 of the
largest assets in the MRT portfolio, provide a sufficient mathematical basis
for extrapolation of the values to the remaining portfolio in order to
calculate a range of valuation on a going concern basis as defined below.
C-1
<PAGE>
The results of our procedures as outlined above are summarized in Exhibit B.
You have requested that we determine the valuation of the portfolio on a
going concern basis. The assumptions utilized by MRT and reviewed by us
included expected collection of amounts due on mortgage loans and cash flows
from operating properties. To determine a going concern valuation, the
assumptions are predicated on the orderly collection and selected disposal of
assets over a period of several years. The going concern valuation is not
reflective of values which would result from a distressed sale, forced
liquidation or disposition of the portfolio in a bulk sale or any other
accelerated manner.
In addition to the specific portfolio valuation procedures outlined above,
you further requested that we approximate a range of valuation for the total
enterprise as of March 31, 1995. Such enterprise valuation is presented in
Exhibit C. The enterprise valuation as of March 31, 1995 utilizes the most
recently available financial statements of MRT and adjusts for the portfolio
analyses as determined above, and other modifications as summarized in the
notes to Exhibit C included herein.
Kenneth Leventhal & Company
May 15, 1995
C-2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF EXHIBITS
- --------------------------------------------------------------------------------
A. Engagement Letter dated April 12, 1995
B. Book Balance and Valuation for Selected Assets and Extrapolated Values
C. Range of Enterprise Going Concern Value
[Paste-Up Logo of Kenneth Leventhal & Company]
C-3
<PAGE>
EXHIBIT A (1 OF 3)
[Kenneth Leventhal & Company Logo]
April 12, 1995
Mr. C.W. Strong, Jr.
President
Mortgage and Realty Trust
3500 West Olive Avenue
Suite 600
Burbank, CA 91505-4628
Dear Mr. Strong:
In accordance with your request, this letter sets forth our understanding and
agreement with respect to the work Kenneth Leventhal & Company will perform in
connection with the valuation of Mortgage and Realty Trust's investment
portfolio, including mortgage loans, property acquired through foreclosure and
held for sale, in-substance foreclosures, participating loans, amortizing
loans, realty equities, real estate equities and investments in partnerships.
Our work is being performed to update our previous work to assist MRT and its
various interested creditor parties in determining an appropriate basis of
valuation for a potential restructuring transaction. This letter summarizes the
scope of services we will provide, project approach, engagement staffing,
timing and estimated fees.
BACKGROUND AND OUR UNDERSTANDING
Kenneth Leventhal & Company ("KL") is familiar with the Mortgage and Realty
Trust ("MRT") portfolio as a result of a comprehensive due diligence project
undertaken in early 1993 on behalf of a potential equity investor and
individual asset valuations and an "Entity" valuation as of June 30, 1994
undertaken for MRT. At the time of the 1993 engagement, KL performed
comprehensive due diligence of all assets in the MRT portfolio. The asset
valuations as of June 30, 1994, updated the valuations for 26 of MRT's assets.
It is our understanding that MRT desires assistance in determining valuations
for the MRT portfolio (as described above) for the purposes of considering
various restructuring alternatives. MRT, through its various financial advisors
and in connection with its ongoing discussions with various creditor groups,
has performed comprehensive analyses of their investment portfolio and certain
other interim valuations have been performed by other outside consultants. It
is contemplated that all previous data and information relative to the
portfolio maintained by MRT will be made available to KL to assist them in
performing the presently requested services.
The valuation consulting services applied to the MRT portfolio as of June 30,
1994 will be updated to March 31, 1995. The valuation services to be provided
will not constitute independent asset appraisals performed in accordance with
standards established by the Appraisal Institute or other professional bodies.
The procedures will be designed to determine an estimated range of value of the
MRT portfolio on a going-concern basis, that is, on a basis that does not
contemplate an accelerated liquidation, bulk sale of assets or other form of
distressed sale. The procedures will also be designed to present a range of
liquidation values for the MRT portfolio to approximate the amount that may be
realized upon a current market accelerated liquidation.
C-4
<PAGE>
EXHIBIT A (2 OF 3)
ENGAGEMENT APPROACH
In consideration of the previous work performed by KL, this engagement will
be designed to utilize all existing information to the fullest extent possible.
The procedures of this engagement will be designed to update the June 30, 1994
values as of March 31, 1995 and will be substantially similar to those
performed for the valuation as of June 30, 1994. This work will be conducted on
the 26 assets previously valued. Any of those 26 assets which have been
disposed of will be replaced by assets with the highest book value that were
not previously tested.
In summary, the procedures to be performed in connection with the 26 assets
will include the following.
. Obtain the most recent "Argus" property cashflow projections.
. Obtain the most recent operating rent rolls and other financial
information.
. Obtain the most recent appraisals, where available.
. Obtain the previous KL portfolio analyses from March 1993 and June 30,
1994.
. Discuss the current status with the asset manager to determine loan
status, foreclosure property characteristics, including current
occupancy, existing market rental rates, new leases, current payoff
discussions, asset sales, etc.
. Review and update market information for the properties, including
selected submarket information, if available.
. Modify MRT assumptions, as necessary, to conform to current updated
market conditions.
. Update the valuation model prepared by KL in 1993 utilizing current
market and/or assumption modifications determined from the procedures
provided above.
. Calculate estimated range of asset values on both a going-concern and
liquidation value basis.
We believe that the procedures outlined above, applied to 26 of the largest
assets in the MRT portfolio, will provide a sufficient mathematical basis for
extrapolation of characteristics to the remaining portfolio and, therefore,
provide an acceptable basis for the calculation of appropriate valuation ranges
on both the going-concern and liquidation basis.
In addition to the specific valuation procedures outlined above, KL is
prepared to assist both MRT and its creditor groups with further refinements to
the valuation and other assistance which may be required in connection with the
potential restructuring alternatives presently considered.
ENGAGEMENT STAFFING
In light of the accelerated timetable mandated for this engagement, the
project will be undertaken by KL personnel on the east coast and west coast
simultaneously. Stephen G. Finn will serve as the overall engagement partner,
assisted by Mr. Frederick Chin, the Director of KL's valuation practice in Los
Angeles. Both Mr. Chin and Mr. Finn will be assisted by staff from KL's various
offices.
It is anticipated that the procedures outlined above will require
approximately 30 to 45 business days to complete and, therefore, a date of May
31, 1995 is the projected completion date.
ESTIMATED FEES
It is anticipated that the procedures outlined above will utilize, to a
significant extent, data prepared by KL and MRT in connection with the previous
portfolio analyses. Our work will also encompass a review of the portfolio
updated valuation procedures performed by MRT to provide a basis for us to
conclude the appropriateness of extrapolating the valuation characteristics of
the 26 assets selected to the entire portfolio. The estimated fees to perform
updated valuations of the 26 selected assets will be $2,000 per asset plus
applicable out-of-pocket expenses. The total estimated fees for this update,
exclusive of any professional services requested to comply with Bankruptcy or
SEC reporting requirements, will be $50,000--$60,000.
C-5
<PAGE>
EXHIBIT A (3 OF 3)
As noted above, the engagement is being approached so as to permit
modification or expansion of procedures to the entire portfolio, if considered
necessary by MRT and its advisors. To the extent an expansion of procedures is
considered necessary or additional tasks are required, supplemental letters of
understanding will be prepared with appropriate estimates of fees and tasks
described herein.
It is understood that the work outlined herein is being performed at the
request of MRT for their use in connection with discussions with various
interested creditor groups. It is further understood that certain portions of
KL's work product may be made available to MRT for use in their bankruptcy/SEC
proxy filing. As the engagement progresses, KL will make periodic status
reports to MRT. It is understood that the work undertaken by KL is of a
confidential nature and will not be utilized by KL or communicated to any other
parties without the express, written authorization from MRT.
In addition to the valuation services outlined above, KL is available to
assist MRT with implementation issues associated with "Fresh Start" accounting
(FAS-SOP-90-7). This assistance may include allocation methodology for asset
valuations or the determination of the "Fresh Start" Balance Sheet. Our charges
for this additional assistance will be made at our standard billing rates, with
a budget estimate, per task approved by you in advance.
As noted above, KL may be called upon to present additional information,
reports, consents, testimony, meetings and consultations in connection with the
restructuring process currently under way. The charges outlined above to update
our valuation do not attempt to estimate such restructuring process costs. To
the extent services are requested outside the scope of the work contemplated
above, we will 1) notify you and 2) bill such time at our normal standard rates
of $80--$350 per hour.
Either party may terminate this letter agreement at any time upon written
notice, without liability or continuing obligation, except that neither the
termination nor completion of this assignment shall affect: (a) any
compensation earned by KL up to the date of termination or completion, as the
case may be, or (b) the reimbursement of expenses incurred by KL up to the date
of termination or completion, as the case may be.
We appreciate the opportunity to be of continued service to Mortgage and
Realty Trust and look forward to beginning this work immediately.
Very truly yours,
/s/ Stephen G. Finn
-------------------------------------
Stephen G. Finn
of Kenneth Leventhal & Company
SGF/ld
cc: Frederick Chin
Accepted:
MORTGAGE AND REALTY TRUST
/s/ C.W. Strong, Jr. April 12, 1995
- ------------------------------------- ----------------------------------------
C.W. Strong, Jr. Date
President
C-6
<PAGE>
EXHIBIT B (1 OF 2)
MORTGAGE AND REALTY TRUST
BOOK BALANCE AND VALUATION FOR SELECTED ASSETS
AND EXTRAPOLATED VALUES
AS OF MARCH 31, 1995
<TABLE>
<CAPTION>
3/31/95 3/31/95 TOTAL PORTFOLIO
3/31/95 3/31/95 3/31/95 3/31/95 ASSET PV ASSET PV % BOOK VALUE
ASSET ASSET BOOK BOOK BALANCE UPDATED ASSET PV PERCENTAGE OF BV 3/31/95
NO. PROPERTY NAME CODE BALANCE BY ASSET TYPE VALUATION BY ASSET TYPE OF BOOK VALUE BY ASSET TYPE BY ASSET TYPE
----- ---------------- ----- ------------ ------------- ------------ ------------- ------------- ------------- ---------------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C>
594 Six Sentry A $ 750,000 $ 638,068 85.08%
Associates (1
bldg)
655 Pacesetter A 8,867,030 8,738,012 98.54%
Business
658 Caltrans-- A 12,043,371 10,176,887 84.50%
Freeway Corp.
Park
621 Lion Associates A 16,608,233 15,687,347 94.46%
- ----------------------------------------------------------------------------------------------------------------------------------
SUBTOTALS FOR $ 38,268,634 $ 35,240,314 92.09% $ 59,077,108
ASSET CODE A
- ----------------------------------------------------------------------------------------------------------------------------------
641 Midis Property B 6,251,012 5,365,783 85.84%
- ----------------------------------------------------------------------------------------------------------------------------------
SUBTOTALS FOR 6,251,012 5,365,783 85.84% 18,048,800
ASSET CODE B
- ----------------------------------------------------------------------------------------------------------------------------------
452 Keewaydin C 5,172,957 3,216,785 62.18%
590 Berdon Plaza C 7,547,467 6,752,852 89.47%
- ----------------------------------------------------------------------------------------------------------------------------------
SUBTOTALS FOR 12,720,424 9,969,637 78.38% 34,416,865
ASSET CODE C
- ----------------------------------------------------------------------------------------------------------------------------------
609 Cascade Drive D 7,862,638 6,068,928 77.19%
639 East Bradford D 10,612,663 8,579,892 80.85%
Associates
- ----------------------------------------------------------------------------------------------------------------------------------
SUBTOTALS FOR 18,475,301 14,648,820 79.29% 30,407,726
ASSET CODE D
- ----------------------------------------------------------------------------------------------------------------------------------
646 McLaughlin E 4,296,330 3,658,732 85.16%
421 Parkway Business E 5,160,009 3,302,134 63.99%
Center
467 North County E 5,845,086 4,848,818 82.96%
647 Moreno Valley E 5,899,121 5,391,718 91.40%
574 Burtonsville E 5,999,782 5,061,194 84.36%
Commerce
687 Six Sentry E 6,537,739 4,903,919 75.01%
Parkway (5
bldgs)
498 Junipers at E 7,605,269 8,591,887 112.97%
Yarmouth
673 Arcade E 7,650,833 5,839,994 76.33%
643 Villa Del Cresta E 9,022,369 9,054,281 100.35%
- ----------------------------------------------------------------------------------------------------------------------------------
SUBTOTAL FOR 58,016,538 50,652,677 87.31% 72,641,217
ASSET CODE E
- ----------------------------------------------------------------------------------------------------------------------------------
563 Slauson Business F 6,434,348 2,694,681 41.88%
Center
447 Riverside Center F 7,641,272 6,642,051 86.92%
558 Pinebrook F 8,099,165 3,918,719 48.38%
Business Center
448 Stadium Towers F 8,511,892 3,821,480 44.90%
672 Paseo Padre F 23,930,469 21,896,218 91.50%
- ----------------------------------------------------------------------------------------------------------------------------------
SUBTOTALS FOR 54,617,146 38,973,149 71.36% 56,939,709
ASSET CODE F
- ----------------------------------------------------------------------------------------------------------------------------------
576 Keystone 1 G 4,769,853 5,035,946 105.58%
591 Creekside Center G 7,492,088 6,489,692 86.62%
Associates
630 Newark C & C G 9,615,859 7,354,002 76.48%
Associates
- ----------------------------------------------------------------------------------------------------------------------------------
SUBTOTALS FOR 21,877,800 18,879,640 86.30% 26,511,072
ASSET CODE G
- ----------------------------------------------------------------------------------------------------------------------------------
SUBTOTALS FOR ASSET Overall Average Assumed = > 82.64% 642,206
CODE H
- ----------------------------------------------------------------------------------------------------------------------------------
SUBTOTALS FOR ASSET Overall Average Assumed = > 82.64% 25,392
CODE I
- ----------------------------------------------------------------------------------------------------------------------------------
TOTALS $210,226,855 $210,226,855 $173,730,020 $173,730,020 82.64% $298,710,095
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EXTRAPOLATED
ASSET PORTFOLIO PV
NO. PROPERTY NAME BY ASSET TYPE
----- ---------------- -------------
<C> <S> <C>
594 Six Sentry
Associates (1
bldg)
655 Pacesetter
Business
658 Caltrans--
Freeway Corp.
Park
621 Lion Associates
- ---------------------------------------------
SUBTOTALS FOR
ASSET CODE A $ 54,402,147
- ---------------------------------------------
641 Midis Property
- ---------------------------------------------
SUBTOTALS FOR
ASSET CODE B 15,492,842
- ---------------------------------------------
452 Keewaydin
590 Berdon Plaza
- ---------------------------------------------
SUBTOTALS FOR
ASSET CODE C 26,974,231
- ---------------------------------------------
609 Cascade Drive
639 East Bradford
Associates
- --------------------------------------------
SUBTOTALS FOR
ASSET CODE D 24,109,881
- --------------------------------------------
646 McLaughlin
421 Parkway Business
Center
467 North County
647 Moreno Valley
574 Burtonsville
Commerce
687 Six Sentry
Parkway (5
bldgs)
498 Junipers at
Yarmouth
673 Arcade
643 Villa Del Cresta
- --------------------------------------------
SUBTOTAL FOR
ASSET CODE E 63,421,090
- --------------------------------------------
563 Slauson Business
Center
447 Riverside Center
558 Pinebrook
Business Center
448 Stadium Towers
672 Paseo Padre
- ---------------------------------------------
SUBTOTALS FOR
ASSET CODE F 40,630,460
- ---------------------------------------------
576 Keystone 1
591 Creekside Center
Associates
630 Newark C & C
Associates
- ---------------------------------------------
SUBTOTALS FOR
ASSET CODE G 22,877,963
- ---------------------------------------------
SUBTOTALS FOR ASSET
CODE H 530,715
- ---------------------------------------------
SUBTOTALS FOR ASSET
CODE I 20,984
- ---------------------------------------------
TOTALS $248,460,312
- ---------------------------------------------
----------
OVERALL AVERAGE PV PERCENTAGE OF BOOK VALUE = > 83.18%
----------
(BASED UPON EXTRAPOLATION BY ASSET TYPE)
</TABLE>
C-7
<PAGE>
EXHIBIT B (2 OF 2)
MORTGAGE AND REALTY TRUST
INDEX TO ASSET CODES
<TABLE>
<CAPTION>
ASSET CODE MRT ASSET TYPE DESCRIPTION
---------- -------------- -----------
<S> <C> <C>
A Earn Mtg Performing Mortgage
B NE ISF In-Substance Foreclosure (Non-Earning)
C NE REO Real Estate Owned (Non-Earning)
D E ISF In-Substance Foreclosure (Earning)
E E REO Real Estate Owned (Earning)
F Equity Investments in Real Estate
G Part Investments in Real Estate (Partnership)
H Note Rec Note Receivable
I NE Mtge Non-Earning Mortgage
</TABLE>
C-8
<PAGE>
EXHIBIT C (1 OF 2)
MORTGAGE AND REALTY TRUST
RANGE OF ENTERPRISE GOING CONCERN VALUE*
AS OF MARCH 31, 1995
<TABLE>
<CAPTION>
(000 OMITTED)
<S> <C>
Extrapolated Valuation of Portfolio as of March 31, 1995 per
Exhibit A (Note A).......................................... $248,500
Adjustments (B)
Add: Cash on Hand........................................... 1,500
Marketable Securities.................................... 71,600
Accounts Receivable and Other Assets..................... 3,700
-----------------
325,300
Less: Outstanding Debt--Imperial............................ 17,600
Deferred Compensation.................................... 400
Accounts Payable and Accrued Expenses.................... 3,400
Employee Termination Pay Plan............................ 1,400
-----------------
302,500
Less: NPV of operating expenses (C)......................... 27,300
-----------------
$275,200
=================
Range of Enterprise Going Concern Value March 31, 1995 (D)... $265,000--285,000
=================
</TABLE>
- --------
*Rounded to the nearest $100,000
(See Next Page for Notes)
C-9
<PAGE>
EXHIBIT C (2 OF 2)
MORTGAGE AND REALTY TRUST
RANGE OF ENTERPRISE GOING CONCERN VALUE
AS OF MARCH 31, 1995
NOTES
(A) The valuation of the asset portfolio assumes continued operation of the
portfolio for several years. Sales and pay-offs of certain assets occur
throughout the analysis period. Property cash flows, loan payments and pay-
offs, and reversion amounts (based on normalized capital expenditures in
the reversion year) were discounted to present value at 12 percent per
year. Amounts DO NOT include extraordinary expenses for reorganization or
litigation.
(B) Amounts per Mortgage and Realty Trust--Quarterly Report pursuant to Section
12 or 15(d) of the Securities Exchange Act of 1934--period ended March 31,
1995.
(C) For purposes of determining enterprise value, it was assumed that operating
expenses (G&A) would be incurred at the following levels in the future:
<TABLE>
<CAPTION>
AMOUNT YEAR
------ ----
<S> <C>
$4,000,000 1
3,500,000 2
3,000,000 3
3,000,000 4
3,000,000 5
3,000,000 6
</TABLE>
The impact of G&A expenses has been reflected as a direct reduction of
total value. The present value of the G&A expenses was calculated by
applying a capitalization rate of 10 percent to Year 6 stabilized G&A
expenses and discounting both the capitalized, stabilized Year 6 expenses
and the annual expenses at 12 percent.
(D) The enterprise valuation assumes the portfolio is operated during the
projection period and that no additional investments are made. An
alternative enterprise valuation could be presented wherein the proceeds
from portfolio operations are used for alternative business purposes, e.g.,
new mortgages, other real estate investments, etc., and general and
administrative expenses are incurred to sustain such operations. Such
alternative valuation has not been presented herein.
The Range of Enterprise Going Concern Value is presented excluding
liabilities for senior notes outstanding and accrued and unpaid interest.
C-10
<PAGE>
ANNEX D
[Paste-up of Kenneth Leventhal & Company]
Mortgage and Realty Trust
Elkins Park, Pennsylvania
This report sets forth a summary of the work performed by Kenneth Leventhal &
Company ("KL") at the request of Mr. C. W. Strong, Jr., President, Mortgage and
Realty Trust ("MRT"). The work performed included the procedures outlined in
our engagement letter dated April 12, 1995 (Exhibit A). It is our understanding
that the work performed by KL as summarized herein will be utilized by MRT in
connection with a judicial restructuring of MRT. Accordingly, this report is
intended solely for your use in connection with such judicial restructuring
transaction and is not to be otherwise used, circulated, quoted or referred to
in any manner. In addition, our letter of April 12, 1995 contains specific
limitations with respect to the analytical procedures performed in connection
with this engagement and is incorporated in its entirety by reference herein.
ENGAGEMENT APPROACH
We obtained selected financial information prepared by MRT as of March 31,
1995. Utilizing this information, we selected 26 assets representing mortgage
loans, investments, in substance foreclosure assets, and real estate equities
owned. The selection was divided between the "West Coast" and "East Coast"
portfolios and generally represented the assets with the highest dollar values
in the portfolio. In addition, as summarized in Exhibit B to this report, the
selection of assets included different portfolio classifications.
For the assets selected as outlined above, the following procedures were
performed:
. We obtained the most recent "Argus" property cash flow projections.
. We obtained, where applicable, the most recent operating rent roll and
other financial information.
. We obtained the most recent appraisals, where applicable and available.
. We obtained the previous KL analytical procedures performed as of March
1993 and July 1994.
. We discussed the current status of each selected asset with the
respective MRT asset manager to determine loan status, property
characteristics, current occupancy, existing market rental rates, new
leases, current payoff discussions, asset sales, etc.
. We reviewed limited market information including selected submarket
information, if available.
. We modified the MRT assumptions, as necessary, to conform to certain
known current market conditions and our understanding of the assets.
. We updated the valuation model prepared by KL in 1993 and 1994 utilizing
current market and/or assumption modifications determined from the
procedures outlined above.
. We capitalized Net Operating Income from Year 2 as derived by the KL
valuation model at both 14 and 16 percent capitalization rates to
determine a high and low range of liquidation values for the selected
assets.
We believe that the procedures outlined above, when applied to 26 of the
largest assets in the MRT portfolio, provide a sufficient mathematical basis
for extrapolation of the values to the remaining portfolio in order to
calculate a range of liquidation values. The liquidation valuation as of March
31, 1995 utilizes the most recently available financial statements of MRT and
adjusts the analyses outlined above as summarized in the notes to Exhibit B
included herein.
D-1
<PAGE>
The results of our procedures as outlined above are summarized in Exhibit B.
You have requested that we determine the valuation of the portfolio on a
liquidation basis. The assumptions utilized by MRT and reviewed by us included
expected collection of amounts due on mortgage loans and cash flows from
operating properties. The Range of Liquidation Values (Exhibit B) approximates
the amounts that may be realized upon an immediate liquidation of MRT. For
purposes of this analysis it was assumed that the portfolio would be liquidated
within a twelve-month period of time under a judicially mandated liquidation
process.
The MRT portfolio is diverse in type as well as geographic distribution. The
liquidation scenario presented herein assumes the accelerated liquidation of
the portfolio in a series of individual and discrete transactions. Other
liquidation scenarios could be presented which might include the disposition of
the portfolio in bulk or selected pool dispositions of assets with similar
qualities, characteristics and geographic locations.
Kenneth Leventhal & Company
May 15, 1995
D-2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF EXHIBITS
- --------------------------------------------------------------------------------
A. Engagement Letter dated April 12, 1995
B. Range of Liquidation Values and Supporting Analyses
D-3
<PAGE>
EXHIBIT A (1 OF 3)
April 12, 1995
Mr. C.W. Strong, Jr.
President
Mortgage and Realty Trust
3500 West Olive Avenue
Suite 600
Burbank, CA 91505-4628
Dear Mr. Strong:
In accordance with your request, this letter sets forth our understanding and
agreement with respect to the work Kenneth Leventhal & Company will perform in
connection with the valuation of Mortgage and Realty Trust's investment
portfolio, including mortgage loans, property acquired through foreclosure and
held for sale, in-substance foreclosures, participating loans, amortizing
loans, realty equities, real estate equities and investments in partnerships.
Our work is being performed to update our previous work to assist MRT and its
various interested creditor parties in determining an appropriate basis of
valuation for a potential restructuring transaction. This letter summarizes the
scope of services we will provide, project approach, engagement staffing,
timing and estimated fees.
BACKGROUND AND OUR UNDERSTANDING
Kenneth Leventhal & Company ("KL") is familiar with the Mortgage and Realty
Trust ("MRT") portfolio as a result of a comprehensive due diligence project
undertaken in early 1993 on behalf of a potential equity investor and
individual asset valuations and an "Entity" valuation as of June 30, 1994
undertaken for MRT. At the time of the 1993 engagement, KL performed
comprehensive due diligence of all assets in the MRT portfolio. The asset
valuations as of June 30, 1994, updated the valuations for 26 of MRT's assets.
It is our understanding that MRT desires assistance in determining valuations
for the MRT portfolio (as described above) for the purposes of considering
various restructuring alternatives. MRT, through its various financial advisors
and in connection with its ongoing discussions with various creditor groups,
has performed comprehensive analyses of their investment portfolio and certain
other interim valuations have been performed by other outside consultants. It
is contemplated that all previous data and information relative to the
portfolio maintained by MRT will be made available to KL to assist them in
performing the presently requested services.
The valuation consulting services applied to the MRT portfolio as of June 30,
1994 will be updated to March 31, 1995. The valuation services to be provided
will not constitute independent asset appraisals performed in accordance with
standards established by the Appraisal Institute or other professional bodies.
The procedures will be designed to determine an estimated range of value of the
MRT portfolio on a going-concern basis, that is, on a basis that does not
contemplate an accelerated liquidation, bulk sale of assets or other form of
distressed sale. The procedures will also be designed to present a range of
liquidation values for the MRT portfolio to approximate the amount that may be
realized upon a current market accelerated liquidation.
ENGAGEMENT APPROACH
In consideration of the previous work performed by KL, this engagement will
be designed to utilize all existing information to the fullest extent possible.
The procedures of this engagement will be designed to update the June 30, 1994
values as of March 31, 1995 and will be substantially similar to those
performed for the valuation as of June 30, 1994. This work will be conducted on
the 26 assets previously valued. Any of those 26 assets which have been
disposed of will be replaced by assets with the highest book value that were
not previously tested.
D-4
<PAGE>
EXHIBIT A (2 OF 3)
In summary, the procedures to be performed in connection with the 26 assets
will include the following.
. Obtain the most recent "Argus" property cashflow projections.
. Obtain the most recent operating rent rolls and other financial
information.
. Obtain the most recent appraisals, where available.
. Obtain the previous KL portfolio analyses from March 1993 and June 30,
1994.
. Discuss the current status with the asset manager to determine loan
status, foreclosure property characteristics, including current
occupancy, existing market rental rates, new leases, current payoff
discussions, asset sales, etc.
. Review and update market information for the properties, including
selected submarket information, if available.
. Modify MRT assumptions, as necessary, to conform to current updated
market conditions.
. Update the valuation model prepared by KL in 1993 utilizing current
market and/or assumption modifications determined from the procedures
provided above.
. Calculate estimated range of asset values on both a going-concern and
liquidation value basis.
We believe that the procedures outlined above, applied to 26 of the largest
assets in the MRT portfolio, will provide a sufficient mathematical basis for
extrapolation of characteristics to the remaining portfolio and, therefore,
provide an acceptable basis for the calculation of appropriate valuation ranges
on both the going-concern and liquidation basis.
In addition to the specific valuation procedures outlined above, KL is
prepared to assist both MRT and its creditor groups with further refinements to
the valuation and other assistance which may be required in connection with the
potential restructuring alternatives presently considered.
ENGAGEMENT STAFFING
In light of the accelerated timetable mandated for this engagement, the
project will be undertaken by KL personnel on the east coast and west coast
simultaneously. Stephen G. Finn will serve as the overall engagement partner,
assisted by Mr. Frederick Chin, the Director of KL's valuation practice in Los
Angeles. Both Mr. Chin and Mr. Finn will be assisted by staff from KL's various
offices.
It is anticipated that the procedures outlined above will require
approximately 30 to 45 business days to complete and, therefore, a date of May
31, 1995 is the projected completion date.
ESTIMATED FEES
It is anticipated that the procedures outlined above will utilize, to a
significant extent, data prepared by KL and MRT in connection with the previous
portfolio analyses. Our work will also encompass a review of the portfolio
updated valuation procedures performed by MRT to provide a basis for us to
conclude the appropriateness of extrapolating the valuation characteristics of
the 26 assets selected to the entire portfolio. The estimated fees to perform
updated valuations of the 26 selected assets will be $2,000 per asset plus
applicable out-of-pocket expenses. The total estimated fees for this update,
exclusive of any professional services requested to comply with Bankruptcy or
SEC reporting requirements, will be $50,000 -$60,000.
As noted above, the engagement is being approached so as to permit
modification or expansion of procedures to the entire portfolio, if considered
necessary by MRT and its advisors. To the extent an expansion of procedures is
considered necessary or additional tasks are required, supplemental letters of
understanding will be prepared with appropriate estimates of fees and tasks
described herein.
D-5
<PAGE>
EXHIBIT A (3 OF 3)
It is understood that the work outlined herein is being performed at the
request of MRT for their use in connection with discussions with various
interested creditor groups. It is further understood that certain portions of
KL's work product may be made available to MRT for use in their bankruptcy/SEC
proxy filing. As the engagement progresses, KL will make periodic status
reports to MRT. It is understood that the work undertaken by KL is of a
confidential nature and will not be utilized by KL or communicated to any other
parties without the express, written authorization from MRT.
In addition to the valuation services outlined above, KL is available to
assist MRT with implementation issues associated with "Fresh Start" accounting
(FAS-SOP-90-7). This assistance may include allocation methodology for asset
valuations or the determination of the "Fresh Start" Balance Sheet. Our charges
for this additional assistance will be made at our standard billing rates, with
a budget estimate, per task approved by you in advance.
As noted above, KL may be called upon to present additional information,
reports, consents, testimony, meetings and consultations in connection with the
restructuring process currently under way. The charges outlined above to update
our valuation do not attempt to estimate such restructuring process costs. To
the extent services are requested outside the scope of the work contemplated
above, we will 1) notify you and 2) bill such time at our normal standard rates
of $80--$350 per hour.
Either party may terminate this letter agreement at any time upon written
notice, without liability or continuing obligation except that neither the
termination nor completion of this assignment shall affect: (a) any
compensation earned by KL up to the date of termination or completion, as the
case may be, or (b) the reimbursement of expenses incurred by KL up to the date
of termination or completion, as the case may be.
We appreciate the opportunity to be of continued service to Mortgage and
Realty Trust and look forward to beginning this work immediately.
Very truly yours,
/s/ Stephen G. Finn
-------------------------------------
Stephen G. Finn
of Kenneth Leventhal & Company
SGF/ld
cc: Frederick Chin
Accepted:
MORTGAGE AND REALTY TRUST
/s/ C.W. Strong, Jr. April 12, 1995
- ------------------------------------- ----------------------------------------
C.W. Strong, Jr. Date
President
D-6
<PAGE>
EXHIBIT B (1 OF 4)
MORTGAGE AND REALTY TRUST
RANGE OF LIQUIDATION VALUES
AS OF MARCH 31, 1995
<TABLE>
<CAPTION>
RANGE
-----------------
LOW HIGH
-------- --------
(000 OMITTED)
<S> <C> <C>
Extrapolated Liquidation Value of Portfolio (A).............. $192,600 $218,100
Adjustments:
Add: Cash on Hand (B)....................................... 1,500 1,500
Marketable Securities (B)................................ 71,600 71,600
Accounts Receivable and Other Assets (A)(B).............. 1,800 3,700
-------- --------
267,500 294,900
Less: Outstanding Debt--Imperial (B)........................ 17,600 17,600
Deferred Compensation (B)................................ 400 400
Accounts Payable and Accrued Expenses (B)................ 3,400 3,400
Termination Pay Plan (A) (C)............................. 1,400 1,400
Wind Down G&A Expenses (A)............................... 5,000 5,000
Legal, Liquidation Costs, etc. (A)....................... 10,000 8,000
-------- --------
$229,700 $259,100
======== ========
Range of Liquidation Values, March 31, 1995.................. $220,000 $260,000
======== ========
</TABLE>
(See Next Page for Notes)
D-7
<PAGE>
EXHIBIT B (2 OF 4)
MORTGAGE AND REALTY TRUST
RANGE OF LIQUIDATION VALUES
AS OF MARCH 31, 1995
NOTES
(A) For the purpose of determining a range of liquidation values, the following
assumptions were utilized:
. All assets in the portfolio were disposed of within a twelve-month
period under a judicially mandated process.
. The assets were sold in discrete individual transactions, not in a bulk
sale.
. The Extrapolated Liquidation Value of the Portfolio was determined by
applying capitalization rates of 14 percent (high) and 16 percent (low)
to the net operating income for selected assets for the 12 month period
from April 1996 to March 1997. These capitalized values were
extrapolated to the entire MRT portfolio. Real estate assets with
outstanding offers for sale at the valuation date were included at their
offer price. Sales proceeds were reduced by estimated selling expenses
of five percent.
. Performing real estate loans were assumed sold at discounts from book
value of 10 percent (high) and 20 percent (low).
. Accounts Receivable and Other Assets are considered 50 percent
collectible (low) or 100% collectible (high).
. Termination Pay Plan has been estimated at approximately $1.4 million.
. Wind Down G&A expenses were assumed to be $5 million.
. Legal, accounting and other costs associated with the judicial
liquidation were assumed to be between $8 million (high) and $10 million
(low).
(B) Amounts per Mortgage and Realty Trust--Quarterly Report pursuant to Section
12 or 15(d) of the Securities Exchange Act of 1934--period ended June 10,
1994.
(C) Amount per Mortgage and Realty Trust Form 10Q as of March 31, 1995.
D-8
<PAGE>
EXHIBIT B (3 OF 4)
MORTGAGE AND REALTY TRUST
LIQUIDATION VALUE
CAPITALIZED AT 14%
<TABLE>
<CAPTION>
APRIL 1996 APRIL 1996
NET ASSET NOI
ASSET ASSET ASSET OPERATING CAPPED @
CONTROL # TYPE ASSET NAME TYPE INCOME 14%
--------- ----- ---------- ------------- ----------- ------------
<C> <C> <S> <C> <C> <C>
594 A Six Sentry Parkway (1 Earn Mtg. 62,430 445,929
bldg.)
- -----------------------------------------------------------------------------------
658 A Caltrans-Freeway Corp. Earn Mtg. 1,825,187 13,037,050
Park
- -----------------------------------------------------------------------------------
655 A Pacesetter Business Earn Mtg. 1,110,377 7,931,264
- -----------------------------------------------------------------------------------
621 A Gordon Drive Earn Mtg. 2,312,788 16,519,914
- -----------------------------------------------------------------------------------
641 B Midis Property NE ISF 651,619 4,654,421
- -----------------------------------------------------------------------------------
590 C Berdon Plaza NE REO 917,141 6,551,007
- -----------------------------------------------------------------------------------
452 C Keewaydin NE REO 394,853 2,820,379
- -----------------------------------------------------------------------------------
639 D East Bradford Associates E ISF 883,152 6,308,229
- -----------------------------------------------------------------------------------
609 D Cascade Drive E ISF 872,415 6,231,536
- -----------------------------------------------------------------------------------
643 E Villa Del Cresta E REO 1,163,212 8,308,657
- -----------------------------------------------------------------------------------
421 E Parkway Business Center E REO 506,442 3,617,443
- -----------------------------------------------------------------------------------
467 E North County E REO 628,208 4,487,200
- -----------------------------------------------------------------------------------
498 E Junipers at Yarmouth E REO 860,871 6,149,079
- -----------------------------------------------------------------------------------
647 E Moreno Valley (BIF) E REO 539,161 3,851,150
- -----------------------------------------------------------------------------------
646 E McLaughlin Apartments E REO 456,150 3,258,214
- -----------------------------------------------------------------------------------
673 E Arcade E REO 737,397 5,267,121
- -----------------------------------------------------------------------------------
687 E Six Sentry Parkway (5 E REO 665,225 4,751,607
bldgs.)
- -----------------------------------------------------------------------------------
574 E Burtonsville Commerce E REO 653,772 4,669,800
- -----------------------------------------------------------------------------------
447 F Riverside Center Equity 860,845 6,148,893
- -----------------------------------------------------------------------------------
563 F Slauson Business Center Equity 299,965 2,142,607
- -----------------------------------------------------------------------------------
672 F Paseo Padre Equity 2,541,631 18,154,507
- -----------------------------------------------------------------------------------
558 F Pinebrook Business Equity 645,255 4,608,964
Center
- -----------------------------------------------------------------------------------
448 F Stadium Towers Equity 529,117 3,779,407
- -----------------------------------------------------------------------------------
591 G Creekside Center Participation 809,083 5,779,164
Associates
- -----------------------------------------------------------------------------------
630 G Newark C&C Associates Participation 943,059 6,736,136
- -----------------------------------------------------------------------------------
576 G Keystone I Participation 543,016 3,878,686
- -----------------------------------------------------------------------------------
TOTALS $22,412,371 $160,088,364
---------------------------------------------------------------------
Extrapolated Portfolio NOI Capped at 14% 227,468,610
ADD: 90% of Face Value of Performing Loans $ 53,169,397
ADD: Proceeds from Sale of Junipers at Yarmouth 9,000,000
LESS: Extrapolated Value of Performing Loans (53,900,420)
LESS: Capitalized NOI of Junipers at Yarmouth (6,149,079)
------------
Subtotal: 229,588,509
------------
LESS: Selling and Disposition Expenses (11,479,425)
------------
EXTRAPOLATED VALUE OF PORTFOLIO $218,109,083
============
</TABLE>
D-9
<PAGE>
EXHIBIT B (4 OF 4)
MORTGAGE AND REALTY TRUST
LIQUIDATION VALUE
CAPITALIZED AT 16%
<TABLE>
<CAPTION>
APRIL 1996 APRIL 1996
NET ASSET NOI
ASSET ASSET ASSET OPERATING CAPPED @
CONTROL # TYPE ASSET NAME TYPE INCOME 16%
--------- ----- ---------- ------------- ----------- ------------
<C> <C> <S> <C> <C> <C>
594 A Six Sentry Parkway (1 Earn Mtg. 62,430 390,188
bldg.)
- -----------------------------------------------------------------------------------
658 A Caltrans-Freeway Corp. Earn Mtg. 1,825,187 11,407,419
Park
- -----------------------------------------------------------------------------------
655 A Pacesetter Business Earn Mtg. 1,110,377 6,939,856
- -----------------------------------------------------------------------------------
621 A Gordon Drive Earn Mtg. 2,312,788 14,454,925
- -----------------------------------------------------------------------------------
641 B Midis Property NE ISF 651,619 4,072,619
- -----------------------------------------------------------------------------------
590 C Berdon Plaza NE REO 917,141 5,732,131
- -----------------------------------------------------------------------------------
452 C Keewaydin NE REO 394,853 2,467,831
- -----------------------------------------------------------------------------------
639 D East Bradford Associates E ISF 883,152 5,519,700
- -----------------------------------------------------------------------------------
609 D Cascade Drive E ISF 872,415 5,452,594
- -----------------------------------------------------------------------------------
643 E Villa Del Cresta E REO 1,163,212 7,270,075
- -----------------------------------------------------------------------------------
421 E Parkway Business Center E REO 506,442 3,165,263
- -----------------------------------------------------------------------------------
467 E North County E REO 628,208 3,926,300
- -----------------------------------------------------------------------------------
498 E Junipers at Yarmouth E REO 860,871 5,380,444
- -----------------------------------------------------------------------------------
647 E Moreno Valley (BIF) E REO 539,161 3,369,756
- -----------------------------------------------------------------------------------
646 E McLaughlin Apartments E REO 456,150 2,850,938
- -----------------------------------------------------------------------------------
673 E Arcade E REO 737,397 4,608,731
- -----------------------------------------------------------------------------------
687 E Six Sentry Parkway (5 E REO 665,225 4,157,656
bldgs.)
- -----------------------------------------------------------------------------------
574 E Burtonsville Commerce E REO 653,772 4,086,075
- -----------------------------------------------------------------------------------
447 F Riverside Center Equity 860,845 5,380,281
- -----------------------------------------------------------------------------------
563 F Slauson Business Center Equity 299,965 1,874,781
- -----------------------------------------------------------------------------------
672 F Paseo Padre Equity 2,541,631 15,885,194
- -----------------------------------------------------------------------------------
558 F Pinebrook Business Equity 645,255 4,032,844
Center
- -----------------------------------------------------------------------------------
448 F Stadium Towers Equity 529,117 3,306,981
- -----------------------------------------------------------------------------------
591 G Creekside Center Participation 809,083 5,056,769
Associates
- -----------------------------------------------------------------------------------
630 G Newark C&C Associates Participation 943,059 5,894,119
- -----------------------------------------------------------------------------------
576 G Keystone I Participation 543,016 3,393,850
- -----------------------------------------------------------------------------------
TOTALS $22,412,371 $140,077,319
---------------------------------------------------------------------
Extrapolated Portfolio NOI Capped at 14% 199,035,034
ADD: 80% of Face Value of Performing Loans $ 47,261,686
ADD: Proceeds from Sale of Junipers at Yarmouth 9,000,000
LESS: Extrapolated Value of Performing Loans (47,162,867)
LESS: Capitalized NOI of Junipers at Yarmouth (5,380,444)
------------
Subtotal: 202,753,409
------------
LESS: Selling and Disposition Expenses (10,137,670)
------------
EXTRAPOLATED VALUE OF PORTFOLIO $192,615,739
============
</TABLE>
D-10
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-6613
MORTGAGE AND REALTY TRUST
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 23-1862664
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
8380 OLD YORK ROAD, SUITE 300 19027
ELKINS PARK, PENNSYLVANIA (Zip code)
(Address of principal
executive offices)
</TABLE>
Registrant's telephone number, including area code: 215-881-1525
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------------------------------- -------------------------------
<S> <C>
Common Shares, par value $1.00 per share New York Stock Exchange
Pacific Stock Exchange
</TABLE>
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. /X/
The aggregate market value of the Common Shares held by non-affiliates of
the registrant at December 14, 1994, computed by reference to the closing sale
price of such shares as reported in the Consolidated Transaction Reporting
System, was $1,750,000. The number of Common Shares outstanding at December 14,
1994 was 11,226,215. Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 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 ___
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
GENERAL
Mortgage and Realty Trust (the "Trust") is a Maryland real estate investment
trust engaged in the business of managing its portfolio of mortgage loans and
real estate investments. The Trust was organized in 1970 as PNB Mortgage and
Realty Investors. In 1979, Sutro Mortgage Investment Trust combined into the
Trust. In 1984, the Trust changed its name to Mortgage and Realty Trust. The
Trust is organized under a Declaration of Trust as amended through February 17,
1993 and conducts its business in such a fashion as to qualify as a real estate
investment trust under Sections 856-860 of the Internal Revenue Code of 1986, as
amended. The Trust is currently managed by seven Trustees, each of whom is
elected annually by the Trust's shareholders at the annual meeting of
shareholders. Although the annual meeting of shareholders is customarily held in
February of each year, the Trust has determined for 1995 to postpone the meeting
pending any restructuring agreed upon with the holders of the Trust's Senior
Secured Uncertificated Notes due 1995 (the "Senior Notes"). The Trust has six
executive officers, two of whom are also Trustees.
PREVIOUS CHAPTER 11 PROCEEDING AND PLAN OF REORGANIZATION
On April 12, 1990, the Trust filed a voluntary petition for reorganization
under chapter 11 of the United States Code, as amended (the "Bankruptcy Code"),
in the United States Bankruptcy Court for the Central District of California.
The decision of the Trustees of the Trust to file a voluntary petition for
reorganization was reached following a series of events commencing on March 12,
1990, when Standard & Poor's Corporation downgraded the rating for the
commercial paper of the Trust from A-2 to A-3. As a result of this downgrading,
the Trust was unable to access the commercial paper markets, resulting in a
series of defaults under the Trust's outstanding indebtedness.
After unsuccessfully negotiating with a group of lenders to establish a
replacement credit arrangement, the Trustees of the Trust decided on April 12,
1990, that the interests of shareholders and other parties in interest would be
better served by filing for reorganization under Chapter 11.
On November 21, 1990, a Joint Plan of Reorganization (the "1991 Plan")
proposed by the Trust, the official creditors' committee and the official equity
security holders' committee was filed with the bankruptcy court pursuant to
section 1121 of the Bankruptcy Code. The 1991 Plan was confirmed by the
bankruptcy court by an order entered February 27, 1991. The 1991 Plan was filed
as Exhibit 4.4 to the Trust's Annual Report on Form 10-K for the fiscal year
ended September 30, 1991. An amendment to the 1991 Plan effected as part of the
1992 Restructuring (discussed below) was filed as Exhibit 4.4 to the Trust's
Annual Report on Form 10-K for the fiscal year ended September 30, 1992.
The 1991 Plan provided that the holders of claims against the Trust were to
receive payments in installments over a period ending on June 30, 1995, with the
right of the Trust to defer certain principal amounts for up to 24 months, up to
December 31, 1995. Interest was payable initially at Bank of America N.T. &
S.A.'s reference rate plus one percent, increasing by 0.25% every six months,
with interest on deferred amounts at the adjusted rate plus two percent. The
1991 Plan also included numerous financial, affirmative and negative covenants,
including covenants relating to the ratio of the Trust's outstanding debt to its
capital base, the ratio of earning assets to outstanding debt and the amount of
non-earning assets, and covenants severely limiting the Trust's ability to make
new investments or to incur new indebtedness.
The forecast upon which the 1991 Plan was based assumed that the real estate
markets would begin to improve in fiscal 1992. However, the markets continued to
materially deteriorate. Despite these conditions, the Trust was able to make all
required interest payments and to exceed the required amortization payments,
reducing the debt to $374,000,000 at June 30, 1991 as opposed to the requirement
of $380,000,000 and to $329,000,000 at January 3, 1992 as opposed to the
requirement of $340,000,000 at December 31, 1991. These results were achieved
through liquidating Trust assets at substantial discounts from their acquisition
cost.
1
The continued deterioration of the real estate markets made it impossible
for the Trust to meet the amortization payment at June 30, 1992, which was
required to reduce the Trust's debt to $291,250,000, taking into account
deferrals permitted under the 1991 Plan. The deterioration also precluded the
Trust from being able to meet the financial covenants of the 1991 Plan.
To adjust its operations to current market conditions, by 1992 the Trust had
redirected its focus. The Trust had historically emphasized earnings growth, and
the accompanying asset acquisitions. Because of changes in the economy and the
financial and real estate markets, which adversely affected the Trust's business
and asset values, management moved to an emphasis on improving cash flow in
order to meet its obligations under the 1991 Plan and then to provide an
opportunity for growth and increased shareholder value in the future when the
United States real estate markets would, eventually, stabilize and return to a
more traditional environment. Meeting the interest and principal payments
required under the 1991 Plan was one of the Trust's important objectives.
Management focused efforts on generating sufficient liquidity through active and
asset-specific management of its overall portfolio to meet those payments, while
at the same time maximizing future shareholder value. However, in light of the
impending June 30, 1992 interest and principal payments, which aggregated
approximately $44.4 million under the 1991 Plan, and the continued stagnation in
the real estate market, in late 1991 and early 1992 the Trust determined that it
was necessary to defer a portion of the principal payments of the outstanding
debt and limit certain future cash interest payments to allow sufficient time
for liquidity to return to the United States real estate markets.
As part of the ongoing effort to strengthen the Trust's capital structure,
of which the 1992 Restructuring (as defined below) was to be an important
element, the Trust also considered raising cash through structured financings
such as asset securitizations. However, the Trust was ultimately unable to
generate funds through such transactions.
1992 RESTRUCTURING
At the end of the Trust's fiscal year ending September 30, 1991, it was
evident to the Trust that conditions in the real estate markets were continuing
to deteriorate. Commencing in the first quarter of fiscal 1992, the Trust held
discussions with the official creditors' committee to discuss a rescheduling of
the debt obligations under the 1991 Plan. Throughout the balance of the first
quarter of fiscal 1992 and during the second and third quarters of fiscal 1992,
the Trust negotiated with the official creditors' committee to develop a prudent
rescheduling of such debt. Pursuant to the Trust's negotiations with its
official creditors' committee, on June 15, 1992 the Trust commenced a
solicitation of acceptances to certain modifications (the "1992 Modifications")
to the outstanding debt obligations of the Trust and to a prepackaged plan of
reorganization (the "Proposed 1992 Plan") to effect the same 1992 Modifications.
In order to effect the 1992 Modifications without implementing the Proposed 1992
Plan, the Trust was required to obtain acceptances from holders of 100% of the
outstanding debt obligations. The proposed modifications to the outstanding debt
were identical under the proposed out-of-court restructuring and the Proposed
1992 Plan. The Trust received 100% acceptance of the 1992 Modifications and, on
July 15, 1992, the Trust successfully restructured its outstanding debt in
accordance with the proposed 1992 Modifications (the "1992 Restructuring").
Pursuant to the 1992 Restructuring, the outstanding debt was restructured in
the form of the Senior Notes. The 1992 Modifications provided, among other
things, for (i) an increase in the amounts of required principal payments which
could be deferred (while retaining the final payment date for deferred payments
at December 31, 1995), (ii) an extension of the permitted repayment period of
such deferred amounts from 24 months to 30 months from the date a deferral is
utilized, (iii) the establishment of a limit on the maximum rate of interest to
be paid in cash on a current basis at 9% through June 30, 1994, with any excess
being accrued and paid at December 31, 1995, (iv) changes in certain required
financial covenants to reflect the then-existing financial condition of the
Trust and the then-existing real estate markets, (v) with the approval of the
holders of 66 2/3% of the Senior Notes, the release of collateral for certain
financings by the Trust, provided such financings would result in the reduction
in the amount of Senior Notes, and (vi) the payment of additional consideration
(the
2
restructuring fee) to the holders of the Senior Notes equal to one percent of
the principal amount of the Senior Notes, payable in four semi-annual
installments commencing on the date the 1992 Restructuring became effective.
Pursuant to the 1992 Restructuring, the Trust entered into the Indenture
(the "Indenture") governing the Senior Notes with Wilmington Trust Company, as
trustee (the "Indenture Trustee"), entered into a second amendment to the
Trust's outstanding collateral and security agreement dated as of February 21,
1991 (as amended, the "Collateral Agreement") with the Indenture Trustee and
William J. Wade, as collateral agents (the "Collateral Agents"), and amended the
1991 Plan.
CURRENT DEBT SERVICE REQUIREMENTS AND DEFAULTS AND FORECAST SHORTFALL IN
OPERATING CASH FLOW
The face amount of the Senior Notes at September 30, 1994 was $290,000,000.
The Senior Notes provide that the holders of Senior Notes will receive
semi-annual payments of principal on June 30 and December 31 of each year until
June 30, 1995 when all undeferred principal is due. The Senior Note Indenture
also provides for quarterly additional payments of principal in an amount equal
to available cash (as defined in the Indenture) held by the Trust at the end of
each quarter in excess of $10 million, less certain dividend overpayments, if
any. The Trust has the right to defer certain principal payments for up to 30
months until December 31, 1995 at which time no more principal payments may be
deferred and all deferred amounts are due. The Senior Notes provide for payments
of interest quarterly on March 31, June 30, September 30 and December 31 of each
year. Interest on the Senior Notes was payable initially in 1991 at Bank of
America N.T. & S.A.'s reference rate plus one percent, increasing 0.25% every
six months. The interest rate spread over such reference rate in effect on
September 30, 1994 was 2.75%, with the next scheduled date for an increase in
the rate being January 1, 1995. Interest on deferred principal is payable at
such adjusted rate plus two percent. The Senior Note Indenture also contains
numerous financial, affirmative and negative covenants as described above.
The financial forecast upon which the 1992 Restructuring was based assumed
that the real estate markets in which the Trust holds assets would stop or slow
their decline by 1993 with some improvement in 1994. Instead, since the
effective date of the 1992 Restructuring, these markets have failed to improve
or otherwise substantially rebound. The Trust's business, including its ongoing
efforts to refinance and sell property, did not generate cash flow sufficient to
service the Senior Notes during the fiscal years ended September 30, 1993 and
1994. In any event, the Senior Notes will need to be refinanced on or about June
30, 1995.
Because its operating income has declined due to the continued deterioration
of the real estate markets, the Trust was not able to meet its scheduled June
30, 1993 principal payment on the Senior Notes of $20,000,000, which was
required to reduce the principal amount of the Senior Notes to $270,000,000,
taking into account deferrals permitted under the Senior Note Indenture. The
Trust's failure to make the June 30 principal payment constituted an event of
default under the Senior Note Indenture. The deterioration of the real estate
markets also precluded the Trust from being able to meet certain ratios set
forth in the financial covenants of the Senior Note Indenture effective March
31, June 30, and September 30, 1993, constituting additional events of default.
Certain of these covenants were previously amended in or prior to the 1992
Restructuring. On May 26, 1993, the Trust received from the holders of more than
66 2/3% in principal amount of Senior Notes a waiver relating to the March 31
financial covenant default.
The Trust timely paid the June 30 and September 30, 1993 interest payments
of $6.8 million and $6.6 million, respectively. The Trust also paid the final
payment of the restructuring fee of $812,500 on September 30, 1993. An
additional $33.8 million in principal (taking into account permitted deferrals)
and $6.6 million in interest was due on December 31, 1993; another $6,400,000 in
interest was due on March 31, 1994; an additional $30,000,000 in principal
(taking into account permitted deferrals) and $7,200,000 in interest was due on
June 30, 1994; and another $7,900,000 in interest was due on September 30, 1994.
Consistent with the then ongoing negotiation with the principal holders of the
3
Senior Notes and an agreement in principal reached in August 1993 (see
"1993-1994 Negotiations With the Creditors' Committee" below), the Trust did not
pay the interest or principal due at December 31, 1993, constituting additional
events of default under the Indenture. The Trust currently has no agreement with
any holders of Senior Notes that it will not pay interest, principal or other
amounts due or to become due on the Senior Notes; however, the Trust has
continued to suspend payments on the Senior Notes. Because the Trust did not
make otherwise required payments on June 30, 1993, December 31, 1993, March 31,
1994, June 30, 1994 and September 30, 1994, at the end of the first quarter of
fiscal 1994 (ending December 31, 1993) the Trust held approximately $17.8
million in available cash (as defined in the Indenture), at the end of the
second quarter of fiscal 1994 (ending March 31, 1994) the Trust held
approximately $32.8 million in available cash, at the end of the third quarter
of fiscal 1994 (ending June 30, 1994) the Trust held approximately $53.2 million
in available cash, and at the end of fiscal year 1994 (ending September 30,
1994) the Trust held approximately $57.3 million in available cash. Assuming no
other payment defaults, the Trust would have been obligated to pay the excess of
such available cash over $10 million to Senior Note holders as an additional
principal payment. The Trust forecasts that it will have continuing difficulty
meeting its obligations under the Senior Note Indenture without a substantial
restructuring of such debt.
Notwithstanding the uncured events of default, neither the Indenture Trustee
nor any holders of the Senior Notes have accelerated the Senior Notes or
exercised any other remedy available upon the occurrence of the events of
default described above. On July 2, 1993 holders of approximately 81% of the
Senior Notes agreed, subject to certain conditions, not to accelerate the Senior
Notes or take any other remedial or enforcement action during a defined
standstill period (the "Standstill Period") initially expiring July 31, 1993.
The Standstill Period was extended by holders of more than 66 2/3% of the Senior
Notes on August 3, August 20, September 23, October 5 and November 23, 1993.
However, the Standstill Period expired on December 3, 1993. The Company believes
that no further extensions of the Standstill Period will be granted. Subsequent
to the expiration of the Standstill Period, on or about December 8, 1993, the
Indenture Trustee notified the Trust's bank of the Indenture Trustee's security
interest in the Trust's deposit accounts and instructed the bank to freeze the
Trust's cash until otherwise instructed by the Indenture Trustee. Since that
date, the Trust has operated on an ad hoc basis with the Indenture Trustee in
administering its cash, with all cash use subject to review and approval by the
Indenture Trustee. On or about February 3, 1994, the Company and the Indenture
Trustee and Collateral Agents reached further understanding regarding the
Trust's use of cash and administration of its assets in the absence of a new or
extended standstill period. Pursuant to the understanding, which is terminable
at will by the Indenture Trustee or Collateral Agents, the Trust will continue
to use its cash on an ad hoc basis, subject to Indenture Trustee and Collateral
Agent approval, and the Trust will administer its assets as if no default had
occurred and was continuing. In May 1994, the Trust's bank notified the Trust
that it intended to close all of the Trust's operating accounts with the bank on
May 31, 1994. Consequently, the Trust established new operating accounts at
Wilmington Trust Company and transferred all of its bank balances to such
accounts. Concurrently, the Trust and the Indenture Trustee entered into a First
Supplemental Indenture, dated as of May 25, 1994, amending the Indenture to
provide for the new accounts. The Trust also entered into a Deposit Account
Security Agreement relating to such accounts and supplemented the February
operating arrangement with the Indenture Trustee and the Collateral Agents to
provide for the new accounts. Although the Trust has entered into the First
Supplemental Indenture and amended its operating arrangement with the Indenture
Trustee and the Collateral Agents, there can be no assurance that the Indenture
Trustee or Collateral Agents will not terminate the amended cash use arrangement
or take further remedial or enforcement action with respect to the Trust's bank
accounts or other properties, including acceleration of the Senior Notes and
foreclosure. Such action, or the failure of the Indenture Trustee to consent to
necessary use of cash or releases of collateral in the conduct of the Trust's
business would have a material adverse effect on the Trust's operations and
could cause the Trust to seek relief under chapter 11 of the Bankruptcy Code.
4
Lack of liquidity for real estate has continued since the end of the Trust's
fiscal year. The Trust's operating cash flow has declined as it has been forced
to sell assets currently yielding higher returns. Approximately half of the
Trust's portfolio is in California where the general economy and the real estate
markets continue to be in recession. See "Investments" below.
1993-1994 NEGOTIATIONS WITH THE OFFICIAL CREDITORS' COMMITTEE
During the second fiscal quarter of 1993, it became apparent to the Trust
and its financial advisors that the Trust's projected cash flow would not be
adequate to meet its obligations in the future. In February 1993 the Trust
contacted its official creditors' committee to apprise the official creditors'
committee and its advisors of the Trust's forecast difficulties. In or about
February 1993, the Trust and its advisors met with its official creditor's
committee and its advisors to discuss the Trust's condition and prospects.
Thereafter, in March 1993, the Trust and the official creditors' committee
commenced negotiations regarding a restructuring of the Senior Notes.
Beginning with the initial formal meeting in March 1993, throughout the
period from March through August 1993, the Trust and its advisors met with the
official creditors' committee and its advisors to negotiate a restructuring. In
August 1993, the Trust and the official creditors' committee met and agreed to
the broad outlines of the economic terms of a restructuring, subject to the
approval of the Trustees of the Trust. Under the agreement in principle, the
Senior Notes would be exchanged for approximately $195 million of new senior
secured notes and common shares representing 85% of the equity of the Trust.
Thereafter, on August 18, 1993, the Trustees of the Trust approved the economic
terms of the restructuring of the Senior Notes subject to, among other things,
receipt of indications of support for the restructuring from individual members
of the official creditors' committee and other holders of the Senior Notes
reasonably sufficient to effect the restructuring pursuant to a prepackaged plan
of reorganization (typically holders of at least two-thirds in principal amount
and one half in number of claims). On August 19, 1993, the Trust announced that
it had reached a non-binding agreement in principle with the official creditors'
committee (representing approximately 43% of the Senior Notes) to restructure
the indebtedness represented by the Senior Notes.
While the Trust was negotiating with the official creditors' committee, the
Trust was also discussing possible third-party investment in the restructuring.
Although all potential third-party investors were offered an opportunity to
propose restructuring alternatives, only three such investors made formal
proposals to the Trust. The official creditors' committee advised the Trust that
the offers were not acceptable and they did not believe that it was in their
best interests in the restructuring to pursue such third-party participation. As
a result, the Trust suspended the solicitation of interested parties, and the
Trust and the official creditors' committee agreed on the internal restructuring
contained in the August 1993 agreement in principle. Commencing again in
November 1993, as the prospects for implementing the August 1993 agreement in
principle waned, the Trust resumed responding to inquiries from third parties
about participation in a restructuring of the Trust.
Commencing at about the time of the agreement in principle between the Trust
and the official creditors' committee, certain of the Senior Notes began to
trade. Interest in the trading of Senior Notes increased after announcement of
the terms of the restructuring and, by December 1993, in excess of 50% of the
principal amount of the Senior Notes had traded.
Included in the Senior Notes initially traded were all of the Senior Notes
held by two of the five members of the official creditors' committee who had
negotiated the August 1993 agreement in principle. In or about October 1993 four
of the holders who had acquired Senior Notes and who then held a significant
amount of Senior Notes signed confidentiality letters with the Trust and
requested to be named to the official creditors' committee and receive financial
and operating information relating to the Trust. The three then-remaining
members of the official creditors' committee did not grant committee membership
to the holders but acquiesced in the Trust's delivery of confidential
information to the investing holders. In October 1993, the investing holders
commenced their due diligence review of the Trust, which included financial and
other information provided by the Trust. At the request of the investing
holders, the Trust agreed to pay certain fees and expenses of a financial
5
advisor to the investing holders. In or about November 1993, the investing
holders retained Smith Barney Shearson Inc. ("Smith Barney") as their financial
advisor. Smith Barney immediately commenced its analysis of the financial
condition and operations of the Trust and the proposed agreement in principle.
Subsequently, another member of the official creditors' committee sold all
of its Senior Notes, part to a member of the official creditors' committee and
the balance to other persons. That sale left the official creditors' committee
with two members, one of whom held, as a result of secondary claims purchases,
at September 30, 1994 in excess of 33 1/3% of the Senior Notes (the "33 1/3%
Holder"). Because of the substantial trading in the Senior Notes and the
inability of the Trust to obtain satisfactory indications of support for the
August 1993 agreement in principle from any holders of Senior Notes, any action
by the Trust to implement the Trust's original agreed restructuring was
suspended. In or about September 1994, another of the members of the official
creditors' committee sold all of its Senior Notes. With that sale, the only
remaining member of the official creditors' committee was the 33 1/3% Holder. On
September 9, 1994, the Trust's counsel received telephonic notice from counsel
to the official creditors' committee that it believed that the official
creditors' committee had ceased to operate.
NEGOTIATIONS REGARDING A RESTRUCTURING
Throughout the second and third quarters of fiscal 1994, the Trust's
management and advisors continued discussions with certain principal holders of
the Senior Notes and their representatives to explore various alternatives for
restructuring the Senior Notes. In March 1994, the principal holders requested
that the Trust agree to pay certain fees and expenses of legal counsel to the
principal holders. The Trust agreed, and in March 1994, the principal holders
retained counsel to advise them in the Trust's financial restructuring.
Thereafter, in June 1994, the principal holders requested and the Trust agreed
to pay certain fees and expenses of a new financial advisor to the principal
holders. The negotiations among the Trust, the various creditor constituencies
and other interested parties in the Trust's financial restructuring continued
into the fourth quarter of fiscal 1994. If a restructing cannot be consummated,
or if the holders of Senior Notes or the Indenture Trustee take action or fail
to cooperate with the Trust in such a manner that the business or operations of
the Trust are jeopardized, the Trust will consider other alternatives, including
the filing of a voluntary bankruptcy petition under chapter 11 of the Bankruptcy
Code.
On November 17, 1994, the Trust issued a press release announcing that it
had reached an agreement in principle with a substantial number of holders of
its Senior Notes on the terms of a restructuring of the Senior Notes. A copy of
the press release and the term sheet to the restructuring were attached as
exhibits to the Current Report on Form 8-K filed on November 28, 1994 with the
Securities and Exchange Commission (the "Commission").
Pursuant to the agreement in principle, holders of the Senior Notes in the
aggregate principal amount of $290 million plus accrued interest of $41.7
million through December 31, 1994 will receive under a prepackaged plan of
reorganization under chapter 11 of the Bankruptcy Code $110 million of new
senior secured notes due 2002, approximately $50 million in cash and 97% of the
restructured equity of the Trust (or substantially all the restructured equity
if holders of the Trust's outstanding common shares do not vote to accept the
prepackaged plan). If holders of the outstanding common shares vote to accept
the prepackaged plan, such holders will retain 3% of the equity of the
restructured Trust. The agreement in principle anticipates that the new senior
secured notes will mature in 2002 and bear interest at the rate of 11 1/8% per
annum. It is also anticipated that holders of unsecured claims will receive cash
in the allowed amount of their claims. It is contemplated that the Trust will
prepare a "shelf" registration statement for the new securities issued pursuant
to the prepackaged plan.
6
The agreement to pursue the restructuring proposal is subject to a number of
conditions and the Trust intends to effect the restructuring through a
prepackaged chapter 11 bankruptcy. At this time there can be no assurance that
the conditions to consummation of the proposed restructuring will be satisfied.
Other details of the agreement, including the additional conditions to
commencement and consummation of the restructuring, have not been finalized
pending the filing of proxy solicitation materials with the Commission and
distribution of a disclosure statement for the solicitation of votes for the
prepackaged plan to holders of the Trust's outstanding securities. No consents
will be accepted other than pursuant to such disclosure statement and proxy
statement. The advisors to the Trust and the various holders of Senior Notes are
negotiating additional terms of the new debt securities to be received by the
Senior Note holders under the prepackaged plan, as well as the formal
documentation necessary to the restructuring. Details of the agreement in
principle will be disclosed in that formal documentation.
OTHER EVENTS
In a letter dated November 29, 1994, the New York Stock Exchange (the
"NYSE") notified the Trust that in light of the Trust's present financial
condition, as well as its November 17, 1994 press release regarding the Trust's
intention to file a prepackaged plan of reorganization under chapter 11 of the
Bankruptcy Code, the NYSE is reviewing the continued listing of the Trust.
Although the Trust is working with representatives of the NYSE to allow the
Trust to continue to be listed, there can be no assurance that the NYSE will not
determine to commence a formal delisting action.
INVESTMENTS
Although the Trust has continued to fund previously existing investment
commitments and to fund limited tenant improvements and similar investments
necessary to retain or obtain tenants, the Trust has not made any new
investments since its chapter 11 filing, but it has continued to manage its
investment portfolio. The Trust's future investment strategy cannot be
formulated until the Trust's debt restructuring terms are finalized. The Trust's
investments include short and intermediate-term standing loans, long-term
participating loans and investments in real estate.
Loans may be secured by first or junior mortgages as well as mortgages
secured by leaseholds. Loans made by the Trust are secured by mortgages on
income-producing properties, including office buildings, shopping centers,
industrial projects, apartments and condominium projects. When the Trust made
investments, it abided by various restrictions consisting principally of
loan-to-value ratios, investment ranges and percentage of total assets invested
in loans to a single borrower.
The Trust's investments are primarily located in major metropolitan areas
throughout the United States. As of September 30, 1994, the Trust held
investments in mortgage loans, investments in real estate and other interests in
real properties located in 19 states.
Total loans and investment commitments outstanding at September 30, 1994
were $310,588,000 of which $615,000 remained to be disbursed.
The following pages contain summaries of the Trust's commitments and
investments at September 30, 1994 and certain information pertaining to
non-earning loans, delinquent earning loans, non-earning in-substance
foreclosures and non-earning foreclosed properties.
7
MORTGAGE AND REALTY TRUST
SUMMARY OF INVESTMENTS AT SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
AMOUNT
AMOUNT COMMITTED OUTSTANDING
---------------- ----------------
<S> <C> <C>
TYPE OF INVESTMENTS
SHORT AND INTERMEDIATE-TERM
Mortgage Loans:
Standing loans............................................................ $ 62,469,000 $ 61,854,000
Properties Acquired Through Foreclosure and Held for Sale:
Earning................................................................... 68,437,000 68,437,000
Non-earning............................................................... 32,282,000 32,282,000
In-Substance Foreclosures:
Earning................................................................... 62,405,000 62,405,000
Non-earning............................................................... 10,228,000 10,228,000
Notes Receivable............................................................ 760,000 760,000
---------------- ----------------
Total Short and Intermediate-Term....................................... 236,581,000 235,966,000
---------------- ----------------
LONG-TERM
Participating Loans:
Participating Phase....................................................... 4,718,000 4,718,000
Amortizing Loans............................................................ 2,908,000 2,908,000
Investment in Real Estate Equities.......................................... 56,857,000 56,857,000
Investment in Partnerships.................................................. 9,524,000 9,524,000
---------------- ----------------
Total Long-Term......................................................... 74,007,000 74,007,000
---------------- ----------------
Total Invested Assets....................................................... $ 310,588,000 309,973,000
----------------
----------------
Less Deferred Fees........................................................ (496,000)
----------------
Total Invested Assets....................................................... $ 309,477,000
----------------
----------------
</TABLE>
MORTGAGE AND REALTY TRUST
NON-EARNING IN-SUBSTANCE FORECLOSURES
AND NON-EARNING FORECLOSED PROPERTY HELD FOR SALE
(BY GEOGRAPHIC DISTRIBUTION AND PROPERTY TYPE)
SEPTEMBER 30, 1994
(000 OMITTED)
<TABLE>
<CAPTION>
RETAIL INDUSTRIAL OFFICE
CENTER CENTER BUILDING TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
California.......................................................... $ -- $ 10,513 $ 10,031 $ 20,544
Massachusetts....................................................... 5,039 2,712 1,027 8,778
New Hampshire....................................................... -- 5,157 -- 5,157
New Jersey.......................................................... -- -- 5,392 5,392
Pennsylvania........................................................ -- 2,609 -- 2,609
--------- --------- --------- ---------
$ 5,039 $ 20,991 $ 16,450 $ 42,480
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
8
MORTGAGE AND REALTY TRUST
GEOGRAPHIC DISTRIBUTION OF INVESTMENTS BY COMMITTED AMOUNTS
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
RETAIL RESEARCH &
STATE APARTMENTS HOTEL INDUSTRIAL OFFICE RESIDENTIAL BUILDINGS DEVELOPMENT TOTALS %
- ------------------- ----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona........... $ 4,384,479 $ 4,384,479 1.41%
California........ $ 254,283 41,353,733 $23,332,370 $ 74,197 $62,855,920 $24,132,073 152,002,576 49.07%
Colorado.......... 37,924 204,931 242,855 0.08%
Delaware.......... 204,312 204,312 0.07%
Georgia........... 62,752 62,752 0.02%
Indiana........... 4,315,288 4,315,288 1.39%
Maine............. 7,690,408 7,690,408 2.48%
Maryland.......... 9,211,305 816,481 10,027,786 3.24%
Massachusetts..... 5,420,203 5,282,263 3,639,943 14,342,409 4.63%
Michigan.......... 6,694,782 6,694,782 2.16%
Minnesota......... 2,341,987 2,840,655 5,182,642 1.67%
Missouri.......... 9,006,582 9,006,582 2.91%
Nevada............ $3,060,000 3,060,000 0.99%
New Hampshire..... 5,157,610 1,398,963 6,556,573 2.12%
New Jersey........ 5,391,693 5,391,693 1.74%
Oregon............ 6,976,545 6,976,545 2.25%
Pennsylvania...... 24,108,284 21,077,135 13,856,155 9,872,505 68,914,079 22.24%
Virginia.......... 138,676 138,676 0.04%
Washington........ 4,633,272 4,633,272 1.49%
----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------ -------
Totals............ $27,961,343 $3,060,000 $87,399,568 $71,271,311 $1,334,342 $81,955,912 $36,845,233 $309,827,709
----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------
----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------
Percentage........ 9.02% 0.99% 28.20% 23.00% 0.43% 26.47% 11.89% 100.00%
----------- ---------- ----------- ----------- ---------- ----------- ----------- -------
----------- ---------- ----------- ----------- ---------- ----------- ----------- -------
</TABLE>
NON-EARNING INVESTMENTS, DELINQUENT EARNING LOANS AND FORECLOSED PROPERTIES
EARNING MORTGAGE LOANS MORE THAN 60 DAYS DELINQUENT -- The Trust generally
considers loans as delinquent if payment of interest and/or principal, as
required by the term of the note, is more than 60 days past due. At September
30, 1994, there were no loans which were so delinquent as to principal and/or
interest.
NON-EARNING MORTGAGE LOANS -- At September 30, 1994, there were no loans
classified as non-earning.
NON-EARNING IN-SUBSTANCE FORECLOSURES -- A loan is considered an
in-substance foreclosure if (1) the debtor has little or no equity considering
the fair value of the collateral, (2) proceeds for the repayment can be expected
to come only from operation or sale of the collateral, and (3) the debtor has
either formally or effectively abandoned control of the collateral. In-substance
foreclosures are classified as non-earning if they do not produce a minimum
annualized return of 5% or greater cash flow yield for two consecutive calendar
quarters. At September 30, 1994, there were two loans classified as non-earning
in-substance foreclosed which totalled $10,198,000. Descriptions of the two
investments are as follows:
(1) The Trust has a first mortgage loan on six industrial buildings
totalling 157,480 square feet located in Chula Vista, California. The
loan was classified as non-earning in-substance foreclosed in April 1994.
The property is currently 74% leased and occupied.
(2) The Trust has a first mortgage loan on 10 industrial buildings
containing 106,663 square feet located in Chino, California. The loan was
placed on non-earning status in June 1993 and reclassified as non-earning
in-substance foreclosed in September 1994. The property is currently 77%
leased and occupied.
9
NON-EARNING PROPERTIES ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE -- At
September 30, 1994, there were eleven non-earning properties acquired through
foreclosure and held for sale which totalled $32,282,000. Descriptions of the
eleven investments are as follows:
(1) The Trust had a first mortgage loan on an office/warehouse building
containing 119,000 square feet located in Hopkinton, Massachusetts. The
Trust acquired title to this property in January 1991. The project is
currently unleased.
(2) The Trust had a first mortgage loan on a retail shopping center
containing 111,339 square feet located in Fairhaven, Massachusetts. The
Trust acquired title to this property in April 1991. The project is
currently 30% leased and occupied. Subsequent to September 1994, a 20
year lease with Shaw's Supermarkets, Inc. for a 65,000 square feet
supermarket anchor store was completed, with occupancy expected in
mid-1995, which will result in the project being 88% leased and occupied.
(3) The Trust had a first mortgage loan on a 3-story office building
containing 37,800 square feet located in Piscataway, New Jersey. The
Trust acquired title to this property in August 1991. The project is
currently 80% leased and occupied.
(4) The Trust had a first mortgage loan on an industrial building
containing 57,900 square feet located in Framingham, Massachusetts. The
Trust acquired title to this property in April 1992. The property is
currently 65% leased and occupied.
(5) The Trust had a first mortgage loan on two adjoining office buildings
containing 39,087 square feet located in Woodland Hills, California. The
Trust acquired title to this property in May 1992. The property is
currently 80% leased and occupied.
(6) The Trust had first and second mortgage loans on two office/industrial
buildings containing 91,710 square feet and a 33,600 square foot
warehouse building located in Salem, New Hampshire. The Trust acquired
title to this property in August 1992. The project is currently 72%
leased and occupied.
(7) The Trust had a first mortgage loan on a manufacturing/warehouse
building containing 251,090 square feet located in Moreno Valley,
California. The Trust acquired title to this property in November 1992.
The property is 100% leased to one tenant who will begin making rental
payments in November 1994.
(8) The Trust had a first mortgage loan on a 4-story office building
containing 99,666 square feet located in Cherry Hill, New Jersey. The
Trust acquired title to this property in November 1992. The project is
currently 48% leased and occupied.
(9) The Trust had a first mortgage loan on an industrial building
containing 120,000 square feet located in Willow Grove, Pennsylvania. The
Trust acquired title to this property in June 1993. The project is
currently unleased.
(10) The Trust had a first mortgage loan on a 2-story office building
containing 30,000 square feet located in Sudbury, Massachusetts. The
Trust acquired title to this property in June 1993. The property is
currently unleased.
(11) The Trust had a first mortgage loan on 21,600 square feet of vacant
land located in Los Angeles, California. The Trust acquired title to this
property in June 1994.
ALLOWANCE FOR LOSSES
An allowance for losses is maintained based upon the Trustees' evaluation of
the Trust's investments. A review of all investments is made quarterly to
determine the adequacy of the allowance for losses. During the Trust's fiscal
year ended September 30, 1994, there were additions of $2,000,000 to the
allowance for losses and there were charges of $378,000, net of recoveries,
against the allowance.
10
The amount of the allowance for losses at September 30, 1994 was $13,430,000
(4.3% of the Trust's invested assets). For a description of the Trust's method
of determining the allowance for losses, see Notes 1 and 3 of Notes to the
Financial Statements.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES WITH THE TRUST
- ---------------------- --- -------------------------------------------------
<S> <C> <C>
Victor H. Schlesinger 69 Chairman and Trustee
C. W. Strong, Jr. 65 President, Chief Executive Officer and Trustee
Executive Vice President and Chief Operating
James A. Dalton 51 Officer
Daniel F. Hennessey 53 Treasurer and Chief Financial Officer
Donald W. Burnes, Jr. 45 Senior Vice President
Douglas R. Eckard 48 Senior Vice President
</TABLE>
The officers of the Trust serve a one-year term of office and are elected to
their positions each year by the Trustees at the annual organization meeting of
Trustees which normally immediately follows the annual meeting of shareholders.
All of the foregoing were last elected as officers at such meeting on February
10, 1993, with Mr. Eckard being promoted from Vice President to Senior Vice
President on August 17, 1993. Messrs. Schlesinger, Strong and Hennessey have
served as officers of the Trust for more than the past five years. Messrs.
Dalton and Eckard were first elected as officers of the Trust on September 20,
1989 in connection with the Trust becoming self-administered. Mr. Burnes was
first elected as an officer of the Trust on February 14, 1990. From 1982 to
1989, Mr. Dalton was the President of GMAC Realty Advisors. From 1984 to 1989,
Mr. Eckard was a Vice President of GMAC Realty Advisors. GMAC Realty Advisors
advised the Trust prior to its becoming a self-administered REIT in 1989. From
1981 to August 1989 Mr. Burnes was a Senior Vice President of Heller Financial
Incorporated. From August 1989 to December 1989 Mr. Burnes was a Vice President
at Sun State Savings in Arizona.
ITEM 2. PROPERTIES.
The Trust's real estate portfolio consists primarily of equity investments
in completed, income-producing properties such as industrial/research and
development buildings, office buildings and retail buildings located primarily
in southern California and mid-atlantic states.
The Trust's real estate portfolio at September 30, 1994 (net of accumulated
depreciation) consists of the following investments:
<TABLE>
<CAPTION>
NUMBER OF INVESTMENT % OF
TYPE OF PROPERTIES PROPERTIES AMOUNT TOTAL
- ---------------------------------------------------------------- --------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Apartments...................................................... 3 $ 21,012 13%
Office Buildings................................................ 13 56,655 34%
Industrial Buildings............................................ 12 46,741 28%
Retail Buildings................................................ 4 36,707 22%
Research and Development Buildings.............................. 2 5,985 3%
--
----------- ---------
34 $ 167,100 100%
--
--
----------- ---------
----------- ---------
</TABLE>
The Trust does not own any real property for use in connection with its
day-to-day operations. Office space for the Trust's principal office at 8380 Old
York Road, Suite 300, Elkins Park, Pennsylvania is leased for a three-year term
ending August 31, 1995. The Trust's only other office, located at 3500 West
Olive Avenue, Suite 600, Burbank, California, is leased for a five-year term
ending October 31, 1995. The total rental expense for the fiscal year ended
September 30, 1994 for both properties was $345,000. The Trust has become, and
may from time to time become, the owner or lessor of real estate in connection
with its investment and lender activities. See Item 1, "Business --
Investments."
11
ITEM 3. LEGAL PROCEEDINGS.
A discussion of events surrounding the Trust's bankruptcy filing and an
explanation of the material terms of the Trust's reorganization under the 1991
Plan are set forth in the section entitled "Previous Chapter 11 Proceeding and
the Plan of Reorganization" under Item 1 above. Notwithstanding the confirmation
of the 1991 Plan, as of September 30, 1994, the bankruptcy court continued to
have jurisdiction to, among other things, resolve disputes that may arise under
the 1991 Plan; however, the bankruptcy case relating to the 1991 Plan was closed
on November 4, 1994 pursuant to a final order of the bankruptcy court and the
official equity security holders' committee officially disbanded on November 22,
1994.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS.
(a) MARKET PRICE AND DIVIDENDS
The Trust's Common Shares are listed for trading on the New York Stock
Exchange and the Pacific Stock Exchange under the symbol MRT. The following
table shows the high and low sales prices for each fiscal quarter during the
past two years and dividends declared attributable to such quarters:
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
--------- --------- -------------
<S> <C> <C> <C>
1994
First Quarter.................................................... $ 5/8 $ 3/8 $ -0-
Second Quarter................................................... 5/8 3/8 -0-
Third Quarter.................................................... 1/2 3/8 -0-
Fourth Quarter................................................... 1/2 1/4 -0-
1993
First Quarter.................................................... $ 1 3/8 $ 7/8 $ -0-
Second Quarter................................................... 2 1/2 1 1/4 -0-
Third Quarter.................................................... 1 7/8 3/8 -0-
Fourth Quarter................................................... 7/8 3/8 -0-
</TABLE>
The Trust incurred net operating losses for tax purposes in fiscal 1991,
1992, 1993 and 1994, all of which will be available as a loss carryforward to
future years' taxable income. (See Note 1 of Notes to the Financial Statements
- --- "Income Taxes" regarding limitation of net operating losses.)
(b) HOLDERS OF COMMON SHARES
There were approximately 5,348 record holders of the Trust's Common Shares
at December 14, 1994.
(c) The Trust did not declare or pay any dividends during the fiscal year
ended September 30, 1994 or the fiscal year ended September 30, 1993. In
addition, the Indenture governing the Senior Notes prohibits the Trust from
paying any dividends to shareholders other than dividends required for the Trust
to maintain its REIT status and inadvertent overpayments of such dividends.
13
ITEM 6. SELECTED FINANCIAL DATA.
MORTGAGE AND REALTY TRUST
SELECTED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Total income..................... $ 36,277,000 $ 38,342,000 $ 42,009,000 $ 56,253,000 $ 68,233,000
Interest and other operating
expenses........................ 47,668,000 43,967,000 42,077,000 51,736,000 47,601,000
Depreciation and amortization.... 5,839,000 5,500,000 4,470,000 3,062,000 2,391,000
Loss before provision for losses,
reorganization expenses and gain
on sales of real estate......... (17,230,000) (11,125,000) (4,538,000) 1,455,000 18,241,000
Provision for losses............. 2,000,000 37,000,000 32,000,000 33,000,000 23,790,000
Reorganization expenses, net..... 2,360,000 5,844,000 934,000 4,352,000 5,051,000
Gain on sale of real estate...... -- -- 244,000 244,000
Net loss......................... (21,590,000) (53,969,000) (37,472,000) (35,653,000) (10,356,000)
PER SHARE DATA
Net loss......................... $(1.92) $(4.87) $(3.38) $ (3.22) $ (.94)
Dividends........................ -0- -0- -0- -0- .45
Book value....................... 1.79 3.71 8.63 12.01 15.23
BALANCE SHEET DATA
Total assets..................... $ 364,244,000 $ 353,874,000 $ 427,268,000 $ 514,754,000 $ 595,640,000
Invested assets.................. 309,477,000 347,526,000 424,394,000 505,600,000 547,480,000
Allowance for losses............. 13,430,000 11,808,000 19,353,000 14,707,000 10,792,000
Senior Notes..................... 290,000,000 290,000,000 312,000,000 374,000,000 403,884,000
Loan on equity investment........ 17,593,000 17,572,000 15,515,000 -- --
Shareholders' equity............. 20,033,000 41,623,000 95,592,000 133,064,000 168,717,000
Debt/equity ratio (1)............ 13.97:1 7.15:1 3.30:1 2.70:1 2.21:1
<FN>
- -------------------------
(1) Includes interest payable and is reduced by cash and cash equivalents.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES -- A Plan of Reorganization under Chapter 11
of the Bankruptcy Code was confirmed at a hearing held in the Bankruptcy Court
in Los Angeles, California, on February 21, 1991, and an order was entered
February 27, 1991, confirming the Plan. As a result of the liquidity problems in
the commercial real estate markets, the Trust was not able to meet the required
amortization at June 30, 1992 and the debt was restructured in July 1992 with
the unanimous consent of the creditors. The debt is now governed by an indenture
dated as of July 15, 1992. At December 31, 1992, debt outstanding was reduced to
$290 million, the maximum debt level permitted under the Plan on that date.
Due to continued lack of liquidity in the real estate marketplace, the Trust
has not been able to meet payment and other obligations on its outstanding debt.
See Item 1, "Business" for additional information regarding current debt service
requirements and events of default.
14
Under the financial covenants of the Indenture governing the Senior Notes,
the Trust was required to maintain a ratio of outstanding securities to its
capital base (as defined in the Indenture) of 515% at March 31, 1993. In
addition, under the Indenture the Trust was required to maintain a ratio of
outstanding securities to its capital base of 438% at June 30, 1993 and
September 30, 1993, 358% at December 31, 1993 and March 31, 1994, and 313% at
June 30, 1994 and September 30, 1994, and a ratio of earning assets (as defined
in the Indenture) to outstanding securities of 113% at June 30, 1993 and
September 30, 1993, 116% at December 31, 1993 and March 31, 1994 and 117% at
June 30, 1994 and September 30, 1994. The Trust failed to meet each of these
ratios, constituting events of default under the Indenture. However, on May 26,
1993, the Trust received from the holders of more than 66-2/3% in principal
amount of Senior Notes a waiver relating to the March 31 default.
Management has continued discussions with the representatives of the
creditors to explore various alternatives for restructuring the outstanding debt
obligations. The Trust's present intention is to reach a consensual
restructuring agreement. If such an agreement cannot be reached with the Trust's
debt holders, the Trust will have to consider other alternatives, including the
filing of a voluntary bankruptcy petition under chapter 11 of the Bankruptcy
Code. Although the holders of more than 66-2/3% of the Trust's debt securities
had agreed with the Trust to temporarily forebear further creditor action on the
defaults for a defined standstill period, such standstill period expired on
December 3, 1993. The Company believes that no further extension of the
standstill will be granted. The Trust intends, therefore, to continue to operate
its business and seek Senior Note holder consent on an ad hoc basis as such
consent is required. Although the Trust believes that such consents, if
requested, would be in the best interest of the Trust, its shareholders and the
Senior Note holders, there can be no assurance that the Trust will obtain
sufficient consents as they are required. Currently, the Trust is in default
under the Indenture and has continued to suspend payments on the Senior Notes.
Consequently, there can be no assurance that the Indenture Trustee and the
Collateral Agents will not take remedial or enforcement action, including
acceleration of the Senior Notes and foreclosure. If it becomes impossible for
the Trust to continue operations under such circumstances, it may be necessary
for Mortgage and Realty Trust to explore other alternatives, including seeking
relief under chapter 11 of the Bankruptcy Code. See Item 1, "Business -- General
- --- Current Debt Service Requirements and Defaults and Forecast In Operating
Cash Flow" and "-- Subsequent Events."
At September 30, 1994, the Trust had cash and cash equivalents of $60.3
million. Included in cash and cash equivalents are $1.4 million of restricted
cash which represents the funding of the employee retention plan and $1.9
million related to borrowers' deposits. The Trust's unfunded loan commitments
totalled $615,000 at September 30, 1994.
RESULTS OF OPERATIONS -- The Trust reported a net loss for fiscal 1994 of
$21.6 million or $1.92 per share compared to a net loss of $54.0 million or
$4.87 per share for fiscal 1993 and a net loss of $37.5 million or $3.38 per
share for fiscal 1992. The 1994 loss includes a provision for losses of $2.0
million or $.18 per share and net expense for reorganization and debt
restructuring items of $2.4 million or $.21 per share compared to a provision
for losses of $37 million or $3.34 per share and net expense for reorganization
and debt restructuring items of $5.8 million or $.53 per share for the 1993 loss
and a provision for losses of $32.0 million or $2.89 per share and net expense
for reorganization and debt restructuring items of $934,000 or $.08 per share
for the 1992 loss.
Interest and fee income on mortgage loans was $14.7 million for fiscal 1994
compared to $19.0 million in fiscal 1993. The decrease results primarily from a
reduction in average earning mortgage loans (including earning in-substance
foreclosures) which totalled $131.4 million at September 30, 1994 compared to
$168.7 million at September 30, 1993. Since September 30, 1993, earning mortgage
loans of approximately $13.1 million have been transferred to investment in real
estate and $25.5 million have been repaid. Interest and fee income decreased
from $26.2 million in fiscal 1992 to $19 million in fiscal 1993. The decrease
resulted primarily from repayment of earning mortgage loans and transfer of
mortgage loans to in-substance foreclosure, foreclosed properties and
investments in partnerships.
15
Rental income was $18.4 million for fiscal 1994 compared to $17.4 million in
fiscal 1993 and $13.7 million in fiscal 1992. In addition to rental income, the
Trust received reimbursement of certain operating expenses totalling $1.7
million, $1.6 million and $1.3 million for fiscal 1994, 1993 and 1992,
respectively. Operating expenses and depreciation and amortization on rental
properties increased to $15.7 million for both fiscal 1994 and 1993 compared to
$12.3 million for fiscal 1992. The increases in income and expenses on rental
properties results from continued growth in real estate equities and properties
acquired through foreclosure and held for sale.
Interest on short-term investments was $1.2 million for fiscal 1994,
$237,000 for fiscal 1993 and $537,000 for fiscal 1992. The increase was due to
the continuing accumulation of available cash. Available cash increased due to:
(1) no payment of principal and interest on the Secured Notes since September
30, 1993 and (2) a net increase of $32.4 million in cash provided by investing
activities.
Interest expense decreased from $29 million in 1992 and $28.5 million in
1993 to $33.0 million in fiscal 1994. This was due primarily to an increase in
the average borrowing rate from 8.34% in 1992 and 9.23% in 1993 to 10.73% in
1994. Offsetting the increase, the average borrowings decreased from $336.4
million in 1992 and $293.2 million in 1993 to $290 million in 1994. At September
30, 1994, the blended interest rate on the Senior Notes was 12.12%, composed of
interest at 11.50% on $200 million of Senior Notes (including default interest
at 1%) and 13.50% on $90 million of deferred amounts of Senior Notes (including
default interest at 1%). The entire unamortized cost of restructuring of the
Senior Notes was charged off during fiscal 1993 as a result of the monetary
default. The Trust expensed $3.4 million in fiscal 1993, of which $2.4 million
related to the acceleration of costs due to the June 1993 monetary default.
Prior to the default, these costs were being amortized using the interest method
over the term of the debt.
Other operating expenses were $4.8 million for fiscal 1994 compared to $5.3
million for both fiscal 1993 and 1992. The decrease in other operating expenses
was due primarily to decreases in professional fees and expenses.
Reorganization expenses related to the Chapter 11 filing and debt
restructuring expenses were $2.4 million for the fiscal year ended September 30,
1994, which reflects professional fees incurred by the official creditors'
committee, the official equity security holders' committee and the Trust.
Reorganization expenses were $5.8 million for the fiscal year ended September
30, 1993, which reflects professional fees and restructuring fees charged off as
a result of the monetary defaults on the Senior Notes. Reorganization expenses
were $934,000 for the fiscal year ended September 30, 1992.
A $2 million provision for losses was established in the current fiscal year
compared to a provision of $37 million in 1993. A $32 million provision for
losses was established in fiscal 1992. Continued deterioration in many real
estate markets during the past years, the continuing liquidity crisis in the
real estate industry and the Trust's requirement to generate cash and liquidate
investments contributed in 1993 and 1992 to the establishment of large provision
for losses based on the Trust's regular analysis of the portfolio. The Trustees
believe the allowance for losses to be adequate at September 30, 1994. The
Trustees review the investment portfolio quarterly using current estimates and
assumptions to determine the adequacy of the allowance for losses. The estimates
and assumptions used in the valuation process are subject to changes which may
be material.
Non-earning loans (including non-earning in-substance foreclosures) and
non-earning properties acquired through foreclosure and held for sale were $42.5
million at September 30, 1994 compared to $58.8 million at September 30, 1993
and $76.3 million at September 30, 1992.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are as set forth in the
"Index to Financial Statements" on page 26.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following biographical information is furnished as to each of the
current Trustees of the Trust.
<TABLE>
<CAPTION>
POSITIONS
NAME, AGE AND YEAR WITH THE
FIRST BECAME TRUSTEE TRUST PRINCIPAL OCCUPATIONS AND OTHER DIRECTORSHIPS (1)(2)
- -------------------------- ------------- ------------------------------------------------------------------------
<S> <C> <C>
Victor H. Schlesinger Chairman, Chairman of the Trust (February 1991-Present); President and Chief
69 years Trustee Executive Officer (1971-1989), Chairman (1980-1990), GMAC Mortgage
1970 Corporation and predecessor companies.
C. W. Strong, Jr. President, President and Chief Executive Officer of the Trust.
65 years Trustee
1984
Jeffrey M. Bucher Trustee Of Counsel, Bryan Cave, Attorneys (January 1993-Present); Partner,
61 years Pepper, Hamilton & Scheetz, Attorneys (February 1990-December 1992);
1979 Partner, Lillick & McHose, Attorneys (July 1987-February 1990);
Director of Dai-Ichi Kangyo Bank of California.
Kent L. Colwell Trustee President of Transamerica Realty Services, Inc.; Vice President -- Real
63 years Estate Services of Transamerica Corporation.
1986
James M. Gassaway Trustee Retired; Director of Strawbridge & Clothier.
72 years
1971
John E. Krout Trustee Retired; Director of Germantown Savings Bank (1971-April 1992).
74 years
1970
Gerhard N. Rostvold Trustee Economist, Urbanomics Research Associates; Consultant to business,
75 years industry and government.
1979
<FN>
- -------------------------
(1) Included are only directorships in companies registered pursuant to Section
12 or subject to the requirements of Section 15(d) of the Securities
Exchange Act of 1934 and in financial institutions and insurance companies.
Several of such persons also hold directorships in various charitable and
non-profit organizations not shown above.
(2) Mr. Schlesinger was Vice Chairman and Mr. Strong was President of the Trust
on April 12, 1990 when the Trust filed its voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code.
</TABLE>
For information required under this item with respect to executive officers
of the Trust, see "Executive Officers of the Registrant" under Item 1 above.
ITEM 11. TRUSTEE AND EXECUTIVE COMPENSATION.
COMPENSATION OF NON-OFFICER TRUSTEES
During the fiscal year ended September 30, 1994, the Trustees, other than
Messrs. Strong and Schlesinger, received as compensation for their services as
Trustees an annual retainer of $10,000 plus $800 for each regular, monthly
Trustee meeting attended in person or conducted by telephone conference; $600
for each committee meeting attended in person; and $400 for any Trustee or
17
committee meeting, other than the regular, monthly Trustee meeting, convened by
telephone conference; provided that no additional compensation was paid for
attendance at any committee meeting held on the same day as any Trustee meeting.
An additional $100 fee was payable per meeting to the chairman of any committee.
On September 20, 1989, the Trustees adopted the Pension Plan for Trustees,
effective October 1, 1989. Trustees become eligible for plan benefits upon
completion of five years of service as Trustee, including years served prior to
the plan's effective date. Under the plan, each eligible Trustee will be
entitled to a normal retirement benefit equal to the annual retainer for
Trustees at the rate in effect on the Trustee's normal retirement date or, if
earlier, the Trustee's last day of board membership. For purposes of this plan,
normal retirement date is the first day of the month following the Trustee's
75th birthday. Plan benefits will generally begin on the normal retirement date,
but eligible former Trustees may elect to have reduced payments commence up to
five years earlier. The reduction will be 10 percent for each year by which
commencement precedes the normal retirement date. Plan benefits will be paid for
a period equal to the number of years served as Trustee after January 1, 1980,
except that payments will cease upon the death of the Trustee. No other death
benefits shall become payable on behalf of any Trustee under the plan.
The following table sets forth, for the fiscal years ended September 30,
1994, 1993 and 1992, the compensation paid by the Trust to its chief executive
officer and its four next most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------
AWARDS
-------------------- PAYOUTS
ANNUAL COMPENSATION (1) RESTRICTED -------
-------------------------------------------------------- STOCK LTIP ALL OTHER
NAME AND SALARY BONUS OTHER ANNUAL AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
PRINCIPAL POSITION FISCAL YEAR ($)(2) ($) COMPENSATION ($) ($) SARS (#) ($) ($)(3)
- ------------------------ ----------- ----------- ---------- ---------------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C.W. Strong, Jr., 1994 $175,000 -- -- -- -- -- $ 3,000
President and Chief 1993 175,000 -- -- -- -- -- 3,000
Executive Officer 1992 250,000 -- -- -- 25,000 -- 3,000
Victor H Schlesinger, 1994 $100,000 -- -- -- -- -- $ 3,000
Chairman 1993 100,000 -- -- -- -- -- 3,000
1992 27,500(4) -- -- -- 23,500 -- 1,650
James A. Dalton, 1994 $188,348 $25,000(5) -- -- -- -- $ 3,000
Executive Vice 1993 181,104 20,000 -- -- -- -- 3,000
President and Chief 1992 177,511 90,000(6) -- -- 25,000 -- 3,000
Operating Officer
Daniel F. Hennessey, 1994 $129,488 $20,000(5) -- -- -- -- $ 3,000
Treasurer and Chief 1993 124,508 20,000 -- -- -- -- 3,000
Financial Officer 1992 122,038 65,000(6) -- -- 20,000 -- 3,000
Donald W. Burnes, Jr. 1994 $120,595 $30,000(5) -- -- -- -- $ 3,000
Senior Vice 1993 114,448 30,000 -- -- -- -- 3,000
President 1992 113,114 65,000(6) -- -- 15,000 -- 3,000
<FN>
- -------------------------------
(1) In the fiscal year ended September 30, 1994, the Trust provided certain
personal benefits to its executive officers. The amount of such benefits to
each of the named individuals did not exceed the lesser of $50,000 or 10%
of salary and bonus for such fiscal year.
(2) Includes salary deferrals and employee contributions to the Trust's Savings
Incentive Plan.
(3) Includes the Trust's matching contributions under the Trust's Savings
Incentive Plan. See "Savings Incentive Plan" below.
(4) Represents fees received as Chairman and Trustee.
(5) Does not include bonus for calendar 1994 which was paid in November 1994.
The bonuses were: for Mr. Dalton $25,000; for Mr. Hennessey $20,000; and
for Mr. Burnes $25,000.
(6) Includes retention bonus of $75,000, $50,000 and $35,000 for Messrs.
Dalton, Hennessey and Burnes, respectively.
</TABLE>
18
The following table sets forth aggregate option exercises during the fiscal
year ended September 30, 1994 and option values for the chief executive officer
and the four next most highly compensated executive officers as of September 30,
1994.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED SEPTEMBER 30, 1994
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)
------------- -------------
SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------- ------------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
C.W. Strong, Jr. -- -- 34,000/-0- 0/0
Victor H. Schlesinger -- -- 29,500/-0- 0/0
James A. Dalton -- -- 74,000/-0- 0/0
Daniel F. Hennessey -- -- 57,500/-0- 0/0
Donald W. Burnes, Jr. -- -- 35,000/-0- 0/0
</TABLE>
EMPLOYEES' RETIREMENT PLAN
On September 20, 1989, the Trustees adopted an Employees' Retirement Plan
effective September 30, 1989. On December 16, 1992, the Trustees amended and
restated the Employees' Retirement Plan effective January 1, 1992 (as amended on
July 20, 1994, and as may be further amended, the "Retirement Plan"). The
Retirement Plan continues the benefits provided to employees of the Trust who
were formerly employees of GMAC Realty Advisors, Inc. All other employees are
eligible to participate in the Retirement Plan provided that they are at least
21 years of age and have been employed for twelve consecutive months, during
which period the employee has completed at least 1,000 hours of service. Under
the Retirement Plan, each eligible employee after completing five years of
vesting service becomes 100% vested and entitled to a retirement pension.
Benefits can be paid as a lump sum or as an annual retirement income for life
equal to the greater of (a) the sum of (i) 1.3% of the highest five-year average
annual base salary, multiplied by the number of years of credited service up to
and including 35 thereof and (ii) 0.4% of the highest five-year average annual
base salary in excess of Social Security covered compensation (as adjusted every
five years), multiplied by the number of years of credited service up to and
including 35 thereof or (b) the sum of (i) 1.3% of the highest five-year average
annual base salary, multiplied by the number of credited service up to and
including 15 thereof; (ii) 1.5% of the highest five-year average annual base
salary, multiplied by the number of years of credited service from 16 to 25
years inclusive; (iii) 0.5% of the highest five-year average annual base salary,
multiplied by the number of years of credited service from 26 to 35 years
inclusive; and (iv) 0.4% of the highest five-year average annual base salary in
excess of Social Security covered compensation (as adjusted every five years),
multiplied by the number of years of credited service up to and including 25
thereof.
Unreduced retirement benefits may begin to be paid at normal retirement (age
65 and five years of participation in the Retirement Plan), late retirement, or
five years prior to Social Security retirement age with 20 years of service.
The table below shows the estimated annual benefits payable upon retirement
under the Trust's Retirement Plan. Retirement benefits shown are based upon
retirement at age 65 and the payment of a straight life annuity to the employee.
The annual benefit under the Retirement Plan shall not exceed the lesser of
$112,221 or 100% of the participant's average compensation for three consecutive
Fiscal Years (as defined in the Retirement Plan) in which such eligible employee
is an active participant in the Retirement Plan.
19
PENSION PLAN TABLE
ESTIMATED ANNUAL RETIREMENT BENEFIT
<TABLE>
<CAPTION>
AVERAGE OF 5
HIGHEST ANNUAL YEARS OF SERVICE
COMPENSATION ---------------------------------------------------------
LEVELS 15 20 25 30 35
- --------------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 29,427 $ 40,486 $ 51,545 $ 58,854 $ 68,663
150,000 35,802 49,236 62,670 71,604 83,538
175,000 42,177 57,986 73,795 84,354 98,413
200,000 48,552 66,736 84,920 97,104 113,288
225,000 54,927 75,486 96,045 109,854 128,163
</TABLE>
For the fiscal year ended September 30, 1994, the base salary for purposes
of the Retirement Plan for the executive officers named in the Summary
Compensation Table is set forth in the salary column of the Summary Compensation
Table. Officers named in the Summary Compensation Table have been credited with
years of service under the Retirement Plan as follows: Mr. Dalton, 12 years; Mr.
Hennessey, 23 years; Mr. Burnes, 5 years. Mr. Schlesinger and Mr. Strong do not
participate in the Retirement Plan.
The benefits listed in the Pension Plan Table are not subject to reduction
for Social Security or other offset amounts.
SAVINGS INCENTIVE PLAN
On September 20, 1989, the Trustees adopted a Savings Incentive Plan
effective September 30, 1989, to provide retirement benefits for eligible
employees of the Trust. On December 16, 1992, the Trustees amended and restated
the Savings Incentive Plan effective January 1, 1992 (as amended, the "Savings
Plan"). The Savings Plan continues the benefits provided under the GMAC Mortgage
Corporation Savings Incentive Plan to employees of the Trust who were formerly
employees of the Adviser. All other employees of the Trust are eligible to
participate in the Savings Plan provided that they have been employed for twelve
consecutive months, during which period the employee has completed at least
1,000 hours of service. Under the Savings Plan, each eligible employee may
authorize payroll deductions not less than 1% nor more than 15% of the
employee's earnings before bonus income, not to exceed the dollar limit
permissible under the Code ($9,240 in 1994). The Trust will match each
employee's contribution for the payroll period, subject to a limitation of 6% of
the employee's compensation for the payroll period, with the maximum amount of
contribution by the Trust in any year being $3,000.
Benefits will be paid to terminating participants as soon as possible
following the participant's date of termination. Participants have a 100%
nonforfeitable right to their contributions to the Savings Plan and the Trust's
matching contributions vest at the rate of 20% for each year of service, but
will, in any event, be 100% vested at the later of age 65 or after five years of
participation in the Savings Plan, or in the event of disability or death.
Subject to certain limitations, hardship distributions of a participant's fully
vested account balance are permitted on account of a demonstrable, immediate and
heavy financial need.
EMPLOYEE RETENTION PLAN
The Trustees have adopted an Employee Retention Plan (the "Retention Plan"),
dated October 17, 1990, as amended January 16, 1991 and March 20, 1991, designed
to provide a financial incentive for key employees to successfully restructure
the organization and maximize the net worth of the Trust. The Retention Plan was
approved by the Bankruptcy Court by order dated February 26, 1991.
20
The Retention Plan is administered by the Compensation and Nominating
Committee which determines the allocation of amounts among the participants. All
full-time employees of the Trust except the Chairman and the President and Chief
Executive Officer are eligible to participate in the Retention Plan.
The first portion of the Retention Plan provides for a termination pay plan
which will remain in effect during the period that the Class 3 Creditor
Obligations (as defined in the 1991 Plan, and as amended, the Senior Notes) are
outstanding. Any employee who is terminated without cause during this period
shall be entitled to termination pay of not less than three and not more than 18
months salary depending on the employee's years of employment and position with
the Trust. The number of months salary for Messrs. Dalton, Hennessey and Burnes
are 18, 18 and 12, respectively. Medical and dental coverage will be continued
during the termination pay period. An employee who is terminated for cause,
voluntarily leaves, dies or becomes disabled during the plan period will not be
entitled to benefits under this plan. The benefits which may be payable under
this plan have been funded in a separate trust.
The second portion of the Retention Plan included a retention bonus plan
which provided for the aggregate payment of up to $350,000 to employees who
remained in the employ of the Trust until February 27, 1992, a period of one
year from the date of the confirmation of the Plan of Reorganization. A separate
trust was funded for the payment of these benefits. The retention bonus was paid
on February 28, 1992.
The third portion of the Retention Plan provided for the grant under the
Trust 1984 Share Option Plan of non-qualified stock options for up to an
aggregate of 200,000 Shares of the Trust to participants. On March 29, 1991,
options for 197,500 shares were granted at an exercise price of $4.15 per share
which was the greater of (i) the average of the closing price of the Trust's
Shares on the New York Stock Exchange for the last five days of the 30 day
period after the effective date of the 1991 Plan and (ii) the fair market value
of the Shares on the date of grant. Options will not vest to employees until
three years after the date of grant and any employee who leaves voluntarily or
is discharged for cause during the three year period will forfeit his or her
rights under the option. After vesting, options can be exercised any time up to
five years from the date of grant except that an employee with a vested option
who leaves the employ of the Trust must exercise within a three month period
after resignation. If a change in control of the Trust occurs, all options which
have not previously been forfeited will vest immediately.
The final portion of the Retention Plan is an incentive program which may
provide total incentive payments during the period the Class 3 Creditor
Obligations (Senior Notes) are outstanding of not more than $1,250,000. For
calendar year 1991, the program was based on an incentive pool calculated as
follows: At June 30, 1991, if the Class 3 Creditor Obligations (Senior Notes)
were no greater than $380,000,000 (the maximum amount allowed under the 1991
Plan without any deferrals), $75,000 would be deposited in the pool with an
added $5,000 for each full $1,000,000 that the Class 3 Creditor Obligations
(Senior Notes) were reduced before that amount. There was eliminated from this
calculation voluntary repayments by the Trust which reduced cash on hand below
$15,000,000. As a result, $95,000 was deposited in the pool. At December 31,
1991, if the Class 3 Creditor Obligations (Senior Notes) were no greater than
$340,000,000, $125,000 would be deposited in the pool with an added $5,000 for
each full $1,000,000 that the Class 3 Creditor Obligations (Senior Notes) are
below that amount after deducting any amounts credited at June 30, 1991. As a
result, $125,000 was deposited in the pool. On September 16, 1992, the
Compensation and Nominating Committee approved a continuation of the incentive
program for calendar year 1993 based on a similar formula for reducing the
outstanding Senior Notes. Under this incentive program, because the Senior Notes
were no greater than $290,000,000 at December 31, 1992, $125,000 was deposited
in the pool. The amounts paid from the pool to the named executive officers for
the fiscal years ended September 30, 1994, 1993 and 1992 are included in the
Summary Compensation Table. The form and amount of this program for future years
will be at the discretion of the Compensation and Nominating Committee.
21
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Bucher, Colwell, Gassaway, Krout and Rostvold served as members of
the Trust's Compensation and Nominating Committee during the Trust's fiscal year
ended September 30, 1994. None of such individuals was, during such fiscal year,
an officer or employee of the Trust, was formerly an officer of the Trust or had
any relationship requiring disclosure by the Trust under Item 404 of Regulation
S-K promulgated under the Securities Exchange Act of 1934.
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
Under the Employee Retention Plan, Messrs. Dalton, Hennessey and Burnes are
entitled to termination pay equal to 18, 18 and 12 months salary, respectively,
if they are terminated without cause during the period that the Class 3 Creditor
Obligations (as defined in the 1991 Plan, and as amended, the Senior Notes) are
outstanding. In addition, all options granted to such individuals under the
Employee Retention Plan that have not otherwise vested will vest automatically
upon the occurrence of a change-in-control of the Trust. See "Employee Retention
Plan."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of December 14, 1994, to the Trust's knowledge, no person or group (as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934)
owned beneficially 5% or more of the Common Shares of the Trust (the "Shares").
The table below sets forth the number of Shares beneficially owned: by each
Trustee; by each executive officer named in the summary compensation table; and
by the Trustees and officers as a group as of December 14, 1994. As of such
date, no individual Trustee or officer had beneficial ownership of 1% or more of
the outstanding Shares and all Trustees and officers as a group beneficially
owned 3.5% of the outstanding Shares. Except as indicated by footnote, the
Trustees and named executive officers have sole voting and investment power with
respect to any Shares beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP AT
DECEMBER 14, 1994
-------------------
<S> <C>
Victor H. Schlesinger.............................................................. 32,038(1)
C. W. Strong, Jr................................................................... 29,914(2)
Jeffrey M. Bucher.................................................................. 8,600(3)
Kent L. Colwell.................................................................... 11,650(3)(4)
James M. Gassaway.................................................................. 13,302(3)
John E. Krout...................................................................... 8,612(3)
Gerhard N. Rostvold................................................................ 10,648(3)
James A. Dalton.................................................................... 71,880(5)(6)
Daniel F. Hennessey................................................................ 50,569(7)
Donald W. Burnes, Jr............................................................... 35,000(8)
All Trustees and officers as a group (21 persons).................................. 397,538(9)
<FN>
- -------------------------
(1) 23,500 of the Shares reported as beneficially owned by Mr. Schlesinger are
obtainable upon exercise of options.
(2) 25,000 of the Shares reported as beneficially owned by Mr. Strong are
obtainable upon exercise of options.
(3) 7,500 of the Shares reported as beneficially owned by each of Messrs.
Bucher, Colwell, Gassaway, Krout and Rostvold are obtainable upon exercise
of options.
(4) 3,500 of the Shares reported as beneficially owned by Mr. Colwell are held
in a family trust of which Mr. Colwell and his wife are co-trustees.
</TABLE>
22
<TABLE>
<S> <C>
(5) 65,000 of the Shares reported as beneficially owned by Mr. Dalton are
obtainable upon exercise of options.
(6) 450 of the Shares reported as beneficially owned by Mr. Dalton are owned by
Mr. Dalton's wife and 2,054 of the Shares reported as beneficially owned by
Mr. Dalton are held in a trust for the benefit of his children. Mr. Dalton
and his wife are co-trustees of the trust.
(7) 50,000 of the Shares reported as beneficially owned by Mr. Hennessey are
obtainable upon exercise of options.
(8) All of the Shares reported as beneficially owned by Mr. Burnes are
obtainable upon exercise of options.
(9) Includes 242,004 Shares reported as beneficially owned by Trustees and
executive officers as described in the footnotes above and 112,500 Shares
obtainable upon exercise of options by officers of the Trust who are not
named in the foregoing table.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS A PART OF THE REPORT.
The following documents are filed as part of this report.
1. Financial Statements.
The financial statements of the Trust are set forth in the "INDEX TO
FINANCIAL STATEMENTS" on page 26.
2. Financial Statement Schedules.
3. Exhibits.
(a) Exhibits are as set forth in the "INDEX TO EXHIBITS" on pages 48-49.
(b) REPORTS ON FORM 8-K. On August 3, 1994, the Registrant filed a current
report on Form 8-K regarding the Trust's unaudited operating results for the
third quarter ended June 30, 1994 and the failure to make scheduled payments on
the Senior Notes. See also Item 1, "Business -- General -- Negotiations
Regarding a Restructuring."
(c) EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE. Exhibits are set
forth in the "INDEX TO EXHIBITS" on pages 48-49. Where so indicated by footnote
in the index, exhibits which were previously filed are incorporated by
reference. For exhibits incorporated by reference, the location of the exhibit
in the previous filing is indicated in parentheses. Copies of the exhibits are
available to Shareholders upon payment of $.25 per page fee to cover the Trust's
expenses in furnishing the exhibits. For copies contact: Mortgage and Realty
Trust, 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania 19027.
(d) Financial Statement Schedules, except those indicated in the "INDEX TO
FINANCIAL STATEMENTS" on page 26, have been omitted because the required
information is included in the financial statements or notes thereto, or the
amounts are not significant.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MORTGAGE AND REALTY TRUST
<TABLE>
<S> <C>
Date: December 29, 1994 By: /s/ C. W. STRONG, JR.
---------------------------------------------
C. W. Strong, Jr.
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Victor H.
Schlesinger, Chairman of Mortgage and Realty Trust, and each of them, his true
and lawful attorney-in-fact, in his name, place and stead to execute and cause
to be filed with the Securities and Exchange Commission any or all amendments to
this report.
<TABLE>
<C> <S> <C>
/s/ VICTOR H. SCHLESINGER
- ----------------------------------------- Chairman and Trustee December 29, 1994
Victor H. Schlesinger
President, Chief Executive
/s/ C. W. STRONG, JR. Officer and Trustee
- ----------------------------------------- (Principal Executive December 29, 1994
C. W. Strong, Jr. Officer)
Treasurer, Chief Financial
/s/ DANIEL F. HENNESSEY Officer (Principal
- ----------------------------------------- Financial and Accounting December 29, 1994
Daniel F. Hennessey Officer)
/s/ JEFFREY M. BUCHER
- ----------------------------------------- Trustee December 29, 1994
Jeffrey M. Bucher
/s/ KENT L. COLWELL
- ----------------------------------------- Trustee December 29, 1994
Kent L. Colwell
/s/ JAMES M. GASSAWAY
- ----------------------------------------- Trustee December 29, 1994
James M. Gassaway
/S/ JOHN E. KROUT
- ----------------------------------------- Trustee December 29, 1994
John E. Krout
/s/ GERHARD N. ROSTVOLD
- ----------------------------------------- Trustee December 29, 1994
Gerhard N. Rostvold
</TABLE>
25
MORTGAGE AND REALTY TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. 27
Financial Statements
Statement of Operations (Years ended September 30, 1994, 1993 and 1992).................................. 28
Balance Sheet (September 30, 1994 and 1993).............................................................. 29
Statement of Cash Flows (Years ended September 30, 1994, 1993 and 1992).................................. 30
Statement of Shareholders' Equity (Years ended September 30, 1994, 1993 and 1992)........................ 31
Notes to the Financial Statements........................................................................ 32
Financial Statement Schedules
Schedule XI -- Real Estate and Accumulated Depreciation and Amortization (September 30, 1994).......... 43
Schedule XII -- Mortgage Loans on Real Estate (September 30, 1994)..................................... 46
</TABLE>
26
REPORT OF INDEPENDENT AUDITORS
Trustees and Shareholders
Mortgage and Realty Trust
We have audited the accompanying balance sheets of Mortgage and Realty Trust
at September 30, 1994 and 1993, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended September 30, 1994. Our audits also included the financial statement
schedules referenced at Item 14(a). These financial statements and schedules are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mortgage and Realty Trust at
September 30, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1994, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
aspects the information set forth therein.
The accompanying financial statements and schedules have been prepared
assuming that Mortgage and Realty Trust will continue as a going concern. As
more fully described in Note 1, the Trust was not able to comply with certain
financial covenants related to the Restructured Joint Plan of Reorganization
dated July 15, 1992. In addition, the Trust was not able to generate sufficient
cash flow from normal operations and could not further liquidate mortgage loans
and real estate investments in order to meet scheduled amortization on its
Senior Notes. These uncertainties raise substantial doubt about the Trust's
ability to continue as a going concern. The financial statements and schedules
do not include any adjustments to reflect the possible future effects on the
classification, realization or amounts of assets or liabilities that may result
from the outcome of these uncertainties.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
November 17, 1994
27
STATEMENT OF OPERATIONS
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1994 1993 1992
--------------- --------------- ---------------
<S> <C> <C> <C>
Income:
Interest and fee income on mortgage loans................... $ 14,725,000 $ 19,027,000 $ 26,261,000
Income of rental properties:
Rental income............................................. 18,495,000 17,368,000 13,733,000
Operating expense reimbursement........................... 1,705,000 1,601,000 1,265,000
Interest on short-term investments.......................... 1,238,000 237,000 537,000
Other....................................................... 114,000 109,000 213,000
--------------- --------------- ---------------
36,277,000 38,342,000 42,009,000
--------------- --------------- ---------------
Expenses:
Interest.................................................... 33,002,000 28,510,000 28,956,000
Expenses of rental properties:
Depreciation and amortization............................. 5,839,000 5,500,000 4,470,000
Operating................................................. 9,827,000 10,199,000 7,808,000
Other operating expenses.................................... 4,839,000 5,258,000 5,313,000
Provision for losses on mortgage loans and related
investments................................................ 2,000,000 37,000,000 32,000,000
--------------- --------------- ---------------
55,507,000 86,467,000 78,547,000
--------------- --------------- ---------------
Loss before reorganization expenses........................... (19,230,000) (48,125,000) (36,538,000)
Reorganization expenses....................................... (2,360,000) (5,844,000) (934,000)
--------------- --------------- ---------------
Net loss...................................................... $ (21,590,000) $ (53,969,000) $ (37,472,000)
--------------- --------------- ---------------
--------------- --------------- ---------------
Per Share:
Net loss.................................................... $(1.92) $(4.87) $(3.38)
--------------- --------------- ---------------
--------------- --------------- ---------------
Weighted average number of common shares outstanding........ 11,226,000 11,080,000 11,076,000
</TABLE>
See accompanying notes.
28
BALANCE SHEET
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
<S> <C> <C>
ASSETS:
Mortgage loans and investments:
Construction loans.......................................................... $ -- $ 5,203,000
Standing loans.............................................................. 61,851,000 76,871,000
Long-term amortizing loans.................................................. 2,908,000 4,731,000
Participating loans and investments......................................... 4,563,000 12,180,000
Non-earning mortgage loans.................................................. -- 5,208,000
---------------- ----------------
69,322,000 104,193,000
Notes receivable.............................................................. 760,000 400,000
In-substance foreclosures:
Earning..................................................................... 62,097,000 69,707,000
Non-earning................................................................. 10,198,000 17,462,000
Real estate:
Investments in real estate equities......................................... 56,857,000 57,213,000
Properties acquired through foreclosure and held for sale:
Earning................................................................... 68,437,000 52,586,000
Non-earning............................................................... 32,282,000 36,134,000
Investment in partnerships.................................................. 9,524,000 9,831,000
---------------- ----------------
309,477,000 347,526,000
Less allowance for losses............................................... (13,430,000) (11,808,000)
---------------- ----------------
296,047,000 335,718,000
Cash and cash equivalents..................................................... 60,332,000 11,451,000
Interest receivable and other assets.......................................... 7,865,000 6,705,000
---------------- ----------------
$ 364,244,000 $ 353,874,000
---------------- ----------------
---------------- ----------------
LIABILITIES:
Senior Secured Notes.......................................................... $ 290,000,000 $ 290,000,000
Loan on equity investment..................................................... 17,593,000 17,572,000
Accounts payable and accrued expenses......................................... 4,050,000 4,267,000
Interest payable.............................................................. 32,568,000 412,000
---------------- ----------------
344,211,000 312,251,000
---------------- ----------------
SHAREHOLDERS' EQUITY:
Preferred shares, $1 par value: 3,500,000 shares authorized, none issued...... -- --
Common shares, $1 par value: 20,000,000 shares authorized, 11,226,000 shares
issued and outstanding....................................................... 11,226,000 11,226,000
Additional paid-in capital.................................................... 182,375,000 182,375,000
Accumulated deficit........................................................... (173,568,000) (151,978,000)
---------------- ----------------
Total shareholders' equity.............................................. 20,033,000 41,623,000
---------------- ----------------
$ 364,244,000 $ 353,874,000
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes.
29
STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1994 1993 1992
--------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (21,590,000) $ (53,969,000) $ (37,472,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization on real estate............... 5,839,000 5,500,000 4,470,000
Provision for losses....................................... 2,000,000 37,000,000 32,000,000
Increase (decrease) in payables and accrued expenses....... (217,000) 106,000 (3,529,000)
Increase in interest payable............................... 32,156,000 412,000 --
Decrease (increase) in receivables and other assets........ (1,160,000) 2,669,000 (641,000)
Net change in interest reserves, deferred income........... (582,000) (934,000) (426,000)
Recoveries of charge offs to allowance for losses.......... 1,019,000 -- --
Other...................................................... (967,000) -- 366,000
--------------- --------------- --------------
Total adjustments............................................ 38,088,000 44,753,000 32,240,000
--------------- --------------- --------------
Net cash provided by (used in) operating activities............ 16,498,000 (9,216,000) (5,232,000)
--------------- --------------- --------------
Cash flows from investing activities:
Investments in real estate:
Properties acquired through foreclosure.................... (5,269,000) (4,600,000) (4,148,000)
In-substance foreclosures.................................. (1,337,000) (1,135,000) (2,203,000)
Real estate equities....................................... (1,847,000) (2,505,000) (3,227,000)
Advances on mortgage loans................................. -- (602,000) (2,624,000)
Partnerships............................................... -- (2,078,000) --
Principal repayments on mortgage loans....................... 25,555,000 24,604,000 50,674,000
Repayments on notes receivable............................... 168,000 -- --
Sale of foreclosed property.................................. 6,360,000 16,170,000 16,982,000
Repayment of
in-substance foreclosure.................................... 8,753,000 360,000 4,309,000
Sale of equity investment.................................... -- -- 5,194,000
--------------- --------------- --------------
Net cash provided by investing activities...................... 32,383,000 30,214,000 64,957,000
--------------- --------------- --------------
Cash flows from financing activities:
Payment of Senior Notes...................................... -- (22,000,000) (62,000,000)
--------------- --------------- --------------
Net cash used in financing activities.......................... -- (22,000,000) (62,000,000)
--------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents........... 48,881,000 (1,002,000) (2,275,000)
Cash and cash equivalents at beginning of year................. 11,451,000 12,453,000 14,728,000
--------------- --------------- --------------
Cash and cash equivalents at end of year....................... $ 60,332,000 $ 11,451,000 $ 12,453,000
--------------- --------------- --------------
--------------- --------------- --------------
Supplemental schedule of non-cash investing and financing
activities:
Transfer of real estate to mortgage loans.................... $ 750,000 $ 348,000 $ 940,000
Transfer of mortgage loans to real estate, in-substance
foreclosure and notes receivable............................ $ 10,321,000 $ 105,863,000 $ 56,554,000
Charge-offs against allowance for losses..................... $ 378,000 $ 44,545,000 $ 27,354,000
Transfer of investment in partnership to investment in real
estate equities............................................. $ -- $ -- $ 7,241,000
Transfer of mortgage loans and in-substance foreclosures to
investment in partnerships.................................. $ -- $ 5,605,000 $ --
Transfer of in-substance foreclosures to real estate......... $ 13,109,000 $ -- $ --
</TABLE>
See accompanying notes.
30
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL TOTAL
----------------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1991....................... 11,076,000 $ 11,076,000 $ 182,525,000 $ (60,537,000) $ 133,064,000
Net loss.................... (37,472,000) (37,472,000)
------------- -------------- ---------------- ---------------- ----------------
Balance at September 30,
1992....................... 11,076,000 11,076,000 182,525,000 (98,009,000) 95,592,000
Shares issued -- Litigation
Settlement................. 150,000 150,000 (150,000) --
Net loss.................... (53,969,000) (53,969,000)
------------- -------------- ---------------- ---------------- ----------------
Balance at September 30,
1993....................... 11,226,000 11,226,000 182,375,000 (151,978,000) 41,623,000
Net loss.................... (21,590,000) (21,590,000)
------------- -------------- ---------------- ---------------- ----------------
Balance at September
30,1994.................... 11,226,000 $ 11,226,000 $ 182,375,000 $ (173,568,000) $ 20,033,000
------------- -------------- ---------------- ---------------- ----------------
------------- -------------- ---------------- ---------------- ----------------
</TABLE>
See accompanying notes.
31
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION
See "Item 1. Business -- General" pages 1 and 2 for information concerning
the Trust's previous chapter 11 petition on April 12, 1990 and related plan of
reorganization (1991 Plan).
See "Item 1. Business -- General -- 1992 Restructuring" for information
concerning the restructuring of the Senior Notes that resulted from the previous
chapter 11 petition.
See "Item 1. Business -- General -- Current Debt Service Requirements and
Defaults and Forecast Shortfall In Operating Cash Flow" for information
concerning the various defaults under the 1992 restructured Senior Notes.
See "Item 1. Business -- General -- 1993-1994 Negotiations With the Official
Creditors Committee" for developments regarding the proposed restructuring.
On November 17, 1994, the Trust announced that it had reached an agreement
in principle with a substantial number of holders of its Senior Notes on the
terms of a restructuring of the Senior Notes.
Pursuant to the agreement in principle, holders of the Senior Notes in the
aggregate principal amount of $290 million plus accrued interest of $41.7
million through December 31, 1994 will receive under a prepackaged plan of
reorganization under chapter 11 of the Bankruptcy Code, $110 million of new
senior secured notes due 2002, approximately $50 million in cash and 97% of the
restructured equity of the Trust (or substantially all the restructured equity
if holders of the Trust's outstanding common shares do not vote to accept the
prepackaged plan). If holders of the outstanding common shares vote to accept
the prepackaged plan, such holders will retain 3% of the equity of the
restructured Trust. The agreement in principle anticipates that the new senior
secured notes will mature in 2002 and bear interest at the rate of 11 1/8% per
annum. It is also anticipated that holders of unsecured claims will receive cash
in the allowed amount of their claims. It is contemplated that the Trust will
prepare a "shelf" registration statement for the new securities issued pursuant
to the prepackaged plan.
The agreement to pursue the restructuring proposal is subject to a number of
conditions and the Trust intends to effect the restructuring through a
prepackaged chapter 11 bankruptcy. At this time there can be no assurance that
the conditions to consummation of the proposed restructuring will be satisfied.
Other details of the agreement, including the additional conditions to
commencement and consummation of the restructuring, have not been finalized
pending the filing of proxy solicitation materials with the SEC and distribution
of a disclosure statement for the solicitation of votes for the prepackaged plan
to holders of the Trust's outstanding securities. The advisors to the Trust and
the various holders of Senior Notes are negotiating additional terms of the new
debt securities to be received by the Senior Note holders under the prepackaged
plan.
The financial statements have been prepared in accordance with generally
accepted accounting principles (GAAP) applicable to a company on a "going
concern" basis, which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. These financial statements
include adjustments and reclassifications that have been made to reflect
indebtedness as extended under the 1991 Plan and the Senior Note Indenture.
These financial statements do not include any adjustments that would be required
should the Trust be unable to continue as a going concern. The conditions noted
above raise substantial doubt about the Trust's ability to continue as a going
concern. These financial statements also do not include any adjustments that
could be required as a result of the November 17, 1994 agreement in principle
with certain holders of Senior Notes and related proposed restructuring and
prepackaged chapter 11 bankruptcy, including adjustments required by The
American Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,"
for fresh start accounting.
32
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION (CONTINUED)
The Trust anticipates that any adjustments that would be occasioned in the
restructuring process by its financial distress, by any inability of the Trust
to continue as a going concern or by any inability of the Trust to achieve a
consensual restructuring would be material and adverse.
The following unaudited Pro Forma Balance Sheet is presented as if (1)
Mortgage and Realty Trust had emerged from bankruptcy on September 30, 1994 with
a reorganization plan identical to the one proposed, and (2) fresh start
accounting had been adopted as of September 30, 1994. This unaudited Pro Forma
Balance Sheet should be read in conjunction with the financial statements of
Mortgage and Realty Trust and the related notes thereto included elsewhere
herein. In management's opinion, all adjustments necessary to reflect the
effects of the proposed reorganization and "fresh start accounting" have been
included. This unaudited Pro Forma Balance Sheet is not necessarily indicative
of what the actual financial position would have been at September 30, 1994, nor
does it purport to represent the future financial position of the Company.
PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------------------
HISTORICAL PROPOSED FRESH PRO FORMA
9/30/94 REORGANIZATION START 9/30/94
---------- -------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash & marketable securities.......... $ 60,332 $ (50,000)(A) $ 8,979
(1,353)(B)
Loans & owned real estate net......... 296,047 (67,047)(E) 229,000
Interest receivable................... 4,638 (2,810)(F) 1,828
Other assets.......................... 3,227 (1,955)(F) 1,272
---------- -------------- --------- ---------
Total assets...................... $ 364,244 $ (51,353) $ (71,812) $ 241,079
---------- -------------- --------- ---------
---------- -------------- --------- ---------
LIABILITIES
Senior secured notes due 1995......... $ 290,000 $(290,000)(C) $ 0
Senior secured notes due 2002......... 0 110,000(C) 110,000
Loan on REO -- Imperial Bank.......... 17,593 17,593
Interest payable...................... 32,568 (32,568)(C) 0
Accounts payable and other............ 4,050 (1,353)(B) (50)(F) 2,647
---------- -------------- --------- ---------
Total liabilities................... 344,211 (213,921) (50) 130,240
---------- -------------- --------- ---------
SHAREHOLDER'S EQUITY
Common stock at par................... 11,226 11,226
Additional paid in capital............ 182,375 162,568(D) (245,330)(G) 99,613
Retained earnings (deficit)........... (173,568) 173,568(G) 0
---------- -------------- --------- ---------
Total shareholders equity........... 20,033 162,568 (71,762) 110,839
---------- -------------- --------- ---------
Total liabilities & equity.......... $ 364,244 $ (51,353) $ (71,812) $ 241,079
---------- -------------- --------- ---------
---------- -------------- --------- ---------
</TABLE>
See Accompanying Notes
33
1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION (CONTINUED)
ADJUSTMENTS TO REFLECT PROPOSED REORGANIZATION
(A) Reflects the $50.0 million minimum payment to creditors being made at
implementation of the proposed plan, provided that such minimum payment may
be increased based upon the amount of cash held by the Trust in excess of
its short-term obligations following confirmation of the proposed plan.
Note: Cash and marketable securities includes $1,375 of restricted cash
related to the Trust's termination pay plan and $1,600 relating to
borrowers' deposits.
(B) Reflects cash payment to unsecured creditors totalling $1,353.
(C) Reflects the cancellation of the Senior Secured notes due 1995 in the face
amount of $290.0 and the related interest payable on these notes of $32.6
million and the recording of the new Senior Notes due 2002 in the face
amount of $110.0 million.
(D) Reflects the conversion of amounts previously owed under the Senior Secured
notes due 1995 converted to a 97% interest in the common shares of the
reorganized Trust as follows:
<TABLE>
<S> <C>
Face amount of Senior Notes due 1995................................... $ 290,000
Interest payable at 9/30/94............................................ 32,568
---------
Total amount payable to creditors at 9/30/94........................... 322,568
Less: New Senior Notes due 2002........................................ (110,000)
Less: Cash payment to creditors........................................ (50,000)
---------
Amount previously due creditors converted to equity.................... $ 162,568
---------
---------
</TABLE>
ADJUSTMENTS TO REFLECT FRESH START ACCOUNTING
(E) Reflects adjustment made to carrying value of loans and owned real estate to
adjust to estimated reorganization values.
(F) Reflects adjustment made to carrying values of accounts receivable/other
assets and accounts payable to adjust to estimated reorganization values of
$3.1 million and $4.0 million, respectively.
(G) Reflects the adjustment of the retained earnings/deficit to zero as a result
of the restructure and the adjustment of additional paid in capital as
follows:
<TABLE>
<S> <C>
Adjust deficit to reset to zero........................................ $(173,568)
Adjustment to carrying value of invested assets........................ (67,047)
Adjustment to carrying value of receivables............................ (4,765)
Adjustment to carrying value of payables............................... 50
---------
$(245,330)
---------
---------
</TABLE>
2. SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
The Trust is a real estate investment trust that has elected to be taxed
under Sections 856-860 of the Internal Revenue Code of 1986, as amended.
Accordingly, no provision has been made for income taxes in the financial
statements.
For the fiscal years ended September 30, 1994, 1993 and 1992, there were
significant differences between taxable net loss and net loss as reported in the
financial statements. The differences were primarily temporary differences
related to the recognition of bad debt deductions and accounting for
reorganization costs. For financial accounting purposes, these items are
expensed currently, while for tax purposes some portion of these items may be
deferred to future periods.
34
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Trust incurred net operating losses of $38 million, $31 million and $12
million for tax purposes in fiscal 1993, 1992 and 1991, respectively. The Trust
estimates a net operating loss for tax purposes of approximately $35 million in
fiscal 1994. Each of these net operating losses will be available for fifteen
years as a loss carryforward to future years' taxable income. If during the
course of the proposed restructuring, Cancellation of Indebtedness taxable
income results, the net operating losses available for use in future years will
be reduced by the amount of such Cancellation of Indebtedness income. The
Trust's goal is to preserve its net operating losses, but the transfer of more
than 50% of the ownership of the Trust to its creditors in a reorganization (as
was provided in the August 1993 agreement in principle and as is likely in any
alternate restructuring) will limit the future per annum use of its net
operating losses (after the aforementioned reduction for Cancellation of
Indebtedness income) under Internal Revenue Code Section 382.
INTEREST INCOME
Interest income on each loan is recorded as earned. Interest income is not
recognized if, in the opinion of the Trustees, collection is doubtful. The Trust
generally considers loans as delinquent if payment of interest and/or principal,
as required by the terms of the note, is more than 60 days past due. Accrual of
interest income is generally terminated and foreclosure proceedings are started
if payment is more than 60 days past due.
LOAN FEE INCOME
Loan fees are recorded as income using the "interest method." Accordingly,
loan fees are deferred when received and are recorded as income over the term of
the loan in relation to outstanding loan balances.
ALLOWANCE FOR LOSSES
The allowance for losses on mortgage loans and related investments is
determined in accordance with The American Institute of Certified Public
Accountants Statement of Position on Accounting Practices of Real Estate
Investment Trusts 75-2, as amended. This statement requires adjustment of the
carrying value of mortgage loans to the lower of their carrying value or
estimated net realizable value. Estimated net realizable value is the estimated
selling price of a property offered for sale in the open market allowing a
reasonable time to find a buyer, reduced by the estimated cost to complete and
hold the property (including the estimated cost of capital), net of estimated
cash income. The cost of capital was computed at 10.5% at September 30, 1994 and
9.0% at September 30, 1993.
Additional provisions for losses on mortgage loans and related investments
may be necessary if the deterioration in real estate markets continues, or there
is a significant increase in the Trust's cost of capital. See also Note 1,
"Basis of Financial Statement Presentation and Plan of Reorganization." Further
adjustments may also be necessary as a result of the restructuring negotiations.
The Trust anticipates that any adjustments that would be occasioned in the
restructuring process by its financial distress, by any inability of the Trust
to continue as a going concern or by any inability of the Trust to achieve a
consensual restructuring would be material and adverse.
PROPERTIES ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE
Properties acquired through foreclosure and held for sale are recorded at
the lower of cost or fair value at acquisition, which becomes the cost basis for
accounting purposes. The fair value of the asset acquired, in accordance with
Financial Accounting Standards Board Statement 15, is the amount that the Trust
could reasonably expect to receive in a current sale between a willing buyer and
a willing seller. Such properties are thereafter accounted for in the same
manner as any similar asset acquired for investment as to depreciation and gain
or loss upon sale. Subsequent to foreclosure, the properties are carried at the
lower of cost or fair value less estimated costs to sell, as set forth in The
American Institute of Certified Public Accountants' Statement of Position 92-3,
"Accounting for Foreclosed Assets" ("SOP 92-3").
35
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IN-SUBSTANCE FORECLOSURE
A loan is considered an in-substance foreclosure if: (1) the debtor has
little or no equity considering the fair value of the collateral, (2) proceeds
for repayment can be expected to come only from operation or sale of the
collateral, and (3) the debtor has either formally or effectively abandoned
control of the collateral. Loans meeting the criteria for in-substance
foreclosure are reclassified and recorded at the lower of cost or fair value of
the collateral, which establishes a new cost basis in the same manner as a legal
foreclosure.
Properties acquired through foreclosure and held for sale and in-substance
foreclosures are reclassified from non-earning to earning status if they produce
and maintain for a minimum of two consecutive quarters an annualized return of
5% or greater cash flow yield.
NET LOSS PER SHARE
Net loss per share for fiscal years ended 1994, 1993 and 1992 is computed
using the weighted average common shares outstanding during each period. Fully
diluted net loss per share is not disclosed because such information is not
meaningful.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed on the straight-line method over
an estimated useful life of 40 years for buildings and three to five years for
other property and lease commissions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments (high grade
commercial paper carried at cost of $58.4 million at September 30, 1994) with
maturities ranging from 3 to 45 days.
Included in cash and cash equivalents is $1.4 million of restricted cash
which represents the funding of the employee retention plan (see Note 9) and
$1.6 million related to borrowers' deposits. See "Item 1. Business -- General --
Current Debt Service Requirements and Defaults and Forecast Shortfall In
Operating Cash Flow" for additional information regarding the establishment of
new operating accounts for the Trust, the enforcement of the Indenture Trustee's
security interest in the old deposit accounts of the Trust and the Trust's
obligation quarterly to pay the excess of available cash (as defined in the
Indenture) over $10 million to Senior Note holders.
3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE
The following table summarizes the Trust's mortgage loan portfolio:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------------- -------------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF UNDERLYING SECURITY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------- ----------- ---------- ----------- ----------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Apartments.................... 1 $ 254 3 $ 5,391
Residential/Condominium*...... 9 1,334 10 1,841
Office Buildings.............. 2 1,699 1 1,135
Industrial Buildings.......... 7 30,328 10 44,086
Research & Development
Buildings.................... 3 16,371 5 25,942
Retail Buildings.............. 4 16,276 6 22,738
Hotels/Motels................. 1 3,060 1 3,060
-- --
---------- ----------
Total..................... 27 $ 69,322 36 $ 104,193
-- --
-- --
---------- ----------
---------- ----------
<FN>
- -------------------------
* Includes 80 mortgage end loans on 9 investments at September 30, 1994 and 107
mortgage end loans on 10 investments at September 30, 1993.
</TABLE>
The Trust's mortgage loan portfolio consists of loans located principally in
California, 49%, and Pennsylvania, 22%.
3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (CONTINUED)
At September 30, 1994, the Trust had undisbursed commitments of $615,000,
all of which represents additional advances on partially funded mortgage loans.
As of September 30, 1994, there were no earning loans delinquent (more than
60 days past due) as to principal and/or interest.
At September 30, 1994 and 1993, loans totalling $24,836,000 and $33,403,000
respectively, were extended beyond their original contractual maturity dates.
Loan terms are extended in the normal course of business for various reasons,
such as delays in construction, slower leasing than originally anticipated or
delay in obtaining permanent financing.
No interest rate modifications were made on mortgage loans during fiscal
1993. During fiscal 1994, two loans totalling $13,939,000 had rate reductions
due to financial difficulties of the borrower.
At September 30, 1994 and 1993, mortgage loans outstanding consisted of
fixed rate loans of $29,428,000 and $21,268,000, floating rate loans of
$35,331,000 and $70,745,000 and participating loans of $4,563,000 and
$12,180,000, respectively. Non-earning loans (including non-earning in-substance
foreclosures) and non-earning properties acquired through foreclosure and held
for sale were $42,480,000 at September 30, 1994 compared to $58,804,000 at
September 30, 1993.
The following table summarizes the Trust's investment in in-substance
foreclosures:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
----------------------- -----------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------- ----------- -------- ----------- --------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
EARNING
Office Buildings.............. 2 $12,840 2 $12,831
Industrial Buildings.......... -- -- 1 4,901
Retail Buildings.............. 3 28,452 3 28,238
Apartments.................... 1 6,695 1 6,689
Research & Development
Buildings.................... 2 14,110 3 17,048
-- --
-------- --------
Total Earning............... 8 62,097 10 69,707
-- --
-------- --------
NON-EARNING
Office Buildings.............. -- -- 1 7,433
Industrial Buildings.......... 2 10,198 3 7,576
Retail Buildings.............. -- -- 1 2,453
Apartments.................... -- -- -- --
Research & Development
Buildings.................... -- -- -- --
Hotel......................... -- -- -- --
-- --
-------- --------
Total Non-Earning........... 2 10,198 5 17,462
-- --
-------- --------
Total....................... 10 $72,295 15 $87,169
-- --
-- --
-------- --------
-------- --------
</TABLE>
The following table summarizes the Trust's investment in real estate
equities, net of accumulated depreciation of $10,023,000 at September 30, 1994
and $7,800,000 at September 30, 1993:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
----------------------- -----------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------- ----------- -------- ----------- --------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Office Buildings.............. 4 $26,264 4 $26,504
Industrial Buildings.......... 1 6,510 1 6,626
Retail Buildings.............. 1 24,083 1 24,083
- -
-------- --------
Total..................... 6 $56,857 6 $57,213
- -
- -
-------- --------
-------- --------
</TABLE>
37
3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (CONTINUED)
The following table summarizes the Trust's investment in properties acquired
through foreclosure and held for sale, net of accumulated depreciation of
$8,329,000 at September 30, 1994 and $6,143,000 at September 30, 1993:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
----------------------- -----------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------- ----------- -------- ----------- --------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
EARNING
Apartments.................... 3 $ 21,012 4 $18,631
Office Buildings.............. 4 13,942 5 11,283
Industrial Buildings.......... 5 19,913 5 18,399
Retail Buildings.............. 1 7,585 1 1,394
Research & Development
Buildings.................... 2 5,985 1 2,879
-- --
-------- --------
Total Earning............... 15 68,437 16 52,586
-- --
-------- --------
NON-EARNING
Office Buildings.............. 5 16,449 3 7,563
Industrial Buildings.......... 4 10,794 5 15,796
Retail Buildings.............. 2 5,039 3 12,775
-- --
-------- --------
Total Non-Earning........... 11 32,282 11 36,134
-- --
-------- --------
Total..................... 26 $100,719 27 $88,720
-- --
-- --
-------- --------
-------- --------
</TABLE>
The following table summarizes the Trust's investment in partnerships, net
of accumulated depreciation of $313,628 at September 30, 1994 and $70,763 at
September 30, 1993:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------------------ ------------------------------
NUMBER OF CARRYING NUMBER OF CARRYING
TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT
- ------------------------------------------------------ ----------------- ----------- ----------------- -----------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Industrial Buildings................................. 2 $ 9,524 2 $ 9,831
- -
- -
----------- -----------
----------- -----------
</TABLE>
4. ALLOWANCE FOR LOSSES
The changes in the allowance for losses for the years ended September 30,
1994, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
($ AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year...................... $11,808 $19,353 $14,707
Provisions charged to expense..................... 2,000 37,000 32,000
------- ------- -------
13,808 56,353 46,707
Less charges against allowance, net of
recoveries....................................... 378 44,545 27,354
------- ------- -------
Balance at end of year............................ $13,430 $11,808 $19,353
------- ------- -------
------- ------- -------
</TABLE>
Approximately $6,276,000, $6,394,000 and $4,488,000 of the allowance at
September 30, 1994, 1993 and 1992, respectively, are applicable to properties
acquired through foreclosure and held for sale.
38
5. SENIOR NOTES
SENIOR SECURED NOTES
The lack of liquidity in many of the commercial real estate markets
continued during the fiscal year ended September 30, 1994. Although the Trust
was able to meet the required principal payment at December 31, 1992, reducing
the principal balance of the Senior Notes to $290 million, it did not have
sufficient funds to meet the $20 million required principal payment due June 30,
1993 or the $33.8 million required principal payment due December 31, 1993 or
the $30 million required principal payment due June 30, 1994 (taking into
account permitted deferrals). The Trust also did not make the $6.6 million, the
$6.4 million, the $7.2 million, and the $8.7 million interest payments due
December 31, 1993, March 31, 1994, June 30, 1994 and September 30, 1994,
respectively. The average borrowing rates for fiscal year ended September 30,
1994 and 1993, respectively, were 10.73% and 9.23%. At September 30, 1994, the
outstanding 12.12% interest rate on the Senior Notes was composed of interest at
11.50% on $200 million of Senior Notes (including default interest at 1%) and
13.50% on $90 million of deferred amounts of Senior Notes (including default
interest at 1%). The entire unamortized cost of restructuring of the Senior
Notes was charged off during fiscal 1993 as a result of the monetary default.
The Trust expensed $3.4 million in fiscal 1993, of which $2.4 million related to
the acceleration of costs due to the June 1993 monetary default. Prior to the
default, these costs were being amortized using the interest method over the
term of the debt.
LOAN ON EQUITY INVESTMENT
In November 1991, the Trust acquired full ownership of a retail center in
which it had a partnership interest. The Trust has a construction borrowing
commitment of $18.7 million of which $17.6 million was outstanding at September
30, 1994. The contractual interest rate on this loan is 9 1/4% (Prime +1 1/2%,
floor of 9%), and the loan matured in May 1994 but was extended until December
1994.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board Statement No. 107 Disclosure of
Fair Value of Financial Statements ("SFAS" 107) requires disclosure of fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Trust.
The carrying value of cash and cash equivalents approximates their fair
value because of the liquidity and short-term maturities of these instruments.
The fair value of mortgage loans is estimated by discounting cash flows at what
is considered a market interest rate for loans with similar terms to borrowers
of similar credit quality.
The measurement of the fair value of the Senior Notes at September 30, 1994
is not practical in the context of the proposed restructuring.
The loan on equity investment is a variable rate loan that reprices
frequently, thus fair value is based on the carrying amount of the loan.
39
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Trust's financial instruments at September
30, 1994 are as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
------------ ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents................................................... $ 60,332 $ 60,332
Mortgage loans and notes receivable (net of allowance for possible
losses).................................................................... 70,240 69,825
FINANCIAL LIABILITIES:
Loan on equity investment................................................... (17,593) (17,593)
Off-Balance Sheet Financial Instruments:
Unfunded loan commitments................................................. -- (615)
</TABLE>
7. SHARE OPTION PLAN
On August 14, 1994, the 1984 Share Option Plan terminated. As of September
30, 1994, options to purchase 426,000 Common Shares were outstanding under the
1984 Share Option Plan. The exercise price per share varies from $2.50 to
$14.50. Options granted, other than those granted in fiscal 1991, expire five
years from the date of grant and may be exercised at any time six months after
the date of grant, subject to the limitation that the aggregate fair market
value (determined as of the time the Option is granted) of the Shares with
respect to which Incentive Stock Options are exercisable for the first time by
any participant during any calendar year shall not exceed $100,000. Options
granted during fiscal 1991, pursuant to the Employee Retention Plan described in
Note 8, expire five years from the date of grant but do not vest until three
years from the date of grant. During the fiscal year ended September 30, 1994,
no options were granted. Options to purchase 26,500 Common Shares at prices from
$2.50 to $14.50 terminated during the fiscal year ended September 30, 1994.
In addition to cash, options may be exercised by exchanging the Trust's
Common Shares valued at the market price on the date of exercise of the options.
During the fiscal year ended September 30, 1994, no options were exercised.
8. PENSION PLANS
EMPLOYEES
On September 20, 1989, the Trustees adopted an Employees' Retirement Plan
effective September 30, 1989. On December 16, 1992, the Trustees amended and
restated the Employees' Retirement Plan effective January 1, 1992 to conform to
amended regulations and further amended the plan on July 20, 1994.
The Trust maintains this non-contributing, defined benefit pension plan for
all eligible employees. Benefits under the plan are generally based on years of
service and average annual base salary rate. Pension costs are accrued and
funded annually from entry date in the plan to projected retirement date and
include service costs for benefits earned during the period and interest costs
on the projected benefit obligation less the return on plan assets. Pension
expense was $60,000 for each of the years ended September 30, 1994 and 1993 and
$136,000 for the year ended September 30, 1992. The
40
8. PENSION PLANS (CONTINUED)
actual return on plan assets was $53,327 for the year ended September 30, 1994,
$53,465 for the year ended September 30, 1993 and $72,492 for the year ended
September 30, 1992. Plan assets are currently invested in various mutual funds
and bonds. The funding status of the pension plan is:
<TABLE>
<CAPTION>
9/30/94 9/30/93
------------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................................. $ 776,000 $ 677,000
Accumulated benefit....................................................... 801,000 694,000
Projected benefit obligation.............................................. 1,008,000 993,000
Plan assets at market value............................................... 1,104,000 998,000
Key economic assumptions used in these determinations were:
Discount rate............................................................. 8.0% 8.0%
Rate of increase in compensation levels................................... 3.0% 3.0%
Expected long-term rate of return......................................... 9.0% 9.0%
</TABLE>
The Trust also maintains a 401(k) profit and sharing plan and trust.
Employer contributions are limited to 6% of participant's compensation, with a
maximum per year of $3,000 per participant. Profit sharing expense was $61,000,
$65,000 and $58,000 for years ended September 30, 1994, 1993 and 1992,
respectively.
TRUSTEES
Effective October 1, 1989, the Trust established a pension plan for
Trustees. All Trustees on or after the effective date (including Trustees who
are employees of the Trust) are eligible to receive the basic normal retirement
benefit under the plan upon completion of five years of credited board service.
Benefits under the plan are based on the annual retainer in effect at the time
the Trustee retires or otherwise terminates service. Plan benefits will be paid
for a period equal to the number of years served as Trustee after January 1,
1980, except that payments will cease upon the death of the Trustee.
The benefit provided by the plan is a contractual obligation on behalf of
the Trust and is payable out of assets of the Trust that are subject to the
claims of creditors of the Trust. It is not intended that the plan be funded.
Accrued pension expense was $260,000 for the year ended September 30, 1994
and $60,000 for each of the years ended September 30, 1993 and 1992. The total
accumulated benefit obligation at September 30, 1994 was $450,000.
9. EMPLOYEE RETENTION PLAN
The Trust established an Employee Retention Plan, to be administered by the
Compensation and Nominating Committee (the "Committee"), in order to assure the
continuity and performance of employees of the Trust. The Plan contains four
categories of benefits: an incentive program, stock options, termination pay and
a retention bonus.
The Committee established an incentive program for calendar year 1991. The
incentive pool was calculated based on the reduction of the Trust's outstanding
debt (the Senior Notes). On January 3, 1992, the principal balance of the Senior
Notes was reduced to $329 million resulting in an incentive bonus pool of
$160,000. On September 16, 1992, the Committee approved a continuation of the
incentive program for 1992 based on a similar formula for reducing the principal
balance of the Senior Notes. At December 31, 1992, the principal balance of the
Senior Notes was reduced to $290 million resulting in an incentive bonus pool of
$125,000. During 1994 and 1993, the Committee approved the payment of
discretionary bonuses totalling $123,000 and $128,500, respectively, for certain
officers of the Trust.
41
9. EMPLOYEE RETENTION PLAN (CONTINUED)
On March 29, 1991, the Committee awarded stock options for the purchase of
197,500 Common Shares at an option price of $4.15. The options had a three-year
vesting period from the date of grant and vested on March 29, 1994.
A termination pay plan has been established to cover termination of
employment without cause during the period that the Senior Notes, as defined,
are outstanding. Employees will be entitled to compensation ranging from a
minimum of twelve weeks to a maximum of eighteen months pay. In addition,
certain health benefits will continue to be paid by the Trust over a period of
time equal to the period used in calculating severance pay. The Trust estimates
that the maximum cost of the termination pay plan would be approximately $1.4
million and the cost is charged to expense at date of termination (as defined in
the termination pay plan).
The retention bonus, which totalled $350,000, was paid on February 28, 1992
to certain employees who remained with the Trust one year after the Effective
Date of the 1991 Plan (February 27, 1991).
10. ISSUANCE OF SHARES
Effective April 1, 1992, the Trust terminated its Dividend Reinvestment and
Share Purchase Plan.
The Trust is authorized to issue up to 3,500,000 Preferred Shares on terms
to be established by the Trustees. No preferred shares have been issued to date.
The Trust contributed 150,000 Common Shares (1.4% of outstanding shares) as
part of the settlement of the consolidated class actions and the Class 5 claims
remaining in the chapter 11 proceeding. The settlement and contribution of
shares occurred on September 17, 1993.
11. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The quarterly results of operations for fiscal 1994 and 1993 are summarized
as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- --------- ------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL 1994
Total income................ $ 8,846 $ 8,420 $ 9,516 $ 9,495
Interest expense............ 7,799 7,663 8,360 9,180
Provision for losses........ -- -- -- 2,000
Reorganization expense...... 676 741 591 352
Net loss.................... (4,656) (5,152) (4,745) (7,037)
Net loss per share.......... $ (0.41) $ (0.46) $ (0.43) $ (0.62)
FISCAL 1993
Total income................ $ 9,577 $ 10,291 $ 9,643 $ 8,831
Interest expense............ 6,839 6,851 6,919 7,901
Provision for losses........ 3,000 5,000 14,000 15,000
Reorganization expense...... 245 482 950 4,167
Net loss.................... (5,497) (7,667) (17,478) (23,327)
Net loss per share.......... $ (0.50) $ (0.69) $ (1.58) $ (2.10)
</TABLE>
42
MORTGAGE AND REALTY TRUST
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
INITIAL COST TO TRUST COSTS GROSS AMOUNT CARRIED AT END OF PERIOD
------------------------- CAPITALIZED --------------------------------------------
BUILDINGS & SUBSEQUENT TO BUILDINGS &
CLASSIFICATION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------------------------- ------------ ----------- ------------ ------------- ----------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENTS IN REAL ESTATE
EQUITIES
Office Building:
Lower Providence, PA.... $ -- $ -- $ 9,723,000 $ 963,000 $ -- $10,686,000 $10,686,000
Anaheim, CA............. -- 2,145,000 6,810,000 1,724,000 2,145,000 8,534,000 10,679,000
Boston, MA.............. -- 500,000 2,033,000 704,000 500,000 2,737,000 3,237,000
Portland, OR............ -- 1,500,000 6,197,000 943,000 1,500,000 7,140,000 8,640,000
Industrial Center:
Whittier, CA............ -- 1,500,000 5,023,000 1,585,000 1,500,000 6,608,000 8,108,000
Retail Building:
Fremont, CA............. 17,593,000 6,528,000 15,161,000 3,841,000 6,528,000 19,002,000 25,530,000
------------ ----------- ------------ ------------- ----------- ------------ -----------------
$17,593,000 $12,173,000 $44,947,000 $ 9,760,000 $12,173,000 $54,707,000 $66,880,000(a)(b)
------------ ----------- ------------ ------------- ----------- ------------ -----------------
------------ ----------- ------------ ------------- ----------- ------------ -----------------
<CAPTION>
LIFE ON WHICH
DEPRECIATION
ACCUMULATED IN LATEST
DEPRECIATION INCOME
AND DATE STATEMENT IS
CLASSIFICATION AMORTIZATION ACQUIRED COMPARED
- ----------------------------- ------------ -------- -------------
<S> <C> <C> <C>
INVESTMENTS IN REAL ESTATE
EQUITIES
Office Building:
Lower Providence, PA.... $ 2,431,000 1987 40 YR.
Anaheim, CA............. 2,031,000 1988 40 YR.
Boston, MA.............. 852,000 1990 40 YR.
Portland, OR............ 1,663,000 1989 40 YR.
Industrial Center:
Whittier, CA............ 1,598,000 1987 40 YR.
Retail Building:
Fremont, CA............. 1,448,000 1992 40 YR.
------------
$10,023,000
------------
------------
</TABLE>
43
MORTGAGE AND REALTY TRUST
SCHEDULE XI (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
SEPTEMBER 30, 1994
NOTES:
(a) Cost for federal income tax purposes $65,031,000.
(b) The changes in gross carrying amounts during the year ended September 30,
1994 are
summarized as follows:
<TABLE>
<S> <C> <C>
Balance at September 30, 1993.............................. $65,012,000
Additions during year:
Improvements............................................. $ 1,847,000
Loan advance by construction lender...................... 21,000 1,868,000
----------- -----------
Balance at September 30, 1994............................ $66,880,000
-----------
-----------
The changes in gross carrying amounts during the year ended September 30, 1993 are
summarized as follows:
Balance at September 30, 1992.............................. $46,400,000
Additions during year:
Reclassification from real estate equities held for sale
and other assets........................................ $16,427,000
Improvements............................................. 2,505,000
Loan advance by construction lender...................... 2,057,000 20,989,000
-----------
Deductions during year:
Charge off against allowance for losses.................. 2,377,000
-----------
Balance at September 30, 1993.............................. $65,012,000
-----------
-----------
The changes in gross carrying amounts during the year ended September 30, 1992 are
summarized as follows:
Balance at September 30, 1991.............................. $24,863,000
Additions during year:
Improvements............................................. $ 1,400,000
Transfer of investment in partnership.................... 7,241,000
Acquisition of partnership interest...................... 14,448,000
Loan advance by construction lender...................... 2,473,000 25,562,000
-----------
Deductions during year:
Charge off against allowance for losses.................. 4,025,000
-----------
Balance at September 30, 1992.............................. $46,400,000
-----------
-----------
The change in accumulated depreciation and amortization during the year ended September
30, 1994 is summarized as follows:
Balance at September 30, 1993.............................. $ 7,799,000
Additions during year:
Charge to income......................................... 2,224,000
-----------
Balance at September 30, 1994.............................. $10,023,000
-----------
-----------
</TABLE>
44
MORTGAGE AND REALTY TRUST
SCHEDULE XI (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
SEPTEMBER 30, 1994
<TABLE>
<S> <C> <C>
The change in accumulated depreciation and amortization during the year ended September
30, 1993 is summarized as follows:
Balance at September 30, 1992.............................. $ 3,132,000
Additions during year:
Reclassification from real estate equities held for sale
and other assets........................................ 2,553,000
Charge to income......................................... 2,114,000
-----------
Balance at September 30, 1993.............................. $ 7,799,000
-----------
-----------
The change in accumulated depreciation and amortization during the year ended September
30, 1992 is summarized as follows:
Balance at September 30, 1991.............................. $ 1,789,000
Additions during year:
Charge to income......................................... 1,343,000
-----------
Balance at September 30, 1991.............................. $ 3,132,000
-----------
-----------
</TABLE>
45
MORTGAGE AND REALTY TRUST
SCHEDULE XII
MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF LOANS SUBJECT
TO DELINQUENT
NUMBER OF INTEREST CARRYING AMOUNT PRINCIPAL OR
TYPE OF LOANS LOANS RATE FINAL MATURITY DATE OF MORTGAGES INTEREST
- ---------------------------------- ------------- ------------- ------------------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Standing Loans:
Industrial buildings:
Tucson, AZ................... 1 8.00% March 1999 $ 4,384,000 $ --
Uwchlan Twp., PA............. 1 9.75% December 1994 16,608,000 --
Carson, CA................... 1 9.50% February 1995 4,029,000 --
Others....................... 2 9.00%-10.00% February 1995-July 1997 2,536,000 --
Retail buildings:
Citrus Heights, CA........... 1 9.25% February 1996 3,957,000 --
El Toro, CA.................. 1 9.25% January 1995 8,864,000 --
Philadelphia, PA............. 1 10.75% December 1994 3,250,000 --
Research & development
buildings:
Santa Anne, CA............... 1 8.00% December 1999 11,929,000 --
San Dumas, CA................ 1 10.75% March 1995 2,484,000 --
Office buildings............... 1 7.25% June 1999 750,000 --
Hotel:
Sparks, NV................... 1 10.00% October 1996 3,060,000 --
----------------
61,851,000 --
----------------
Long-Term Amortizing Loans:
Office buildings............... 1 9.75% April 1999 949,000 --
Apartments..................... 1 9.00% July 2000 254,000 --
Residential/Condominiums (a)... 80 6.20%-9.50% July 1995-June 2009 1,334,000 --
Retail building................ 1 8.875% November 1999 205,000 --
Industrial buildings........... 1 9.00% April 1999 166,000 --
---------------- -----
2,908,000 --
---------------- -----
Participating Loans and
Investments:
Industrial buildings:
Worcester, MA................ 1 11.00% May 2002 2,605,000 --
Research & development
buildings:
Bristol, PA.................. 1 9.00% November 1995 1,958,000 --
---------------- -----
4,563,000 --
---------------- -----
Total Mortgage Loans and
Investments..................... $ 69,322,000(b)(c) $ --
---------------- -----
---------------- -----
</TABLE>
46
MORTGAGE AND REALTY TRUST
SCHEDULE XII (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 1994
NOTES:
(a) Consists of 80 mortgage end loans on 9 projects.
(b) The aggregate cost for federal income tax purposes is $69,480,000.
(c) The change in carrying value of mortgage loans during the year ended
September 30, 1994
were as follows:
<TABLE>
<S> <C>
Balance at September 30, 1993.......................................... $ 104,193,000
Advances on mortgage loans............................................. --
Transfer of real estate to mortgage loans.............................. 750,000
Net change in interest reserves, deferred income....................... 480,000
-------------
105,423,000
Collections of principal............................................... 25,555,000
Transfer to real estate................................................ 10,321,000
Chargeoff against allowance for losses................................. 225,000
-------------
$ 69,322,000
-------------
-------------
The change in carrying value of mortgage loans during the year ended September 30, 1993
were as follows:
Balance at September 30, 1992.......................................... $ 237,428,000
Advances on mortgage loans............................................. 602,000
Transfer of real estate to mortgage loans.............................. 348,000
Net change in interest reserves, deferred income....................... 1,323,000
-------------
239,701,000
Collections of principal............................................... 24,604,000
Transfer to real estate................................................ 110,218,000
Chargeoff against allowance for losses................................. 686,000
-------------
$ 104,193,000
-------------
-------------
The change in carrying value of mortgage loans during the year ended September 30, 1992
were as follows:
Balance at September 30, 1991.......................................... $ 344,632,000
Advances on mortgage loans............................................. 2,624,000
Transfer of real estate to mortgage loans.............................. 940,000
Net change in interest reserves, deferred income....................... 426,000
-------------
348,622,000
Collections of principal............................................... 50,674,000
Transfer to real estate................................................ 56,554,000
Chargeoff against allowance for losses................................. 3,566,000
Other.................................................................. 400,000
-------------
$ 237,428,000
-------------
-------------
</TABLE>
47
MORTGAGE AND REALTY TRUST
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------------
<C> <S>
3.1 Declaration of Trust as amended through February 17, 1993 (1)
(Exhibit 3).
3.2 By-Laws, as amended through June 20, 1984 (2) (Exhibit 3.3).
4.1 Form of Certificate for Common Shares (3) (Exhibit 1A).
4.2(a) Joint Plan of Reorganization Proposed by Debtor, Creditors'
Committee and Equity Security Holders Committee (4) (Exhibit
10.11).
4.2(b) Modification to Joint Plan of Reorganization Proposed by Debtor,
Creditors' Committee and Equity Security Holders Committee (5)
(Exhibit 2).
4.2(c) Amendment No. 1 and Consent to Plan of Reorganization dated as of
September 30, 1991 (6) (Exhibit 4.4(c)).
4.2(d) Amendment No. 2 to Plan of Reorganization, dated as of July 15,
1992 (7) (Exhibit 4.2(d)).
4.3 Indenture dated as of July 15, 1992 between Mortgage and Realty
Trust and Wilmington Trust Company, as trustee, governing the
registrant's Senior Secured Uncertificated Notes due 1995 (7)
(Exhibit 4.3).
10.1 1984 Share Option Plan (8) (Exhibit 19.1).
10.2 Form of Incentive Stock Option Agreement under the 1984 Share
Option Plan (9) (Exhibit 10.9).
10.3 Form of Non-Qualified Stock Option Agreement under the 1984 Share
Option Plan (2) (Exhibit 10.19).
10.4 Amended and Restated Saving Incentive Plan effective January 1,
1992 (7) (Exhibit 10.7).
10.5 Amended and Restated Employees' Retirement Plan effective January
1, 1992 (7) (Exhibit 10.8).
10.6 Pension Plan for Trustees dated October 1, 1989 (10) (Exhibit
10.13).
10.7 Employee' Retention Plan dated October 17, 1990 as amended January
16, 1991 and March 10, 1991 (11) (Exhibit 19.1).
10.8* Resolutions of Amendment to Amended and Restated Employees'
Retirement Plan.
11* Schedule of Net Income Per Share -- Assuming Full Dilution for the
years ended September 30, 1994, 1993 and 1992
20.1 Press Release (12) (Exhibit 20.1).
20.2 Term Sheet (12) (Exhibit 20.2).
21* Subsidiaries.
23* Consent of Ernst & Young LLP dated December 27, 1994.
<FN>
- -------------------------
(1) Filed on May 13, 1993 as an exhibit to the Quarterly Report on Form 10-Q
(No. 1-6613) and incorporated herein by reference.
(2) Filed on December 6, 1984 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
(3) Filed on May 20, 1981 as an exhibit to Amendment No. 1 to the Registration
Statement on Form 8-A (No. 1-6613) and incorporated herein by reference.
(4) Filed on December 28, 1990 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
</TABLE>
48
<TABLE>
<S> <C>
(5) Filed on March 14, 1991 as an exhibit to the Current Report on Form 8-K
(No. 1-6613) and incorporated herein by reference.
(6) Filed on December 27, 1991 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
(7) Filed on December 22, 1992 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
(8) Filed on August 13, 1987 as an exhibit to the Quarterly Report on Form 10-Q
(No. 1-6613) and incorporated herein by reference.
(9) Filed on December 29, 1987 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
(10) Filed on December 21, 1989 as an exhibit to the Annual Report on Form 10-K
(No. 1-6613) and incorporated herein by reference.
(11) Filed on May 14, 1991 as an exhibit to the Quarterly Report on Form 10-Q
(No. 1-6613) and incorporated herein by reference.
(12) Filed on November 28, 1994 as an exhibit to the Current Report on Form 8-K
(No. 1-6613) and incorporated herein by reference.
* Exhibit filed with this Form 10-K.
</TABLE>
49
<PAGE>
EXHIBIT 10.8
SECRETARY'S CERTIFICATION
The undersigned Secretary of Mortgage and Realty Trust (the "Trust"), a real
estate investment trust duly organized under the laws of the State of Maryland,
hereby certifies that the following is a true and correct copy of the preambles
and resolutions duly adopted by the Board of Trustees of the Trust on July 20,
1994, and that such resolutions have not been modified or rescinded and are
still in full force and effect as of the date hereof:
WHEREAS, the Trust has heretofore adopted and maintained, and continues to
maintain, a certain Plan and Trust qualified under Sections 401(a) and 501(a) of
the Internal Revenue Code known as the "Employees' Retirement Plan for Mortgage
and Realty Trust" (the "Plan"); and
WHEREAS, in the opinion of the Board of Trustees, it is in the best interest
of the Trust to amend the Plan so as to permit distributions following
termination of employment and to permit distribution of an employee's vested
benefit in lump sum form;
NOW THEREFORE, BE IT
RESOLVED, that Item E16 of the Adoption Agreement to the Employees'
Retirement Plan for Mortgage and Realty Trust dated December 16,
1992 is hereby amended by eliminating E16 c. thereof and selecting
instead E16 d. reading "Distributions may be made at the
Participant's election as soon as practicable after the
Anniversary Date following termination of employment"; and it is
further
RESOLVED, that Item E17 of the aforesaid Adoption Agreement is hereby
amended by eliminating E17 a. thereof and selecting instead E17 c.
reading "Distributions under the Plan may be made in annuities and
. . . IN LUMP SUMS OR INSTALLMENTS"; and it is further
RESOLVED, that the aforesaid amendments shall be effective as of January 1,
1994; and it is further
RESOLVED, that the appropriate officers of the Trust are hereby authorized
and directed to take any and all actions, to sign such documents
and to make such filings with any State or Federal agency as may
be necessary to effectuate the foregoing resolutions.
/s/ CLAIRE M. ADAMS
--------------------------------------
Claire M. Adams, Secretary
DATED: July 20, 1994
[SEAL]
<PAGE>
EXHIBIT 11
MORTGAGE AND REALTY TRUST
SCHEDULE OF NET INCOME PER SHARE -- ASSUMING FULL DILUTION
FOR THE YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1994 1993 1992
--------------- --------------- ---------------
<S> <C> <C> <C>
BASIS:
Net loss...................................................... $ (21,590,000) $ (53,969,000) $ (37,472,000)
Average common shares outstanding............................. 11,226,000 11,080,000 11,076,000
20% limitation on assumed repurchase.......................... 2,245,000 2,216,000 2,215,000
Market price at the end of the period......................... $.375 $.375 $1.125
Options outstanding........................................... 426,000 452,500 584,500
COMPUTATION:
Proceeds:
Options..................................................... 426,000 452,500 584,500
Average exercise price...................................... X $5.37 X $5.36 X $8.15
--------------- --------------- ---------------
$ 2,288,000 $ 2,425,000 $ 4,764,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Adjustment of proceeds:
Purchase of outstanding common shares at market............. $ 842,000 $ 831,000 $ 2,492,000
Retirement of debt.......................................... 1,446,000 1,594,000 2,272,000
--------------- --------------- ---------------
$ 2,288,000 $ 2,425,000 $ 4,764,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Adjustment of net loss:
Net loss before gain on sales of real estate................ $ (21,590,000) $ (53,969,000) $ (37,472,000)
Interest reduction.......................................... 155,000 135,000 176,000
--------------- --------------- ---------------
Adjusted net loss......................................... $ (21,435,000) $ (53,834,000) $ (37,296,000)
--------------- --------------- ---------------
--------------- --------------- ---------------
Adjustment of shares outstanding:
Average shares outstanding.................................. 11,226,000 11,080,000 11,076,000
Net shares repurchased...................................... (1,819,000) (1,764,000) (1,631,000)
--------------- --------------- ---------------
Adjusted shares outstanding (basis for computation of net
income per share -- assuming full dilution).............. 9,407,000 9,316,000 9,445,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Fully diluted earnings per share:
Net loss.................................................... $(2.28) $(5.78) $(3.95)
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
- ------------------------
NOTE -- Primary earnings per share is based on the average number of shares
outstanding.
<PAGE>
EXHIBIT 21
MORTGAGE AND REALTY TRUST
SUBSIDIARIES AS OF SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
PERCENTAGE OF STATE OF
NAME OWNERSHIP ORGANIZATION
- - ------------------------------------------------- ---------------------- -------------------
<S> <C> <C>
MRT West, Inc. (corporation) 100% California
Paseo Padre Associates 85% California
(limited partnership) (Limited partner
interest)
15%
(General partner
interest
through MRT West)
150 Rittenhouse Circle, Inc. (corporation) 100% Maryland
MRT Santa Monica, Inc. (corporation) 100% California
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated November 17, 1994 with respect to
the financial statements and schedules of Mortgage and Realty Trust included in
this Annual Report (Form 10-K) for the year ended September 30, 1994.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
December 27, 1994
<PAGE>
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] SEP-30-1994
[PERIOD-START] OCT-01-1993
[PERIOD-END] SEP-30-1994
[CASH] 60,332
[SECURITIES] 0
[RECEIVABLES] 7,865
[ALLOWANCES] (13,430)
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 0
[DEPRECIATION] 0
[TOTAL-ASSETS] 364,244
[CURRENT-LIABILITIES] 0
[BONDS] 307,593
[COMMON] 11,226
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 8,807
[TOTAL-LIABILITY-AND-EQUITY] 364,244
[SALES] 0
[TOTAL-REVENUES] 36,277
[CGS] 0
[TOTAL-COSTS] 20,505
[OTHER-EXPENSES] 2,360
[LOSS-PROVISION] 2,000
[INTEREST-EXPENSE] 33,002
[INCOME-PRETAX] (21,590)
[INCOME-TAX] 0
[INCOME-CONTINUING] (21,590)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (21,590)
[EPS-PRIMARY] (1.92)
[EPS-DILUTED] (1.92)
</TABLE>
<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 March 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission File Number 1-6613
MORTGAGE AND REALTY TRUST
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 23-1862664
------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
8380 Old York Road, Suite 300
Elkins Park, Pennsylvania 19027-1590
- - --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 881-1525
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
----- -----
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
----- -----
Number of Common Shares Outstanding at March 31, 1995:
11,226,215
MORTGAGE AND REALTY TRUST
INDEX OF FINANCIAL INFORMATION
PART I
1. Unaudited Financial Statements including the following:
Balance Sheet at March 31, 1995 and
September 30, 1994
Statement of Operations for the periods ended
March 31, 1995 and 1994
Statement of Cash Flows for the six months
ended March 31, 1995 and 1994
Statement of Shareholders' Equity for the six
months ended March 31, 1995
Notes to the Financial Statements
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II
3. Defaults Upon Senior Securities
6. Exhibits and Reports on Form 8-K
1
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements:
- --------------------------------------------------------------------------------
BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, September 30,
1995 1994
------------ -------------
<S> <C> <C>
ASSETS:
Mortgage loans and investments:
Standing loans $ 54,272,000 $ 61,851,000
Long-term amortizing loans 2,694,000 2,908,000
Participating loans and investments 1,960,000 4,563,000
Non-earning 25,000 -
------------ ------------
58,951,000 69,322,000
------------ ------------
Notes receivable 642,000 760,000
In-substance foreclosures:
Earning 30,328,000 62,097,000
Non-earning 18,018,000 10,198,000
Real estate:
Investment in real estate equities, net 56,940,000 56,857,000
Properties acquired through foreclosure and
held for sale, net:
Earning 72,642,000 68,437,000
Non-earning 34,417,000 32,282,000
Investment in partnerships, net 26,511,000 9,524,000
------------ ------------
298,449,000 309,477,000
Less allowance for losses (11,031,000) (13,430,000)
------------ ------------
287,418,000 296,047,000
Cash and cash equivalents 73,140,000 60,332,000
Interest receivable and other assets 6,390,000 7,865,000
------------ ------------
$366,948,000 $364,244,000
============ ============
LIABILITIES:
Senior secured notes $290,000,000 $290,000,000
Loan on equity investment 17,593,000 17,593,000
Accounts payable and accrued expenses 3,715,000 4,050,000
Interest payable 51,324,000 32,568,000
------------ ------------
362,632,000 344,211,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Preferred shares, $1 par value: 3,500,000
shares authorized, none issued - -
Common shares, $1 par value: 20,000,000 shares
authorized, 11,226,000 shares issued and
outstanding 11,226,000 11,226,000
Additional paid-in capital 182,375,000 182,375,000
Accumulated deficit (189,285,000) (173,568,000)
------------ ------------
Total shareholders' equity 4,316,000 20,033,000
------------ ------------
$366,948,000 $364,244,000
============ ============
</TABLE>
See accompanying notes.
2
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Periods Ended March 31, (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-------------------------- --------------------------
3/31/95 3/31/94 3/31/95 3/31/94
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Income:
Interest and fee income on mortgage
loans $ 2,303,000 $ 3,661,000 $ 5,181,000 $ 7,666,000
Income on rental properties:
Rental income 5,825,000 4,167,000 11,517,000 8,469,000
Operating expense reimbursement 590,000 418,000 1,167,000 849,000
Interest on short-term investments 1,042,000 140,000 1,864,000 234,000
Other 14,000 34,000 47,000 48,000
------------ ----------- ------------ -----------
9,774,000 8,420,000 19,776,000 17,266,000
------------ ----------- ------------ -----------
EXPENSES:
Interest 10,273,000 7,663,000 19,832,000 15,462,000
Expenses of rental properties:
Depreciation and amortization 1,782,000 1,426,000 3,486,000 2,833,000
Operating 2,802,000 2,360,000 5,472,000 4,734,000
Other operating expenses 1,045,000 1,382,000 2,198,000 2,628,000
Provision for losses on mortgage
loans and related investments 3,000,000 - 3,000,000 -
Reorganization expenses 1,135,000 741,000 1,505,000 1,417,000
------------ ----------- ------------ -----------
20,037,000 13,572,000 35,493,000 27,074,000
------------ ----------- ------------ -----------
Net loss $(10,263,000) $(5,152,000) $(15,717,000) $(9,808,000)
============ =========== ============ ===========
PER SHARE:
Net loss $(.91) $(.46) $(1.40) $(.87)
===== ===== ====== =====
Weighted average number of common
shares outstanding 11,226,000 11,226,000 11,226,000 11,226,000
</TABLE>
See accompanying notes.
3
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
Six Months Ended March 31, (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(15,717,000) $(9,808,000)
------------ -----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization on real estate 3,486,000 2,833,000
Decrease in payables and accrued expenses (335,000) (134,000)
Increase in interest payable 18,756,000 15,512,000
Decrease (increase) in receivables and other assets 1,475,000 (399,000)
Net change in interest reserves, deferred income (349,000) (455,000)
Provision for losses 3,000,000 -
Recoveries of charge offs to allowance for losses 116,000 69,000
------------ -----------
Total adjustments 26,149,000 17,426,000
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,432,000 7,618,000
------------ -----------
Cash flows from investing activities:
Investments in real estate:
Properties acquired through foreclosure (6,189,000) (2,103,000)
In-substance foreclosures (97,000) (1,030,000)
Real estate equities (1,349,000) (738,000)
Partnerships (1,849,000) -
Principal repayments on mortgage loans 835,000 11,564,000
Repayments on notes receivable 118,000 100,000
Sale of foreclosed property 3,350,000 6,665,000
Repayment on in-substance foreclosure 7,557,000 2,338,000
------------ -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,376,000 16,796,000
------------ -----------
Net increase in cash and cash equivalents 12,808,000 24,414,000
Cash and cash equivalents at beginning of period 60,332,000 11,451,000
------------ -----------
Cash and cash equivalents at end of period $ 73,140,000 $35,865,000
============ ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTMENT AND
FINANCING ACTIVITIES:
Charge offs against allowance for losses $ 5,515,000 $ 758,000
============ ===========
Transfer of in-substance foreclosures to real estate
and investment in partnerships $ 23,740,000 $ 5,556,000
============ ===========
Transfer of in-substance foreclosures to mortgage
loans $ 105,000 $ -
============ ===========
Transfer of mortgage loans to real estate and in-
substance foreclosures $ 9,762,000 $ 400,000
============ ===========
</TABLE>
See accompanying notes.
4
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
- --------------------------------------------------------------------------------
STATEMENT OF SHAREHOLDERS' EQUITY
For the Six Months Ended March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Common Shares Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period 11,226,000 $11,226,000 $182,375,000 $(173,568,000) $20,033,000
Net loss (15,717,000) (15,717,000)
---------- ----------- ------------ ------------- -----------
Balance, end of
period 11,226,000 $11,226,000 $182,375,000 $(189,285,000) $ 4,316,000
========== =========== ============ ============= ===========
</TABLE>
See accompanying notes.
5
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION -
On November 17, 1994, the Trust announced that it had reached an
agreement in principle with a substantial number of holders of its
Senior Notes on the terms of a restructuring of the Senior Notes.
Pursuant to the agreement in principle, holders of the Senior Notes
in the aggregate principal amount of $290 million plus accrued
interest of $51.3 million through March 31, 1995 will receive
under a prepackaged plan of reorganization under chapter 11 of the
Bankruptcy Code, $110 million of new senior secured notes due 2002,
approximately $50 million in cash and 97% of the restructured equity
of the Trust (or substantially all the restructured equity if holders
of the Trust's outstanding common shares do not vote to accept the
prepackaged plan). If holders of the outstanding common shares vote
to accept the prepackaged plan, such holders will retain 3% of the
equity of the restructured Trust. The agreement in principle
anticipates that the new senior secured notes will mature in 2002
and bear interest at the rate of 11-1/8% per annum. It is also
anticipated that holders of unsecured claims will receive cash in the
allowed amount of their claims. It is contemplated that the Trust
will prepare a "shelf" registration statement for the new securities
issued pursuant to the prepackaged plan.
In April 1995, the Trust and certain holders of Senior Notes executed
an agreement of understanding, pursuant to which such noteholders
agreed to support the proposed restructuring. On April 11, 1995,
pursuant to such agreement, the Trust advanced $25 million towards
the $50 million minimum payment required to implement the proposed
restructuring.
The agreement to pursue the restructuring proposal is subject to a
number of conditions and the Trust intends to effect the
restructuring through a prepackaged chapter 11 bankruptcy. At this
time there can be no assurance that the conditions to consummation of
the proposed restructuring will be satisfied.
On March 30, 1995, the Trust filed preliminary solicitation materials
with the SEC regarding the proposed restructuring and prepackaged
chapter 11 bankruptcy. Details of the proposed restructuring and
prepackaged bankruptcy including the conditions to commencement and
consummation of the restructuring and terms of the new debt securities
to be received by the Senior Note holders under the prepackaged plan
have not been finalized pending the filing of definitive solicitation
materials with the SEC and distribution of a disclosure statement for
the solicitation of votes for the prepackaged plan to holders of the
Trust's outstanding securities.
The financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) applicable to a
company on a "going concern" basis, which contemplates the
realization of assets and the liquidation of liabilities in the
ordinary course of business. These financial statements include
adjustments and reclassifications that have been made to reflect
indebtedness as extended under the 1991 Plan and the Senior Note
Indenture. These financial statements do not include any adjustments
6
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION (Continued)
that would be required should the Trust be unable to continue as a
going concern. The conditions noted above raise substantial doubt
about the Trust's ability to continue as a going concern. These
financial statements also do not include any adjustments that could
be required as a result of the November 17, 1994 agreement in
principle with certain holders of Senior Notes and related proposed
restructuring and prepackaged chapter 11 bankruptcy, including
adjustments required by The American Institute of Certified Public
Accountants Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," for fresh
start accounting. The Trust anticipates that any adjustments that
would be occasioned in the restructuring process by its financial
distress, by any inability of the Trust to continue as a going
concern or by any inability of the Trust to achieve a consensual
restructuring would be material and adverse.
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six months period
ended March 31, 1995 are not necessarily indicative of the results
that may be expected for the year ended September 30, 1995.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES - The Trust is a real estate investment trust that has
elected to be taxed under Sections 856-860 of the Internal Revenue
Code of 1986, as amended. Accordingly, no provision has been made
for income taxes in the financial statements.
For the fiscal year ended September 30, 1994 and the six months ended
March 31, 1995, there were significant differences between taxable
net loss and net loss as reported in the financial statements. The
differences were primarily temporary differences related to the
recognition of bad debt deductions and accounting for reorganization
costs. For financial accounting purposes, these items are expensed
currently, while for tax purposes some portion of these items may
be deferred to future periods.
7
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Trust incurred net operating losses of $38 million, $31 million
and $12 million for tax purposes in fiscal 1993, 1992 and 1991,
respectively. The Trust estimates a net operating loss for tax
purposes of approximately $35 million for fiscal 1994. Each of these
net operating losses will be available for fifteen years as a loss
carryforward to future years' taxable income. If during the course
of the proposed restructuring, Cancellation of Indebtedness taxable
income results, the net operating losses available for use in future
years will be reduced by the amount of such Cancellation of
Indebtedness income. The Trust intends to preserve its net operating
losses, but the transfer of more than 50% of the ownership of the
Trust to its creditors in a reorganization (as was provided in the
November 1994 agreement in principle and as is likely in any
alternate restructuring) will limit the future per annum use of its
net operating losses (after the aforementioned reduction for
Cancellation of Indebtedness income) under Internal Revenue Code
Section 382.
INTEREST INCOME - Interest income on each loan is recorded as earned.
Interest income is not recognized if, in the opinion of the Trustees,
collection is doubtful. The Trust generally considers loans as
delinquent if payment of interest and/or principal, as required by the
terms of the note, is more than 60 days past due. Accrual of interest
income is generally terminated and foreclosure proceedings are
started if payment is more than 60 days past due.
RENTAL INCOME - Rental income is recognized on a straight-line basis
over the applicable term of the lease.
LOAN FEE INCOME - Loan fees are recorded as income using the "interest
method". Accordingly, loan fees are deferred when received and are
recorded as income over the term of the loan in relation to
outstanding loan balances.
ALLOWANCE FOR LOSSES - The allowance for losses on mortgage loans and
related investments is determined in accordance with The American
Institute of Certified Public Accountants Statement of Position on
Accounting Practices of Real Estate Investment Trusts 75-2, as
amended. This statement requires adjustment of the carrying value of
mortgage loans to the lower of their carrying value or estimated net
realizable value. Estimated net realizable value is the estimated
selling price of a property offered for sale in the open market
allowing a reasonable time to find a buyer, reduced by the estimated
cost to complete and hold the property (including the estimated cost
of capital), net of estimated cash income. At March 31, 1995, no
assets were valued using the cost of capital method.
Additional provisions for losses on mortgage loans and related
investments may be necessary if the deterioration in real estate
markets continues, or there is a significant increase in the Trust's
cost of capital. See also Note 1, "Basis of Financial Statement
Presentation and Plan of Reorganization". Further adjustments may
also be necessary as a result of the restructuring negotiations. The
8
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Trust anticipates that any adjustments that would be occasioned in
the restructuring process by its financial distress, by any inability
of the Trust to continue as a going concern or by any inability of
the Trust to achieve a consensual restructuring would be material and
adverse.
CONCENTRATION OF CREDIT RISKS - The Trust's mortgage loan portfolio is
heavily concentrated in California (49%) and Pennsylvania (23%). The
mortgage loans are secured by the underlying real estate. The real
estate is subject to risks arising in connection with the underlying
real estate, such as defaults or non-renewal of the tenant leases,
increased operating costs, environmental problems and availability
of financing.
PROPERTIES ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE - Properties
acquired through foreclosure and held for sale are recorded at the
lower of cost or fair value at acquisition, which becomes the cost
basis for accounting purposes. The fair value of the asset acquired,
in accordance with Financial Accounting Standards Board Statement 15,
is the amount that the Trust could reasonably expect to receive in a
current sale between a willing buyer and a willing seller. Such
properties are thereafter accounted for in the same manner as any
similar asset acquired for investment as to depreciation and gain or
loss upon sale. Subsequent to foreclosure, the properties are carried
at the lower of cost or fair value less estimated costs to sell, as
set forth in The American Institute of Certified Public Accountants'
Statement of Position 92-3, "Accounting for Foreclosed Assets"
("SOP 92-3").
IN-SUBSTANCE FORECLOSURE - A loan is considered an in-substance fore-
closure if: (1) the debtor has little or no equity considering the
fair value of the collateral, (2) proceeds for repayment can be
expected to come only from operation or sale of the collateral, and
(3) the debtor has either formally or effectively abandoned control
of the collateral. Loans meeting the criteria for in-substance
foreclosure are reclassified and recorded at the lower of cost or fair
value of the collateral, which establishes a new cost basis in the
same manner as a legal foreclosure.
Properties acquired through foreclosure and held for sale and in-
substance foreclosures are reclassified from non-earning to earning
status if they produce and maintain for a minimum of two consecutive
quarters an annualized return of 5% or greater cash flow yield.
NET LOSS PER SHARE - Net loss per share is computed using the
weighted average common shares outstanding during each period. Fully
diluted net loss per share is not disclosed because such information
is not meaningful.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization are
computed on the straight-line method over an estimated useful life of
40 years for buildings and three to five years for other property and
lease commissions.
Investments in real estate equities and properties acquired through
foreclosure and held for sale and investments in partnerships are
shown on the balance sheet, net of accumulated depreciation.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include short-
term investments (high grade commercial paper carried at cost of
$71.6 million at March 31, 1995) with original maturities ranging
from 3 to 28 days.
9
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Included in cash and cash equivalents is $1.3 million of restricted
cash which represents the funding of the employee retention plan (see
Note 8) and $1.1 million related to borrowers' deposits.
NOTE 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE
The following table summarizes the Trust's mortgage loan portfolio:
<TABLE>
<CAPTION>
March 31, 1995 September 30, 1994
---------------------- ----------------------
Number of Carrying Number of Carrying
Type of Underlying Security Investments Amount Investments Amount
- - --------------------------- ----------- -------- ----------- --------
($ Amounts in Thousands)
<S> <C> <C> <C> <C>
Apartments 1 $ 235 1 $ 254
Residential/Condominium* 8 1,218 9 1,334
Office Buildings 3 18,181 2 1,699
Industrial Buildings 8 11,203 7 30,328
Research & Development 1 12,043 3 16,371
Retail Buildings 3 13,011 4 16,276
Hotel/Motels 1 3,060 1 3,060
-- ------- -- -------
Total 25 $58,951 27 $69,322
== ======= == =======
_____________
<FN>
* Includes 79 mortgage end loans on 8 investments at March 31, 1995 and 80
mortgage end loans on 9 investments at September 30, 1994.
</TABLE>
The Trust's mortgage loan portfolio consists of loans located
principally in California, 49% and Pennsylvania, 23%.
At March 31, 1995, the Trust had undisbursed commitments of
$690,000, all of which represents additional advances on partially
funded mortgage loans.
As of March 31, 1995, there was one earning loan totalling
$16,608,000 that was delinquent (more than 60 days past due) as to
principal.
At March 31, 1995 and 1994, loans totalling $18,438,000 and
$31,019,000, respectively, were extended beyond their original
contractual maturity dates. Loan terms are extended in the normal
course of business for various reasons, such as delays in
construction, slower leasing than originally anticipated or delay in
obtaining permanent financing.
No interest rate modifications were made on mortgage loans for the
quarter ended March 31, 1995.
10
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (Continued)
The following table summarizes the Trust's investment in in-substance
foreclosures:
<TABLE>
<CAPTION>
March 31, 1995 September 30, 1994
---------------------- ----------------------
Number of Carrying Number of Carrying
Type of Property Investments Amount Investments Amount
- - ---------------- ----------- -------- ----------- --------
($ Amounts in Thousands)
<S> <C> <C> <C> <C>
EARNING:
Office Buildings 1 $ 4,654 2 $12,840
Retail Buildings 2 13,800 3 28,452
Apartments - - 1 6,695
Research & Development Bldgs. - - 2 14,110
Industrial Buildings 2 11,874 - -
-- ------- -- -------
Total Earning 5 30,328 8 62,097
-- ------- -- -------
NON-EARNING:
Industrial Buildings 4 18,018 2 10,198
-- ------- -- -------
Total Non-Earning 4 18,018 2 10,198
-- ------- -- -------
Total 9 $48,346 10 $72,295
== ======= == =======
</TABLE>
The following table summarizes the Trust's investment in real estate
equities, net of accumulated depreciation of $11,294,000 at March
31, 1995 and $10,023,000 at September 30, 1994:
<TABLE>
<CAPTION>
March 31, 1995 September 30, 1994
---------------------- ----------------------
Number of Carrying Number of Carrying
Type of Property Investments Amount Investments Amount
- - ---------------- ----------- -------- ----------- --------
($ Amounts in Thousands)
<S> <C> <C> <C> <C>
Office Buildings 4 $26,576 4 $26,264
Industrial Buildings 1 6,434 1 6,510
Retail Buildings 1 23,930 1 24,083
-- ------- -- -------
Total 6 $56,940 6 $56,857
== ======= == =======
</TABLE>
11
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (Continued)
The following table summarizes the Trust's investment in properties
acquired through foreclosure and held for sale, net of accumulated
depreciation of $10,180,000 at March 31, 1995 and $8,329,000 at
September 30, 1994:
<TABLE>
<CAPTION>
March 31, 1995 September 30, 1994
---------------------- ----------------------
Number of Carrying Number of Carrying
Type of Property Investments Amount Investments Amount
- - ---------------- ----------- -------- ----------- --------
($ Amounts in Thousands)
<S> <C> <C> <C> <C>
EARNING
Apartments 3 $ 20,924 3 $ 21,012
Office Buildings 3 14,772 4 13,942
Industrial Buildings 6 23,280 5 19,913
Retail Buildings 1 7,651 1 7,585
Research & Development Bldgs. 2 6,015 2 5,985
-- -------- -- --------
Total Earning 15 72,642 15 68,437
-- -------- -- --------
NON-EARNING
Office Buildings 4 12,754 5 16,449
Industrial Buildings 5 14,116 4 10,794
Retail Buildings 1 7,547 2 5,039
-- -------- -- --------
Total Non-Earning 10 34,417 11 32,282
-- -------- -- --------
Total 25 $107,059 26 $100,719
== ======== == ========
</TABLE>
The following table summarized the Trust's investment in partnerships,
net of accumulated depreciation of $618,120 at March 31, 1995 and
$313,628 at September 30, 1994:
<TABLE>
<CAPTION>
March 31, 1995 September 30, 1994
---------------------- ----------------------
Number of Carrying Number of Carrying
Type of Property Investments Amount Investments Amount
- - ---------------- ----------- -------- ----------- --------
($ Amounts in Thousands)
<S> <C> <C> <C> <C>
Industrial Buildings 2 $ 9,403 2 $ 9,524
Retail Buildings 2 17,108 - -
-- ------- -- -------
Total 4 $26,511 2 $ 9,524
== ======= == =======
</TABLE>
12
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. ALLOWANCE FOR LOSSES
The changes in the allowance for losses for the six months ended
March 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
3/31/95 3/31/94
-------- --------
(Amounts in Thousands)
<S> <C> <C>
Balance at beginning of period $13,430 $11,808
Provisions charged to expense 3,000 -
------- -------
16,430 11,808
Less charges against allowance, net of recoveries 5,399 758
------- -------
Balance at end of period $11,031 $11,050
======= =======
</TABLE>
Approximately $7,205,000 and $6,524,000 of the allowance at March
31, 1995 and 1994, respectively, are applicable to properties
acquired through foreclosure and held for sale.
NOTE 5. SENIOR NOTES
SENIOR SECURED NOTES - The lack of liquidity in many of the commercial
real estate markets continued during the past year. Although the
Trust was able to meet the required principal payment at December 31,
1992, reducing the principal balance of the Senior Notes to $290
million, it did not have sufficient funds to meet the $20 million
required principal payment due June 30, 1993 or the $33.8 million
required principal payment due December 31, 1993 or the $30 million
required principal payment due June 30, 1994 or the $18.8 million
required principal payment due December 31, 1994 (taking into account
permitted deferrals). The Trust also did not make the $6.6 million,
the $6.4 million, the $7.2 million, the $8.7 million, the $9.1
million and the $9.6 million interest payments due December 31, 1993,
March 31, 1994, June 30, 1994, September 30, 1994, December 31, 1994,
and March 31, 1995, respectively. The average borrowing rates for
the six months ended March 31, 1995 and 1994, respectively, were
12.97% and 10.01%. At March 31, 1995, the outstanding 13.62%
interest rate on the Senior Notes was composed of interest at 13.00%
on $200 million of Senior Notes (including default interest at 1%)
and 15.00% on $90 million of deferred amounts of Senior Notes
(including default interest at 1%).
LOAN ON EQUITY INVESTMENT - In November 1991, the Trust acquired full
ownership of a retail center in which it had a partnership interest.
The Trust has a fully funded construction borrowing commitment of
$17.6 million outstanding at March 31, 1995. The contractual
interest rate on this loan is 11% (Prime + 2%, floor of 8.5%), and
the loan matures on July 3, 1995.
The Trust can further extend the loan to April 22, 1996, but will be
required to make a $3.6 million payment in order to receive the
additional extension.
13
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board Statement No. 107 Disclosure
of Fair Value of Financial Statements ("SFAS" 107) requires
disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. SFAS 107
excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the
underlying value of the Trust.
The carrying value of cash and cash equivalents approximates that
fair value because of the liquidity and short-term maturities of
these instruments. The fair value of mortgage loans is estimated
by discounting cash flows at what is considered a market interest
rate for loans with similar terms to borrowers of similar credit
quality.
The measurement of the fair value of the Senior Notes at March 31,
1995 is not practical in the context of the proposed restructuring.
The loan on equity investment is a variable rate loan that reprices
frequently, thus fair value is based on the carrying amount of the
loan.
The estimated fair values of the Trust's financial instruments at
March 31, 1995 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- --------
(Amounts in Thousands)
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $73,140 $73,140
Mortgage loans and notes receivable (net
of allowance for possible losses) 59,744 59,744
FINANCIAL LIABILITIES:
Loan on equity investment (17,593) (17,593)
Off-Balance Sheet Financial Instruments:
Unfunded loan commitments - (690)
</TABLE>
14
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7. SHARE OPTION PLAN
On August 14, 1994, the 1984 Share Option Plan terminated. As of
March 31, 1995, options to purchase 348,500 Common Shares were
outstanding under the 1984 Share Option Plan. The exercise price
per share varies from $2.50 to $4.15. Options granted, other than
those granted in fiscal 1991, expire five years from the date of
grant and may be exercised at any time six months after the date of
grant, subject to the limitation that the aggregate fair market
value (determined as of the time the Option is granted) of the
Shares with respect to which Incentive Stock Options are exercisable
for the first time by any participant during any calendar year shall
not exceed $100,000. Options granted during fiscal 1991, pursuant
to the Employee Retention Plan described in Note 8, expire five years
from the date of grant but do not vest until three years from the
date of grant. Options to purchase 77,500 Common Shares at a price
of $14.50 terminated during the six months ended March 31, 1995.
In addition to cash, Options may be exercised by exchanging the
Trust's Common Shares valued at the market price on the date of
exercise of the Options. During the six months ended March 31, 1995,
no Options were exercised.
NOTE 8. EMPLOYEE RETENTION PLAN
The Trust established an Employee Retention Plan, to be administered
by the Compensation and Nominating Committee (the "Committee"), in
order to assure the continuity and performance of employees of the
Trust. The Plan contains four categories of benefits: an incentive
program, stock options, termination pay and a retention bonus.
The Committee established an incentive program for calendar year 1991.
The incentive pool was calculated based on the reduction of the
Trust's outstanding debt (the Senior Notes). During the six month
periods ended March 31, 1995 and 1994, the Committee approved the
payment of discretionary bonuses totalling $128,500 and $123,000,
respectively, for certain officers and employees of the Trust.
On March 29, 1991, the Committee awarded stock options for the
purchase of 197,500 Common Shares at an option price of $4.15. The
options had a three-year vesting period from the date of grant and
vested on March 29, 1994.
A termination pay plan has been established to cover termination of
employment without cause during the period that the Senior Notes, as
defined, are outstanding. Employees will be entitled to compensation
ranging from a minimum of twelve weeks to a maximum of eighteen
months pay. In addition, certain health benefits will continue to be
paid by the Trust over a period of time equal to the period used in
calculating severance pay. The Trust estimates that the maximum cost
of the termination pay plan would be approximately $1.3 million and
the cost is charged to expense at date of termination (as defined in
the termination pay plan).
The retention bonus, which totalled $350,000, was paid on February 28,
1992 to certain employees who remained with the Trust one year after
the Effective Date of the 1991 Plan (February 27, 1991).
15
MORTGAGE AND REALTY TRUST FORM 10Q
Item 1. Financial Statements (Continued)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9. ISSUANCE OF SHARES
Effective April 1, 1992, the Trust terminated its Dividend
Reinvestment and Share Purchase Plan.
The Trust is authorized to issue up to 3,500,000 Preferred Shares on
terms to be established by the Trustees. No preferred shares have
been issued to date.
The Trust contributed 150,000 Common Shares (1.4% of outstanding
shares) as part of the settlement of the consolidated class actions
and the Class 5 claims remaining in the chapter 11 proceeding. The
settlement and contribution of shares occurred on September 17, 1993.
16
MORTGAGE AND REALTY TRUST FORM 10Q
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES - A Plan of Reorganization under Chapter 11 of
the Bankruptcy Code was confirmed at a hearing held in the Bankruptcy Court in
Los Angeles, California, on February 21, 1991, and an order was entered
February 27, 1991, confirming the Plan. As a result of the liquidity problems
in the commercial real estate markets, the Trust was not able to meet the
required amortization at June 30, 1992 and the debt was restructured in July
1992 with the unanimous consent of the creditors. The debt is now governed by
an indenture dated as of July 15, 1992. At December 31, 1992, debt outstanding
was reduced to $290 million, the maximum debt level permitted under the Plan
on that date.
For the six months ended March 31, 1995, cash provided by operating activities
increased the cash balance by approximately $10.4 million. This was due
primarily to an increase in interest payable due to no payment of interest on
the Secured Notes since September 30, 1993. Cash provided by investing
activities increased the cash balance by approximately $2.4 million. This was
due to higher repayments, net of advances, on: (1) mortgage loans of $835,000,
and (2) in-substance foreclosures of $7.5 million. Offsetting these increases
were advances, net of repayments, on: (1) properties acquired through
foreclosure of $2.8 million, (2) real estate equities of $1.3 million and (3)
investment in partnerships of $1.8 million.
Due to the lack of liquidity that has existed in the real estate marketplace,
the Trust has not been able to meet payment and other obligations on its
outstanding debt.
Under the financial covenants of the Indenture governing the Senior Notes, the
Trust was required to maintain a ratio of outstanding securities to its capital
base (as defined in the Indenture) of 515% at March 31, 1993. In addition,
under the Indenture the Trust was required to maintain a ratio of outstanding
securities to its capital base of 438% at June 30, 1993 and September 30, 1993,
358% at December 31, 1993 and March 31, 1994, and 313% at June 30, 1994 and
September 30, 1994, and 209% at December 31, 1994 and March 31, 1995, and a
ratio of earning assets (as defined in the Indenture) to outstanding securities
of 113% at June 30, 1993 and September 30, 1993, 116% at December 31, 1993 and
March 31, 1994, 117% at June 30, 1994 and September 30, 1994 and 120% at
December 31, 1994 and March 31, 1995. The Trust failed to meet each of these
ratios, constituting events of default under the Indenture. However, on May
26, 1993, the Trust received from the holders of more than 66-2/3% in principal
amount of Senior Notes a waiver relating to the March 31 default.
Outstanding Securities refers to all $290 million of securities governed by and
registered under the Indenture dated July 15, 1992 for the Senior Secured
Uncertificated Notes due 1995. Capital Base means the amount equal to the
Company's Shareholders' Equity less 50% of the non-earning assets. Non-Earning
Assets means the aggregate of non-earning loans (as defined in the Indenture)
and non-earning properties (properties that do not produce and maintain an
annualized return of 5% or greater cash flow yield). Earning Assets means an
amount equal to between the aggregate amount of invested assets and aggregate
amount of non-earning assets.
Management has held discussions with the representatives of the creditors to
explore various alternatives for restructuring the outstanding debt
obligations. The Trust's present intention is to reach a consensual
restructuring agreement to be effected through a prepackaged chapter 11
bankruptcy. In April 1995, the Trust and certain holders of Senior Notes
executed an agreement of understanding, pursuant to which such noteholders
agreed to support the proposed restructuring. On April 11, 1995, pursuant to
such agreement, the Trust advanced $25 million towards the $50 million minimum
payment required to implement the proposed restructuring. See Note 1, "Basis
17
MORTGAGE AND REALTY TRUST FORM 10Q
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
of Financial Information and Plan of Reorganization". If such an agreement
cannot be reached with the Trust's debt holders, the Trust will have to
consider other alternatives, including the filing of a voluntary bankruptcy
petition under chapter 11 of the Bankruptcy Code. Although the holders of more
than 66-2/3% of the Trust's debt securities had agreed with the Trust to
temporarily forebear further creditor action on the defaults for a defined
standstill period, such standstill period expired on December 3, 1993. The
Company believes that no further extension of the standstill will be granted.
The Trust intends, therefore, to continue to operate its business and seek
Senior Note holder consent on an ad hoc basis as such consent is required.
Although the Trust believes that such consents, if requested, would be in the
best interest of the Trust, its shareholders and the Senior Note holders, there
can be no assurance that the Trust will obtain sufficient consents as they are
required. Currently, the Trust is in default under the Indenture and has
continued to suspend payments on the Senior Notes. Consequently, there can be
no assurance that the Indenture Trustee and the Collateral Agents will not take
remedial or enforcement action, including acceleration of the Senior Notes and
foreclosure. If it becomes impossible for the Trust to continue operations
under such circumstances, it may be necessary for Mortgage and Realty Trust to
explore other alternatives, including seeking relief under chapter 11 of the
Bankruptcy Code.
At March 31, 1995, the Trust had cash and cash equivalents of $71.6 million.
Included in cash and cash equivalents are $1.3 million of restricted cash which
represents the funding of the employee retention plan and $1.1 million related
to borrowers' deposits. The Trust's unfunded loan commitments totalled
$690,000 at March 31, 1995.
RESULTS OF OPERATIONS-SIX MONTHS ENDED MARCH 31, 1995 VS. SIX MONTHS ENDED
MARCH 31, 1994 - Net loss for the six months ended March 31, 1995 was
$(15,717,000) or $(1.40) per share compared to a net loss of $(9,808,000) or
$(.87) per share for the six months ended March 31, 1994. The six months ended
March 31, 1995 included a provision for losses of $3,000,000 or $.27 per share
compared to no provision for the six months ended March 31, 1994. The Trust's
spread (interest income on mortgage loans plus net operating income from real
estate owned less interest expense) decreased from $(3,212,000) for the six
months ended March 31, 1994 to $(7,439,000) for the six months ended March 31,
1995. Offsetting these decreases was an increase in interest income on short-
term investments which was $1,864,000 for the six months ended March 31, 1995
compared to $234,000 for the six months ended March 31, 1994.
Interest and fee income on mortgage loans decreased $2,485,000 to $5,181,000
for the six months ended March 31, 1995 from $7,666,000 for the six months
ended March 31, 1994. The decrease was due primarily to a reduction in earning
mortgage loans (including earning in-substance foreclosures) which totalled
$89.2 million at March 31, 1995 compared to $149.9 million at March 31, 1994.
During the six months ended March 31, 1995, there were two mortgage loans
totalling $15.4 million that were transferred into investment in Partnerships.
In addition, advances of $1.8 million on investment in partnerships were made
during the period.
During the six months ended March 31, 1995, no advances were made on mortgage
loans. Prepayment on mortgage loans of approximately $6 million were received
during the six months ended March 31, 1994. There were no prepayments on
mortgage loans received during the six months ended March 31, 1995. The
average interest rate on mortgage loans for the six months ended March 31, 1995
was 7.90% compared to 7.58% for the six months ended March 31, 1994.
18
MORTGAGE AND REALTY TRUST FORM 10Q
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Rental income increased $3,048,000 to $11,517,000 in the six months ended March
31, 1995 from $8,469,000 for the six months ended March 31, 1994. In addition
to rental income, the Trust received reimbursement of certain operating
expenses totalling $1,167,000 and $849,000 for the six months ended March 31,
1995 and 1994, respectively. Operating expenses and depreciation and
amortization on rental properties increased $1,391,000 to $8,958,000 for the
six months ended March 31, 1995 from $7,567,000 for the six months ended March
31, 1994, primarily from continued growth in real estate equities and
properties acquired through foreclosure and held for sale.
Interest on short-term investments increased due to the continuing accumulation
of available cash. Available cash increased due to no payment of principal and
interest on the Secured Notes since September 30, 1993.
Interest expense increased $4,370,000 to $19,832,000 in the current period from
$15,462,000 for the six months ended March 31 1994. This was due primarily to
an increase in the average borrowing rate from 10.01% for the six months ended
March 31, 1994 to 12.97% for the six months ended March 31, 1995.
Other operating expenses decreased $430,000 to $2,198,000 for the six months
ended March 31, 1995 from $2,628,000 for the six months ended March 31, 1994.
The decrease was due to decreases in professional fees and expenses, insurance
costs, Trustees expenses and tax (other than income).
Reorganization expenses related to the Chapter 11 filing and debt restructuring
expenses were $1,505,000 for the six months ended March 31, 1995 compared to
$1,417,000 for the six months ended March 31, 1994. These expenses reflect
professional fees incurred by the representatives of the creditors,
shareholders and the Trust.
RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1995 VS. QUARTER ENDED DECEMBER
31, 1994 - Net loss for the quarter ended March 31, 1995 was $(10,263,000) or
$(.91) per share compared to $(5,454,000) or $(.49) per share for the quarter
ended December 31, 1994. The quarter ended March 31, 1995 included a
provisions for losses of $3,000,000 or $.27 per share compared to no provision
for the quarter ended December 31, 1994.
Interest and fee income on mortgage loans decreased $575,000 to $2,303,000 for
the quarter ended March 31, 1995 from $2,878,000 for the quarter ended December
31, 1994. The decrease was due to a reduction in earning mortgage loans
(including earning in-substance foreclosures) because of: (1) the repayment of
approximately $6.6 million on earning in-substance foreclosures; (2) the
transfer of approximately $8.3 million of earning in-substance foreclosures to
properties acquired through foreclosure and held for sale; and (3) the
reclassification of approximately $8.7 million from earning to non-earning in-
substance foreclosures.
Rental income increased $133,000 to $5,825,000 in the quarter ended March 31,
1995 from $5,692,000 for the quarter ended December 31, 1994. In addition to
rental income, the Trust received reimbursement of certain operating expenses
totalling $590,000 and $577,000 for the quarters ended March 31, 1995 and
December 31, 1994, respectively. Operating expenses and depreciation and
amortization on rental properties increased $210,000 to $4,584,000 for the
quarter ended March 31, 1995 from $4,374,000 for the quarter ended December 31,
1994, primarily from continued growth in real estate equities and properties
acquired through foreclosure and held for sale.
Interest on short-term investments increased due to continuing accumulation of
available cash.
19
MORTGAGE AND REALTY TRUST FORM 10Q
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Interest expense increased $714,000 to $10,273,000 in the current quarter from
$9,559,000 for the quarter ended December 31, 1994. This was due primarily to
an increase in the average borrowing rate from 12.50% for the quarter ended
December 31, 1994 to 13.45% for the quarter ended March 31, 1995.
Reorganization expenses related to the Chapter 11 filing and debt restructuring
expenses were $1,135,000 for the quarter ended March 31, 1995 compared to
$370,000 for the quarter ended December 31, 1994. These expenses reflect
professional fees incurred by the representatives of the creditors,
shareholders and the Trust.
RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1995 VS. QUARTER ENDED MARCH
31, 1994 - Net loss for the quarter ended March 31, 1995 was $(10,263,000) or
$(.91) per share compared to $(5,152,000) or $(.46) per share for the quarter
ended March 31, 1994. The quarter ended March 31, 1995 included a provision
for losses of $3,000,000 or $.27 per share compared to no provision for the
quarter ended March 31, 1994.
Interest and fee income on mortgage loans decreased $1,358,000 to $2,303,000
for the quarter ended March 31, 1995 compared to $3,661,000 for the quarter
ended March 31, 1994. The decrease was due primarily to a reduction in earning
mortgage loans (including earning in-substance foreclosures) which totalled
$149.9 million at March 31, 1994 compared to $89.3 million at March 31, 1995.
Rental income increased $1,658,000 to $5,825,000 in the quarter March 31, 1995
from $4,167,000 for the quarter ended March 31, 1994. In addition to rental
income, the Trust received reimbursement of certain operating expenses
totalling $590,000 and $418,000 for the quarters ended March 31, 1995 and 1994,
respectively. Operating expenses and depreciation and amortization on rental
properties increased $798,000 to $4,584,000 for the quarter ended March 31,
1995 from $3,786,000 for the quarter ended March 31, 1994, primarily from
continued growth in real estate equities and properties acquired through
foreclosure and held for sale.
Interest on short-term investments increased due to the continuing accumulation
of available cash.
Interest expense increased $2,610,000 to $10,273,000 for the current quarter
compared to $7,663,000 for the quarter ended March 31, 1994. This increase was
due primarily to an increase in the average borrowing rate from 10.15% for the
quarter ended March 31, 1994 to 13.45% for the quarter ended March 31, 1995.
Reorganization expenses related to the Chapter 11 filing and debt restructuring
expenses were $1,135,000 for the quarter ended March 31, 1995 compared to
$741,000 for the quarter ended March 31, 1994. These expenses reflect
professional fees incurred by the representatives of the creditors,
shareholders and the Trust.
NON-EARNING LOANS AND INVESTMENTS - At March 31, 1995, the Trust's non-
earning loans, non-earning in-substance foreclosures and non-earning properties
acquired through foreclosure and held for sale were $52,460,000, representing
17.58% of invested assets compared to $47,008,000 (15.25%) at December 31, 1994
and $44,909,000 (13.71%) at March 31, 1994.
20
MORTGAGE AND REALTY TRUST FORM 10Q
PART II
Item 3. DEFAULTS UPON SENIOR SECURITIES
The Trust did not make a $9.6 million interest payment due March 31,
1995 on the Senior Notes.
In addition, based on financial results at March 31, 1995 the Trust
was in violation of certain financial covenants in the Indenture
relating to the ratio of outstanding securities to the Trust's
capital base and the ratio of earning assets to outstanding
securities. Outstanding Securities refers to all Securities
governed by and registered under the Indenture dated July 15, 1992
for the Senior Secured Uncertificated Notes due 1995. Capital Base
means the amount equal to the Company's Shareholders' Equity less
50% of the non-earning assets. Non-Earning Assets means the
aggregate of non-earning loans (as defined in the Indenture) and
non-earning properties (properties that do not produce and maintain
an annualized return of 5% or greater cash flow yield). Earning
Assets means an amount equal to between the aggregate amount of
invested assets and aggregate amount of non-earning assets. Under
the financial covenants of the Indenture, the Trust was required to
maintain a ratio of outstanding indenture securities to its capital
base (as defined in the Indenture) of 209% at March 31, 1995 and a
ratio of earning assets to outstanding securities of 120% at March
31, 1995. Failure to satisfy these covenants constitute additional
events of default under the Indenture. In addition, at December 31,
1994, the Trust's non-performing assets (as defined in the Indenture)
exceeded the limits prescribed in the Indenture. In addition to
constituting an event of default, the Trust is obligated under the
Indenture to pay to the holders of Senior Notes a penalty equal to
1.5% of the excess of non-performing assets, or a payment of
approximately $183,000. The are also outstanding certain other
events of default under the Indenture.
Notwithstanding the uncured events of default, neither the Indenture
Trustee nor any holders of the Senior Notes have accelerated the
Senior Notes. On July 2, 1993 holders of approximately 81% of the
Senior Notes agreed, subject to certain conditions, not to accelerate
the Senior Notes or take any other remedial or enforcement action
during a defined standstill period (the "Standstill Period")
initially expiring July 31, 1993. The Standstill Period was extended
by holders of more than 66-2/3% of the Senior Notes on August 3,
August 20, September 23, October 5 and November 23, 1993. However,
the Standstill Period expired on December 3, 1993. At the present
time, it appears unlikely that any further extensions of the
Standstill Period will be granted. Subsequent to the expiration of
the Standstill Period, on or about December 8, 1993 the Indenture
Trustee (and the Collateral Agents) notified the Trust's bank of the
Indenture Trustee's security interest in the Trust's deposit accounts
and instructed the bank to freeze the Trust's cash until otherwise
instructed by the Indenture Trustee. Since that date, the Trust has
operated on an ad hoc basis with the Indenture Trustee in
administering its cash, with all cash use subject to review and
approval by the Indenture Trustee. On or about February 3, 1994, the
Trust and the Indenture Trustee and Collateral Agents reached further
understanding regarding the Trust's use of cash and administration
of its assets in the absence of a continued or extended Standstill
21
MORTGAGE AND REALTY TRUST FORM 10Q
PART II
Item 3. DEFAULTS UPON SENIOR SECURITIES (Continued)
Period. Pursuant to the understanding, which is terminable at will
by the Indenture Trustee or Collateral Agents, the Trust will
continue to use its cash on an ad hoc basis, subject to Indenture
Trustee or Collateral Agent approval, and the Trust will administer
its assets as if no default had occurred and was continuing. There
can be no assurance that the Indenture Trustee will not terminate the
understanding or take further remedial or enforcement action with
respect to the Trust's bank accounts or other properties, including
acceleration of the Senior Notes and foreclosure. Such action, or
failure of the Indenture Trustee and the Collateral Agents to consent
to necessary use of cash or releases of collateral in the conduct of
the Trust's business, would have a material adverse effect on the
Trust's operations and could cause the Trust to seek relief under
Chapter 11 of the United States Bankruptcy Code.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibits are as set forth in the "INDEX TO EXHIBITS" on page 24.
(B) REPORTS ON FORM 8-K
None
22
MORTGAGE AND REALTY TRUST FORM 10Q
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.
MORTGAGE AND REALTY TRUST
By /s/ Victor H. Schlesinger
-------------------------------
Victor H. Schlesinger
Chairman
By /s/ Daniel F. Hennessey
-------------------------------
Daniel F. Hennessey
Treasurer
Principal Financial Officer
DATE: May 12, 1995
23
MORTGAGE AND REALTY TRUST FORM 10Q
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- - ------- -----------
11* Schedule of Net Income (Loss) Per Share - Assuming Full Dilution
- - ------------------
* Exhibit filed with this Form 10-Q.
24
<PAGE>
Exhibit 11
MORTGAGE AND REALTY TRUST
SCHEDULE OF NET INCOME (LOSS) PER SHARE - ASSUMING FULL DILUTION
FOR THE PERIODS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
Quarter Six Months
Ended Ended
------------ -------------
<S> <C> <C>
BASIS:
Net (loss) $(10,263,000) $(15,717,000)
Average common shares outstanding 11,226,000 11,226,000
20% limitation on assumed repurchase 2,245,000 2,245,000
Market price at the end of the period $.25 $.25
Options outstanding 348,500 348,500
COMPUTATION:
Proceeds:
Options 348,500 348,500
Average exercise price X $3.35 X $3.35
----------- -----------
$ 1,167,000 $ 1,167,000
=========== ===========
Adjustment of proceeds:
Purchase of outstanding common shares
at market value $ 561,000 $ 561,000
Retirement of debt 606,000 606,000
----------- -----------
$ 1,167,000 $ 1,167,000
=========== ===========
Adjustment of net income (loss):
Net (loss) before gain on sales of
real estate $(10,263,000) $(15,717,000)
Interest reduction 20,000 40,000
------------ ------------
Adjusted net income (loss) $(10,243,000) $(15,677,000)
============ ============
Adjustment of shares outstanding:
Average shares outstanding 11,226,000 11,226,000
Net shares repurchased (1,897,000) (1,897,000)
----------- -----------
Adjusted shares outstanding (basis for
computation of net income per share -
assuming full dilution) 9,329,000 9,329,000
=========== ===========
Fully diluted earnings per share:
Net (loss) $(1.10) $(1.68)
====== ======
</TABLE>
NOTE - Primary earnings per share is based on the average number of shares
outstanding during the period.
Exhibit 11
MORTGAGE AND REALTY TRUST
SCHEDULE OF NET INCOME (LOSS) PER SHARE - ASSUMING FULL DILUTION
FOR THE PERIODS ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
Quarter Six Months
Ended Ended
------------ ------------
<S> <C> <C>
BASIS:
Net (loss) $(5,152,000) $(9,808,000)
Average common shares outstanding 11,226,000 11,226,000
20% limitation on assumed repurchase 2,245,000 2,245,000
Market price at the end of the period $.50 $.50
Options outstanding 426,000 426,000
COMPUTATION:
Proceeds:
Options 426,000 426,000
Average exercise price X $5.37 X $5.37
----------- -----------
$ 2,288,000 $ 2,288,000
=========== ===========
Adjustment of proceeds:
Purchase of outstanding common shares
at market value $ 1,123,000 $ 1,123,000
Retirement of debt 1,165,000 1,165,000
----------- -----------
$ 2,288,000 $ 2,288,000
=========== ===========
Adjustment of net income (loss):
Net (loss) before gain on sales of
real estate $(5,152,000) $(9,808,000)
Interest reduction 29,000 58,000
----------- -----------
Adjusted net income (loss) $(5,123,000) $(9,750,000)
=========== ===========
Adjustment of shares outstanding:
Average shares outstanding 11,226,000 11,226,000
Net shares repurchased (1,819,000) (1,819,000)
----------- -----------
Adjusted shares outstanding (basis for
computation of net income per share -
assuming full dilution) 9,407,000 9,407,000
=========== ===========
Fully diluted earnings per share:
Net (loss) $(.54) $(1.04)
===== ======
</TABLE>
NOTE - Primary earnings per share is based on the average number of shares
outstanding during the period.
<PAGE>
IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN
COMMENCED AS OF THE DATE OF THIS DOCUMENT.
MORTGAGE AND REALTY TRUST
MASTER BALLOT
FOR ACCEPTING OR REJECTING
THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST
CLASS 5: COMMON SHARES
THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00
MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1995, UNLESS EXTENDED.
This Master Ballot is submitted to you to solicit and obtain the vote of the
beneficial owners of the securities described below to accept or reject the
Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and
Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement
and Proxy Statement, dated July 12, 1995 (the "Proxy"). The Prepackaged Plan
would be filed in connection with a case to be commenced in the future by the
Trust under chapter 11 of the Bankruptcy Code. At this time, the Trust has not
commenced a chapter 11 case. If sufficient votes are received accepting the
Prepackaged Plan, it is the Trust's present intention to commence a chapter 11
case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as
promptly as practicable.
PLEASE READ THE VOTING INFORMATION AND INSTRUCTIONS ON THE REVERSE SIDE
BEFORE COMPLETING THIS MASTER BALLOT.
<PAGE>
[X] Please mark
your votes
as this example
ITEM 1. Tabulation of Beneficial Class 5 Voting. The undersigned certifies that
__________ beneficial owners of __________ in number of shares of Common Shares,
par value $1.00 per share (the "Common Shares"), have delivered ballots to the
undersigned voting Class 5 equity interests to ACCEPT the Prepackaged Plan.
The undersigned certifies that _________ beneficial owners of _________ in
number of Common Shares have delivered ballots to the undersigned voting Class 5
equity interests to REJECT the Prepackaged Plan.
ITEM 2. Releases. The undersigned certifies that __________ beneficial owners of
__________ in number of Common Shares have delivered ballots to the undersigned
voting Class 5 equity interests to NOT CONSENT to the mutual release (the
"Release") provided in Section 5.13 of the Prepackaged Plan.
The undersigned certifies that _________ beneficial owners of __________ in
number of Common Shares have delivered ballots to the undersigned voting Class 5
equity interests to CONSENT to the Release provided in Section 5.13 of the
Prepackaged Plan.
ITEM 3. Class 5 Beneficial Owner Information. The undersigned certifies that
listed below (or attached hereto) is a true and accurate schedule of the
beneficial owners of Common Shares, that have delivered ballots to the
undersigned voting Class 5 equity interests to accept or reject the
Prepackaged Plan and to consent or not consent to the Release. (Please
complete the following table or attach the information requested by this Item
3 in the following format:)
<TABLE>
<S> <C> <C> <C> <C> <C>
YOUR CUSTOMER ACCOUNT NUMBER(S) NUMBER OF TO ACCEPT THE TO REJECT THE TO CONSENT TO NOT CONSENT
FOR EACH BENEFICIAL OWNER COMMON SHARES PREPACKAGED PLAN PREPACKAGED PLAN TO THE RELEASE TO THE RELEASE
------------------------------- ------------- ---------------- ---------------- -------------- --------------
1.
------------------------------ ------------- ---------------- ---------------- -------------- --------------
2.
------------------------------ ------------- ---------------- ---------------- -------------- --------------
3.
------------------------------ ------------- ---------------- ---------------- -------------- --------------
4.
------------------------------ ------------- ---------------- ---------------- -------------- --------------
5.
------------------------------ ------------- ---------------- ---------------- -------------- --------------
6.
------------------------------ ------------- ---------------- ---------------- -------------- --------------
7.
------------------------------ ------------- ---------------- ---------------- -------------- --------------
8.
------------------------------ ------------- ---------------- ---------------- -------------- --------------
9.
------------------------------ ------------- ---------------- ---------------- -------------- --------------
10.
------------------------------ ------------- ---------------- ---------------- -------------- --------------
</TABLE>
ITEM 4. The undersigned certifies that the undersigned is an agent of the
registered owner with full power and authority to execute this document in its
own name or through a position held at a securities depository of the Common
Shares set forth in Item 1. The undersigned further certifies that none of the
Common Share accounts identified in Item 3 above have previously been voted by
any other Master Ballot, except to the extent provided in Item 5 of the Voting
Information and Instructions attached hereto, submitted by the undersigned.
The undersigned also acknowledges the terms and conditions set forth in the
Proxy.
Return this Master Ballot by August 17, 1995 by mail to Mortgage and Realty
Trust at 8380 Old York Road, Suite 300, Elkins Park, PA 19027, Attention: Dan-
iel F. Hennessey.
<TABLE>
<S> <C> <C>
PRINT OR TYPE NAME ______________ IF BY AUTHORIZED AGENT, NAME AND TITLE ___________________________ DATED _____
SIGNATURE _______________________ ADDRESS (STREET) _________________________________________________
NAME OF BROKER, BANK OR OTHER
NOMINEE _________________________ CITY, STATE, ZIP CODE ____________________________________________
</TABLE>
<PAGE>
VOTING INFORMATION AND INSTRUCTIONS
FOR COMPLETING THE MASTER BALLOT
1. THE MASTER BALLOT IS TO BE USED BY BROKERAGE FIRMS, BANKS OR PROXY
INTERMEDIARIES FOR SUMMARIZING VOTES CAST BY BENEFICIAL OWNERS OF THE
SECURITIES IN CLASS 5 TO ACCEPT OR REJECT THE PREPACKAGED PLAN.
2. MASTER BALLOTS MUST BE RECEIVED BY THE TRUST, AT THE ADDRESS INDICATED
ABOVE ON THIS MASTER BALLOT BY MIDNIGHT, NEW YORK TIME, ON AUGUST 17, 1995
(THE "EXPIRATION DATE"). MASTER BALLOTS NOT RECEIVED BY THE EXPIRATION DATE
WILL NOT BE COUNTED.
3. THE MASTER BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR
ANY PURPOSE OTHER THAN TO TRANSMIT VOTES TO ACCEPT OR REJECT THE PREPACKAGED
PLAN. HOLDERS SHOULD NOT SURRENDER CERTIFICATES REPRESENTING THEIR SECURITIES
AT THIS TIME, AND THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH CERTIFICATES
TRANSMITTED TOGETHER WITH A MASTER BALLOT. SURRENDER OF SECURITIES FOR
EXCHANGE PURSUANT TO THE PREPACKAGED PLAN MAY BE MADE ONLY PURSUANT TO A
LETTER OF TRANSMITTAL WHICH WILL BE FURNISHED TO YOU BY THE TRUST (OR ITS
AGENT) AFTER CONFIRMATION OF THE PREPACKAGED PLAN BY THE BANKRUPTCY COURT.
4. WITH RESPECT TO ANY INDIVIDUAL BALLOTS RETURNED TO YOU BY THE BENEFICIAL
OWNER, YOU MUST EITHER (A) FORWARD SUCH BALLOTS DIRECTLY TO THE TRUST
INDICATING THE APPROPRIATE AUTHORITY TO VOTE ON EACH SUCH BALLOT SUBMITTED OR
(B) COMPLETE A MASTER BALLOT SUMMARIZING THE VOTING WITH RESPECT TO SUCH
INDIVIDUAL BALLOTS, RETURN THE MASTER BALLOT TO THE TRUST, AND RETAIN ALL SUCH
INDIVIDUAL BALLOTS FOR INSPECTION BY THE BANKRUPTCY COURT UNTIL 90 DAYS AFTER
CONFIRMATION OF THE PREPACKAGED PLAN.
5. MULTIPLE MASTER BALLOTS MAY BE COMPLETED AND DELIVERED TO THE TRUST.
VOTES REFLECTED BY MULTIPLE MASTER BALLOTS WILL BE COUNTED EXCEPT TO THE
EXTENT THAT THEY ARE DUPLICATIVE OF OTHER MASTER BALLOTS. IF TWO OR MORE
MASTER BALLOTS ARE INCONSISTENT IN WHOLE OR IN PART, THE LATEST MASTER BALLOT
RECEIVED PRIOR TO THE EXPIRATION DATE WILL, TO THE EXTENT OF SUCH
INCONSISTENCY, SUPERSEDE AND REVOKE ANY PRIOR MASTER BALLOT. IF MORE THAN ONE
MASTER BALLOT IS SUBMITTED AND THE LATER MASTER BALLOTS(S) SUPPLEMENT RATHER
THAN SUPERSEDE EARLIER MASTER BALLOT(S), PLEASE MARK THE SUBSEQUENT MASTER
BALLOT(S) WITH THE WORDS "ADDITIONAL VOTE" OR SUCH OTHER LANGUAGE AS YOU
CUSTOMARILY USE TO INDICATE AN ADDITIONAL VOTE THAT IS NOT MEANT TO REVOKE AN
EARLIER VOTE.
6. ITEM 3 OF THE MASTER BALLOT REQUESTS THAT YOU PROVIDE INFORMATION IN THE
INDICATED FORMAT FOR EACH INDIVIDUAL BENEFICIAL OWNER ON WHOSE BEHALF YOU ARE
EXECUTING THE MASTER BALLOT. TO IDENTIFY SUCH BENEFICIAL OWNERS WITHOUT
DISCLOSING THEIR NAMES, PLEASE USE THE CUSTOMER ACCOUNT NUMBER ASSIGNED BY YOU
TO EACH SUCH BENEFICIAL OWNER. IN THE EVENT THAT A SINGLE CUSTOMER HAS MORE
THAN ONE ACCOUNT WITH THE IDENTICAL REGISTRATION, THAT CUSTOMER SHOULD BE
LISTED NO MORE THAN ONCE IN ITEM 3. IN COMPLETING ITEM 3, THE TOTAL NUMBER OF
SHARES OF ALL ACCOUNTS VOTED WITH RESPECT TO A SINGLE CUSTOMER SHOULD BE
LISTED IN A SINGLE LINE ENTRY, SO THAT EACH LINE WILL REPRESENT A DIFFERENT
BENEFICIAL OWNER.
7. EACH BENEFICIAL OWNER MUST VOTE ITS ENTIRE CLAIM OR EQUITY INTEREST
WITHIN A SINGLE CLASS UNDER THE PREPACKAGED PLAN TO EITHER ACCEPT OR REJECT
THE PREPACKAGED PLAN. A BENEFICIAL OWNER MAY NOT SPLIT ITS VOTE WITHIN A CLASS
AND, ACCORDINGLY, AN INDIVIDUAL BALLOT (OR MULTIPLE INDIVIDUAL BALLOTS WITH
RESPECT TO MULTIPLE CLAIMS OR EQUITY INTERESTS WITHIN A SINGLE CLASS) RECEIVED
FROM A BENEFICIAL OWNER THAT PARTIALLY REJECTS AND PARTIALLY ACCEPTS THE
PREPACKAGED PLAN SHOULD NOT BE COUNTED. FURTHERMORE, FOR PURPOSES OF COMPUTING
THE VOTE ON A MASTER BALLOT, EACH VOTING BENEFICIAL OWNER SHOULD BE DEEMED TO
HAVE VOTED THE FULL AMOUNT OF ITS HOLDINGS ACCORDING TO YOUR RECORDS AS OF THE
CLOSE OF BUSINESS ON JULY 7, 1995 (THE "VOTING RECORD DATE").
8. NO FEES OR COMMISSIONS OR OTHER REMUNERATION WILL BE PAYABLE TO ANY
BROKER, DEALER OR OTHER PERSON IN CONNECTION WITH THE SOLICITATION BY THE
TRUST PURSUANT TO THE PREPACKAGED PLAN. THE TRUST WILL, HOWEVER, UPON WRITTEN
REQUEST, REIMBURSE YOU FOR CUSTOMARY MAILING AND HANDLING EXPENSES INCURRED BY
YOU IN FORWARDING INDIVIDUAL BALLOTS AND ACCOMPANYING SOLICITATION PACKAGES TO
YOUR CLIENTS.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON AS THE AGENT OF THE TRUST, OR AUTHORIZE YOU OR ANY PERSON
TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH
RESPECT TO THE PREPACKAGED PLAN, EXCEPT FOR THE STATEMENTS CONTAINED IN THE
DOCUMENTS ENCLOSED HEREWITH.
IF YOU HAVE ANY QUESTIONS REGARDING THIS MASTER BALLOT OR THE VOTING
PROCEDURES, OR IF YOU NEED ADDITIONAL COPIES OF THE MASTER BALLOT, INDIVIDUAL
BALLOTS OR SOLICITATION PACKAGES, INCLUDING THE PREPACKAGED PLAN AND THE
PROXY, PLEASE CALL DANIEL F. HENNESSEY, TREASURER OF THE TRUST, AT (215) 881-
1525.
<PAGE>
MORTGAGE AND REALTY TRUST
SOLICITATION OF
PREPACKAGED PLAN ACCEPTANCE
RECORD DATE: JULY 7, 1995
EXPIRATION DATE: AUGUST 17, 1995
To: Securities Dealers, Brokers, Commercial Banks, Trust Companies and Other
Nominees
Mortgage and Realty Trust (the "Trust") is soliciting acceptances (the
"Solicitation") to its prepackaged plan of reorganization (the "Prepackaged
Plan") as set forth in the enclosed Disclosure Statement and Proxy Statement
(the "Proxy") from Holders of Senior Secured Uncertificated Notes due 1995,
Common Shares, Other Secured Claims and Unsecured Claims. Capitalized terms
used herein but not defined have the meanings assigned to them in the Proxy
Statement.
For the Prepackaged Plan to be confirmed without utilizing the "cramdown"
provisions of Chapter 11 of the Bankruptcy Code as to a class of Claims or
Interest entitled to vote on the Prepackaged Plan, it is necessary for the
Trust to receive acceptances from (i) holders of Claims constituting at least
two-thirds in dollar amount and more than one-half in number of the allowed
Claims in each impaired class voting on the Prepackaged Plan and (ii) holders
of at least two-thirds in amount of outstanding Common Shares in such class
voting on the Prepackaged Plan.
Enclosed are copies of the following documents:
1. The Proxy.
2. A form of letter ("To Our Clients") to be sent to your clients for whose
account you hold Common Shares registered in your name or the name of your
nominee, with instructions regarding voting on the Prepackaged Plan.
3. Ballots and Ballot instructions for accepting or rejecting the Prepackaged
Plan to be sent to your clients for whose account you hold Common Shares
registered in your name or the name of your nominee.
4. Master Ballots and Master Ballot Instructions to be used only by you to
calculate and report the total number of votes either accepting or rejecting
the Prepackaged Plan with respect to Common Shares owned by beneficial owners
for whom you serve as nominee and from whom you have received a completed and
executed Ballot.
5. A pre-addressed postage pre-paid business reply envelope to be used only
by your firm to return Master Ballot(s) to the Trust.
TO VOTE ON THE PREPACKAGED PLAN. To vote on the Prepackaged Plan pursuant to
the Solicitation, you must first deliver a Proxy, the appropriate Ballot(s) and
instructions thereto, a self-addressed postage pre-paid business reply
envelope, and a "To Our Clients" letter to each of your clients for whose
account you hold Common Shares. You should affix a label stating, or otherwise
appropriately indicate at the space provided on each Ballot, the number of
Common Shares held by such beneficial owner(s) in his, her or its account as of
the close of business on July 7, 1995 (the "Voting Record Date").
To vote using the Master Ballot, please: (i) retain the returned, completed
Ballots in your files, (ii) provide appropriate information for each of the
Items on the Master Ballot, in accordance with the instructions thereto, (iii)
sign and date the Master Ballot, (iv) if you are completing the Master Ballot
on behalf of another entity, indicate your relationship with such entity and
the capacity in which you are signing and (v) provide your name and mailing
address.
If the Master Ballot request for account identification number(s) for
individual beneficial owners is applicable, you may identify such beneficial
owners without disclosing their names by using the customer account number
assigned by you to each such beneficial owner or a sequential number assigned
by you to each such beneficial owner, provided that you retain a list of the
number(s) assigned to each such beneficial owner. Retain in your files all
completed Ballots received which are reflected in the Master Ballot.
Except as provided in the Proxy, the Trust will not pay any fees or
commissions to any broker or dealer or other person for soliciting acceptances
to the Prepackaged Plan. You will, however, be reimbursed for customary mailing
and handling expenses incurred by you in forwarding any of the enclosed
materials to your clients.
Failure to follow the above instructions in a timely manner may result in
your or your client's vote being deemed invalid.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY OTHER PERSON AS THE AGENT OF THE TRUST OR AUTHORIZE YOU OR ANY PERSON TO
USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT
TO THE PREPACKAGED PLAN, EXCEPT FOR THE STATEMENTS CONTAINED IN THE DOCUMENTS
ENCLOSED HEREIN.
If you need additional copies of the above materials, or if you have
questions regarding the Ballots, Master Ballots or Voting Procedures, please
call Daniel F. Hennessey at the Trust at (215) 881-1525.
<PAGE>
MORTGAGE AND REALTY TRUST
SOLICITATION OF
PREPACKAGED PLAN ACCEPTANCES
To Our Clients:
Enclosed for your consideration are a Disclosure Statement and Proxy
Statement dated July 12, 1995 (the "Proxy") and other documents relating to the
restructuring of Mortgage and Realty Trust (the "Trust"). Capitalized terms
used herein but not defined herein shall have the meanings assigned to them in
the Proxy.
The Trust is soliciting acceptances of its prepackaged plan of reorganization
(the "Prepackaged Plan") from holders of Senior Secured Uncertificated Notes
due 1995, Common Shares, Other Secured Claims and Unsecured Claims. For the
Prepackaged Plan to be confirmed (without utilizing "cramdown" provisions of
Chapter 11 of the Bankruptcy Code as to a class of Claims or Interests entitles
to vote on the Prepackaged Plan), it must be accepted by the (i) the holders of
Claims constituting at least two-thirds in dollar amount and more than one-half
in number of the allowed Claims in each impaired class voting on the
Prepackaged Plan and (ii) holders of at least two-thirds in amount of
outstanding Common Shares in such class voting on the Prepackaged Plan.
In addition to the Proxy, enclosed are a Ballot and the instructions thereto
(the "Ballot") for voting to accept or to reject the Prepackaged Plan.
To Vote on the Prepackaged Plan: Review the Proxy, complete the Ballot in
accordance with the instructions thereto and return the completed Ballot to us
for processing. If neither the "Accepts" nor "Rejects" box on the Ballot is
checked and the Ballot is not signed on the appropriate line(s), the Ballot
will not be counted as having been cast. Please be sure to return your
ballot(s) to us to allow time for our handling prior to the Expiration Date
indicated in the box below.
THE SOLICITATION WILL EXPIRE AT MIDNIGHT, NEW YORK TIME, ON AUGUST 17, 1995
(THE "EXPIRATION DATE"), UNLESS THE TRUST, IN ITS SOLE DISCRETION, EXTENDS OR
WAIVES THE PERIOD.
We request that you give this matter your immediate attention to ensure that
you have a full opportunity to consider and respond to the Solicitation.
Except as provided in the Proxy, the Trust will not pay any fees or
commissions to any broker or dealer or other person for soliciting acceptances
to the Prepackaged Plan.
YOUR IMMEDIATE ATTENTION IS REQUESTED
<PAGE>
IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN
COMMENCED AS OF THE DATE OF THIS DOCUMENT.
MORTGAGE AND REALTY TRUST
BALLOT
FOR ACCEPTING OR REJECTING
THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST
CLASS 2: SENIOR SECURED UNCERTIFICATED NOTES DUE 1995
THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00
MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1995, UNLESS EXTENDED.
This Ballot is submitted to you to solicit your vote to accept or reject the
Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and
Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement
and Proxy Statement, dated July 12, 1995 (the "Proxy"). The Prepackaged Plan
would be filed in connection with a case to be commenced in the future by the
Trust under chapter 11 of the Bankruptcy Code. At this time, the Trust has not
commenced a chapter 11 case. If sufficient votes are received accepting the
Prepackaged Plan, it is the Trust's present intention to commence a chapter 11
case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as
promptly as practicable.
THIS BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY OTHER
PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN. HOLDERS
SHOULD NOT SURRENDER ANY DOCUMENTS REPRESENTING SECURITIES AT THIS TIME, THE
TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH DOCUMENTS.
PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE
COMPLETING THIS BALLOT.
IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT
SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR
COUNTED AS HAVING BEEN CAST. PLEASE COMPLETE ITEMS 1-4.
<PAGE>
[X] Please mark
your votes
as this example
ITEM 1. The undersigned, a Holder of a Class 2 Claim as defined in the
Prepackaged Plan, is the beneficial owner of Senior Secured
Uncertificated Notes due 1995, in the unpaid principal amount of:
$__________ (enter amount).
ITEM 2. Vote. The undersigned votes all To Accept the To Reject the
Class 2 Claims referenced in Prepackaged Plan Prepackaged Plan
Item 1 (check one box): [_] [_]
ITEM 3. Release. Please indicate whether you elect to opt out of the mutual
release provided in Section 5.13 of the Prepackaged Plan by checking the
box below.
[_] The undersigned DOES NOT CONSENT to the mutual release provided in
Section 5.13 of the Prepackaged Plan.
ITEM 4. Accredited Investor. Please certify that you are an "accredited
investor" with the meaning of Rule 501 under the Securities Act of 1933,
as amended, by checking the box: [_]
ITEM 5. By signing this Ballot, the undersigned certifies that the undersigned
is the beneficial owner(s) of the Senior Secured Uncertificated Notes
due 1995 voted on this Ballot and/or has full power and authority to
vote to accept or reject the Prepackaged Plan. The undersigned also
acknowledges receipt of the Proxy and other applicable Solicitation
Materials as well as all terms and conditions set forth therein.
The signature(s) below should conform to the name(s) shown on the document(s)
representing the claims being voted. Where claims are held in the names of
more than one person, all such owners should sign below.
SIGNATURE ___________________________________________________ DATED ______
SIGNATURE OF CO-OWNER, IF APPLICABLE ________________________
IF BY AUTHORIZED AGENT, NAME AND TITLE ______________________
<PAGE>
VOTING INFORMATION AND INSTRUCTIONS
FOR COMPLETING THE BALLOT
1. FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE ITEMS 1-4, SIGN AND RETURN
THE BALLOT TO THE TRUST, AT THE ADDRESS SET FORTH ON THE ENCLOSED PRE-ADDRESSED
POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE. YOU WILL FIND THE AMOUNT OF YOUR
HOLDINGS AS OF THE CLOSE OF BUSINESS ON THE VOTING RECORD DATE INDICATED ON THE
ADDRESS LABEL AFFIXED TO THE FRONT OF THE BALLOT. THAT TOTAL SHOULD BE ENTERED
IN ITEM 1.
IF FOR ANY REASON YOU DID NOT RECEIVE A PRE-ADDRESSED POSTAGE PRE-PAID
BUSINESS REPLY ENVELOPE OR IF THE AMOUNT OF YOUR HOLDINGS INDICATED ON THE
AFOREMENTIONED LABEL IS UNCLEAR, PLEASE CONTACT DANIEL F. HENNESSEY AT THE
TELEPHONE NUMBER BELOW.
BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON AUGUST 17,
1995 (THE "EXPIRATION DATE"). IF A BALLOT IS RECEIVED AFTER THE EXPIRATION
DATE, IT WILL NOT BE COUNTED.
2. IF YOU HOLD CLAIMS OR EQUITY INTERESTS IN MORE THAN ONE CLASS UNDER THE
PREPACKAGED PLAN (I.E., COMMON SHARES AND NOTES), YOU SHOULD RECEIVE ONE
BALLOT, CODED BY CLASS NUMBER AND ONE SET OF SOLICITATION MATERIALS FOR EACH
SUCH CLASS OF CLAIMS OR EQUITY INTERESTS. EACH BALLOT YOU RECEIVE VOTES ONLY
YOUR CLAIMS OR EQUITY INTERESTS. PLEASE COMPLETE AND RETURN EACH BALLOT YOU
RECEIVE. YOU MUST VOTE ALL OF YOUR CLAIMS OR EQUITY INTERESTS WITHIN A SINGLE
CLASS UNDER THE PREPACKAGED PLAN TO EITHER ACCEPT OR REJECT THE PREPACKAGED
PLAN. ACCORDINGLY, A BALLOT THAT PARTIALLY REJECTS AND PARTIALLY ACCEPTS THE
PREPACKAGED PLAN WILL NOT BE COUNTED.
3. THE BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY
OTHER PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN.
HOLDERS SHOULD NOT SURRENDER ANY DOCUMENTS REPRESENTING THEIR SECURITIES AT
THIS TIME, AND THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH DOCUMENTS
TRANSMITTED TOGETHER WITH A BALLOT. SURRENDER OF DOCUMENTS FOR EXCHANGE
PURSUANT TO THE PREPACKAGED PLAN MAY BE MADE ONLY PURSUANT TO A LETTER OF
TRANSMITTAL, WHICH WILL BE FURNISHED TO YOU BY THE TRUST (OR ITS AGENT) AFTER
CONFIRMATION OF THE PREPACKAGED PLAN BY THE BANKRUPTCY COURT.
4. THE BALLOT IS FOR VOTING PURPOSES ONLY AND DOES NOT CONSTITUTE AND SHALL
NOT BE DEEMED A PROOF OF CLAIM OR INTEREST OR AN ASSERTION OF A CLAIM OR
INTEREST.
PLEASE RETURN YOUR BALLOT PROMPTLY!
IF YOU HAVE ANY QUESTIONS REGARDING
THIS BALLOT OR THE VOTING PROCEDURES,
PLEASE CALL:
MORTGAGE AND REALTY TRUST
(215) 881-1525
<PAGE>
IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN
COMMENCED AS OF THE DATE OF THIS DOCUMENT.
MORTGAGE AND REALTY TRUST
BALLOT
FOR ACCEPTING OR REJECTING
THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST
CLASS 3: OTHER SECURED CLAIMS
THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00
MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1995, UNLESS EXTENDED.
This Ballot is submitted to you to solicit your vote to accept or reject the
Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and
Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement
and Proxy Statement, dated July 12, 1995 (the "Proxy"). The Prepackaged Plan
would be filed in connection with a case to be commenced in the future by the
Trust under chapter 11 of the Bankruptcy Code. At this time, the Trust has not
commenced a chapter 11 case. If sufficient votes are received accepting the
Prepackaged Plan, it is the Trust's present intention to commence a chapter 11
case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as
promptly as practicable.
PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE
COMPLETING THIS BALLOT.
IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT
SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR
COUNTED AS HAVING BEEN CAST. PLEASE COMPLETE ITEMS 1-3.
<PAGE>
[X] Please mark
your votes
as this example
ITEM 1. The undersigned, a Holder of a Class 3 Claim as defined in the
Prepackaged Plan, is the owner of Other Secured Claims, in the amount
of: $__________ (enter amount).
ITEM 2. Vote. The undersigned votes all To Accept the To Reject the
Class 3 Claims referenced in Prepackaged Plan Prepackaged Plan
Item 1 (check one box): [_] [_]
ITEM 3. Release. Please indicate whether you elect to opt out of the mutual
release provided in Section 5.13 of the Prepackaged Plan by checking the
box below.
[_] The undersigned DOES NOT CONSENT to the mutual release provided in
Section 5.13 of the Prepackaged Plan.
ITEM 4. By signing this Ballot, the undersigned certifies that the undersigned
is the owner(s) of the Other Secured Claims voted on this Ballot and/or
has full power and authority to vote to accept or reject the Prepackaged
Plan. The undersigned also acknowledges receipt of the Proxy and other
applicable Solicitation Materials as well as all terms and conditions
set forth therein.
The signature(s) below should conform to the name(s) shown on the document(s)
representing the claims being voted. Where claims are held in the names of
more than one person, all such owners should sign below.
SIGNATURE ___________________________________________________ DATED ______
SIGNATURE OF CO-OWNER, IF APPLICABLE ________________________
IF BY AUTHORIZED AGENT, NAME AND TITLE ______________________
<PAGE>
VOTING INFORMATION AND INSTRUCTIONS
FOR COMPLETING THE BALLOT
1. FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE ITEMS 1-3, SIGN AND RETURN
THE BALLOT TO THE TRUST, AT THE ADDRESS SET FORTH ON THE ENCLOSED PRE-ADDRESSED
POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE.
IF FOR ANY REASON YOU DID NOT RECEIVE A PRE-ADDRESSED POSTAGE PRE-PAID
BUSINESS REPLY ENVELOPE OR IF THE AMOUNT OF YOUR HOLDINGS INDICATED ON THE
AFOREMENTIONED LABEL IS UNCLEAR, PLEASE CONTACT DANIEL F. HENNESSEY AT THE
TELEPHONE NUMBER BELOW.
BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON AUGUST 17,
1995 (THE "EXPIRATION DATE"). IF A BALLOT IS RECEIVED AFTER THE EXPIRATION
DATE, IT WILL NOT BE COUNTED.
2. IF YOU HOLD CLAIMS OR EQUITY INTERESTS IN MORE THAN ONE CLASS UNDER THE
PREPACKAGED PLAN (I.E., COMMON SHARES AND NOTES), YOU SHOULD RECEIVE ONE
BALLOT, CODED BY CLASS NUMBER AND ONE SET OF SOLICITATION MATERIALS FOR EACH
SUCH CLASS OF CLAIMS OR EQUITY INTERESTS. EACH BALLOT YOU RECEIVE VOTES ONLY
YOUR CLAIMS OR EQUITY INTERESTS. PLEASE COMPLETE AND RETURN EACH BALLOT YOU
RECEIVE. YOU MUST VOTE ALL OF YOUR CLAIMS OR EQUITY INTERESTS WITHIN A SINGLE
CLASS UNDER THE PREPACKAGED PLAN TO EITHER ACCEPT OR REJECT THE PREPACKAGED
PLAN. ACCORDINGLY, A BALLOT THAT PARTIALLY REJECTS AND PARTIALLY ACCEPTS THE
PREPACKAGED PLAN WILL NOT BE COUNTED.
3. THE BALLOT IS FOR VOTING PURPOSES ONLY AND DOES NOT CONSTITUTE AND SHALL
NOT BE DEEMED A PROOF OF CLAIM OR INTEREST OR AN ASSERTION OF A CLAIM OR
INTEREST.
PLEASE RETURN YOUR BALLOT PROMPTLY!
IF YOU HAVE ANY QUESTIONS REGARDING
THIS BALLOT OR THE VOTING PROCEDURES,
PLEASE CALL:
MORTGAGE AND REALTY TRUST
(215) 881-1525
<PAGE>
IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN
COMMENCED AS OF THE DATE OF THIS DOCUMENT.
MORTGAGE AND REALTY TRUST
BALLOT
FOR ACCEPTING OR REJECTING
THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST
CLASS 4: UNSECURED CLAIMS
THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00
MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1995, UNLESS EXTENDED.
This Ballot is submitted to you to solicit your vote to accept or reject the
Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and
Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement
and Proxy Statement, dated July 12, 1995 (the "Proxy"). The Prepackaged Plan
would be filed in connection with a case to be commenced in the future by the
Trust under chapter 11 of the Bankruptcy Code. At this time, the Trust has not
commenced a chapter 11 case. If sufficient votes are received accepting the
Prepackaged Plan, it is the Trust's present intention to commence a chapter 11
case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as
promptly as practicable.
PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE
COMPLETING THIS BALLOT.
IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT
SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR
COUNTED AS HAVING BEEN CAST. PLEASE COMPLETE ITEMS 1-3.
<PAGE>
[X] Please mark
your votes
as this example
ITEM 1. The undersigned, a Holder of a Class 4 Claim as defined in the
Prepackaged Plan, is the owner of Unsecured Claims, in the amount of:
$________ (enter amount).
ITEM 2. Vote. The undersigned votes To Accept the To Reject the
all Class 4 Claims referenced Prepackaged Plan Prepackaged Plan
in Item 1 (check one box): [_] [_]
ITEM 3. Release. Please indicate whether you elect to opt out of the mutual
release provided in Section 5.13 of the Prepackaged Plan by checking the
box below.
[_] The undersigned DOES NOT CONSENT to the mutual release provided in
Section 5.13 of the Prepackaged Plan.
ITEM 4. By signing this Ballot, the undersigned certifies that the undersigned
is the owner(s) of the Unsecured Claims voted on this Ballot and/or has
full power and authority to vote to accept or reject the Prepackaged
Plan. The undersigned also acknowledges receipt of the Proxy and other
applicable Solicitation Materials as well as all terms and conditions
set forth therein.
The signature(s) below should conform to the name(s) shown on the document(s)
representing the claims being voted. Where claims are held in the names of
more than one person, all such owners should sign below.
SIGNATURE ___________________________________________________ DATED ______
SIGNATURE OF CO-OWNER, IF APPLICABLE ________________________
IF BY AUTHORIZED AGENT, NAME AND TITLE ______________________
<PAGE>
VOTING INFORMATION AND INSTRUCTIONS
FOR COMPLETING THE BALLOT
1. FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE ITEMS 1-3, SIGN AND RETURN
THE BALLOT TO THE TRUST, AT THE ADDRESS SET FORTH ON THE ENCLOSED PRE-ADDRESSED
POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE.
IF FOR ANY REASON YOU DID NOT RECEIVE A PRE-ADDRESSED POSTAGE PRE-PAID
BUSINESS REPLY ENVELOPE OR IF THE AMOUNT OF YOUR HOLDINGS INDICATED ON THE
AFOREMENTIONED LABEL IS UNCLEAR, PLEASE CONTACT DANIEL F. HENNESSEY AT THE
TELEPHONE NUMBER BELOW.
BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON AUGUST 17,
1995 (THE "EXPIRATION DATE"). IF A BALLOT IS RECEIVED AFTER THE EXPIRATION
DATE, IT WILL NOT BE COUNTED.
2. IF YOU HOLD CLAIMS OR EQUITY INTERESTS IN MORE THAN ONE CLASS UNDER THE
PREPACKAGED PLAN (I.E., COMMON SHARES AND NOTES), YOU SHOULD RECEIVE ONE
BALLOT, CODED BY CLASS NUMBER AND ONE SET OF SOLICITATION MATERIALS FOR EACH
SUCH CLASS OF CLAIMS OR EQUITY INTERESTS. EACH BALLOT YOU RECEIVE VOTES ONLY
YOUR CLAIMS OR EQUITY INTERESTS. PLEASE COMPLETE AND RETURN EACH BALLOT YOU
RECEIVE. YOU MUST VOTE ALL OF YOUR CLAIMS OR EQUITY INTERESTS WITHIN A SINGLE
CLASS UNDER THE PREPACKAGED PLAN TO EITHER ACCEPT OR REJECT THE PREPACKAGED
PLAN. ACCORDINGLY, A BALLOT THAT PARTIALLY REJECTS AND PARTIALLY ACCEPTS THE
PREPACKAGED PLAN WILL NOT BE COUNTED.
3. THE BALLOT IS FOR VOTING PURPOSES ONLY AND DOES NOT CONSTITUTE AND SHALL
NOT BE DEEMED A PROOF OF CLAIM OR INTEREST OR AN ASSERTION OF A CLAIM OR
INTEREST.
PLEASE RETURN YOUR BALLOT PROMPTLY!
IF YOU HAVE ANY QUESTIONS REGARDING
THIS BALLOT OR THE VOTING PROCEDURES,
PLEASE CALL:
MORTGAGE AND REALTY TRUST
(215) 881-1525
<PAGE>
IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN
COMMENCED AS OF THE DATE OF THIS DOCUMENT.
MORTGAGE AND REALTY TRUST
BALLOT
FOR ACCEPTING OR REJECTING
THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST
CLASS 5: COMMON STOCK
THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00
MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1995, UNLESS EXTENDED.
This Ballot is submitted to you to solicit your vote to accept or reject the
Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and
Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement
and Proxy Statement, dated July 12, 1995 (the "Proxy"). The Prepackaged Plan
would be filed in connection with a case to be commenced in the future by the
Trust under chapter 11 of the Bankruptcy Code. At this time, the Trust has not
commenced a chapter 11 case. If sufficient votes are received accepting the
Prepackaged Plan, it is the Trust's present intention to commence a chapter 11
case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as
promptly as practicable.
THIS BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY OTHER
PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN. HOLDERS
SHOULD NOT SURRENDER CERTIFICATES REPRESENTING SECURITIES AT THIS TIME, THE
TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH CERTIFICATES.
PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE
COMPLETING THIS BALLOT.
IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT
SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR
COUNTED AS HAVING BEEN CAST. PLEASE COMPLETE ITEMS 1-3.
<PAGE>
[X] Please mark
your votes
as this example
ITEM 1. The undersigned, a Holder of a Class 5 Interest as defined in the
Prepackaged Plan, is the beneficial owner of Common Shares, par value
$1.00 per share, in the amount of: (enter number of shares).
ITEM 2. Vote. The undersigned votes all To Accept the To Reject the
Class 5 Interests referenced Prepackaged Plan Prepackaged Plan
in Item 1 (check one box): [_] [_]
ITEM 3. Release. Please indicate whether you elect to opt out of the mutual
release provided in Section 5.13 of the Prepackaged Plan by checking the
box below.
[_] The undersigned DOES NOT CONSENT to the mutual release provided in
Section 5.13 of the Prepackaged Plan.
ITEM 4. By signing this Ballot, the undersigned certifies that the undersigned
is the beneficial owner(s) of the Common Shares voted on this Ballot
and/or has full power and authority to vote to accept or reject the
Prepackaged Plan. The undersigned also acknowledges receipt of the Proxy
and other applicable Solicitation Materials as well as all terms and
conditions set forth therein.
The signature(s) below should conform to the name(s) shown on the certificate-
(s) representing the Common Shares being voted. Where Common Shares are regis-
tered in the names of more than one person, all such beneficial owners should
sign below.
SIGNATURE ___________________________________________________ DATED ______
SIGNATURE OF CO-OWNER, IF APPLICABLE ________________________
IF BY AUTHORIZED AGENT, NAME AND TITLE ______________________
<PAGE>
VOTING INFORMATION AND INSTRUCTIONS
FOR COMPLETING THE BALLOT
1. FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE, SIGN AND RETURN THE
BALLOT AS FOLLOWS:
(A) IF YOUR COMMON SHARES ARE HELD THROUGH A BROKER, BANK, OR OTHER NOMINEE:
TO HAVE YOUR VOTE COUNT YOU MUST COMPLETE ITEMS 1-3 AND RETURN THIS
BALLOT TO SUCH BROKER, BANK OR NOMINEE. YOU MUST RETURN THE BALLOT TO
SUCH ENTITY, EARLY ENOUGH FOR YOUR VOTE TO BE PROCESSED AND FORWARDED TO
AND RECEIVED BY THE SOLICITATION AGENT PRIOR TO THE EXPIRATION DATE.
THE BROKER, BANK OR OTHER NOMINEE SHOULD INDICATE ON THE BALLOT THE NUMBER
OF SHARES HELD IN YOUR ACCOUNT AS OF THE CLOSE OF BUSINESS ON JULY 7,
1995, (THE "RECORD DATE".) PLEASE LOCATE THAT DATA AND USE THAT TOTAL
NUMBER WHEN COMPLETING ITEM 1. IF THAT DATA HAS NOT BEEN PROVIDED, PLEASE
CONTACT THE INSTITUTION(S) AT WHICH YOUR ACCOUNT(S) ARE HELD AND REQUEST
THE SAME.
(B) IF YOUR COMMON SHARES ARE REGISTERED IN YOUR OWN NAME: FOR YOUR VOTE TO
BE COUNTED, YOU MUST COMPLETE ITEMS 1-3 AND RETURN THIS BALLOT TO THE
TRUST, AT THE ADDRESS SET FORTH ON THE ENCLOSED PRE-ADDRESSED POSTAGE
PRE-PAID BUSINESS REPLY ENVELOPE. YOU WILL FIND THE NUMBER OF SHARES YOU
HELD AS OF THE CLOSE OF BUSINESS ON THE VOTING RECORD DATE INDICATED ON
THE ADDRESS LABEL AFFIXED TO THE FRONT OF THE BALLOT. THAT TOTAL SHOULD
BE ENTERED IN ITEM 1.
IF FOR ANY REASON YOU DID NOT RECEIVE A PRE-ADDRESSED POSTAGE PRE-PAID
BUSINESS REPLY ENVELOPE OR IF THE AMOUNT OF YOUR HOLDINGS INDICATED ON THE
AFOREMENTIONED LABEL IS UNCLEAR, PLEASE CONTACT DANIEL F. HENNESSEY AT THE
TELEPHONE NUMBER BELOW.
BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON AUGUST 17,
1995 (THE "EXPIRATION DATE"). IF A BALLOT IS RECEIVED AFTER THE EXPIRATION
DATE, IT WILL NOT BE COUNTED.
2. IF YOU HOLD CLAIMS OR EQUITY INTERESTS IN MORE THAN ONE CLASS UNDER THE
PREPACKAGED PLAN (I.E., COMMON SHARES AND NOTES), YOU SHOULD RECEIVE ONE
BALLOT, CODED BY CLASS NUMBER AND ONE SET OF SOLICITATION MATERIALS FOR EACH
SUCH CLASS OF CLAIMS OR EQUITY INTERESTS. EACH BALLOT YOU RECEIVE VOTES ONLY
YOUR CLAIMS OR EQUITY INTERESTS. PLEASE COMPLETE AND RETURN EACH BALLOT YOU
RECEIVE. YOU MUST VOTE ALL OF YOUR CLAIMS OR EQUITY INTERESTS WITHIN A SINGLE
CLASS UNDER THE PREPACKAGED PLAN TO EITHER ACCEPT OR REJECT THE PREPACKAGED
PLAN. ACCORDINGLY, A BALLOT THAT PARTIALLY REJECTS AND PARTIALLY ACCEPTS THE
PREPACKAGED PLAN WILL NOT BE COUNTED.
3. THE BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY
OTHER PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN.
HOLDERS SHOULD NOT SURRENDER ANY DOCUMENTS REPRESENTING THEIR SECURITIES AT
THIS TIME, AND THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH DOCUMENTS
TRANSMITTED TOGETHER WITH A BALLOT. SURRENDER OF DOCUMENTS FOR EXCHANGE
PURSUANT TO THE PREPACKAGED PLAN MAY BE MADE ONLY PURSUANT TO A LETTER OF
TRANSMITTAL, WHICH WILL BE FURNISHED TO YOU BY THE TRUST (OR ITS AGENT) AFTER
CONFIRMATION OF THE PREPACKAGED PLAN BY THE BANKRUPTCY COURT.
4. THE BALLOT IS FOR VOTING PURPOSES ONLY AND DOES NOT CONSTITUTE AND SHALL
NOT BE DEEMED A PROOF OF CLAIM OR INTEREST OR AN ASSERTION OF A CLAIM OR
INTEREST.
PLEASE RETURN YOUR BALLOT PROMPTLY!
IF YOU HAVE ANY QUESTIONS REGARDING
THIS BALLOT OR THE VOTING PROCEDURES,
PLEASE CALL:
MORTGAGE AND REALTY TRUST
(215) 881-1525
