UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996
OR
For the transition period from __________________ to____________________
Commission File No. 1-10150
ANGELES PARTICIPATING MORTGAGE TRUST
(Exact name of registrant as specified in its charter)
California 95-6881527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3 Pickwick Plaza, Suite 250 91362
Greenwich, CT 06830 (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 861-0752
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange
on which registered:
Title of each class:
Class A Shares, $1.00 par American Stock Exchange
value Angeles Participating
Mortgage Trust Units
Securities registered pursuant to Section 12(g) of the Act: None
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 this
Form 10-K.
The aggregate market value of the Class A Shares held by non-affiliates on
March 24, 1997 was approximately $5,764,750.
As of March 24, 1997, there were 7,550,000 Shares of Angeles Participating
Mortgage Trust Class A, $1.00 par value, outstanding.
Total Pages 59
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I..................................................................................................................3
ITEM 1. BUSINESS........................................................................................................3
General..............................................................................................................3
History..............................................................................................................3
Investment Policy....................................................................................................3
The Partnership......................................................................................................5
Competiton...........................................................................................................6
Qualification as a Real Estate Investment Trust......................................................................6
Loan Portfolio.......................................................................................................6
Unfunded Commitments.................................................................................................6
Employees............................................................................................................6
ITEM 2. PROPERTIES......................................................................................................6
ITEM 3. LEGAL PROCEEDINGS...............................................................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................................6
PART II.................................................................................................................7
ITEM 5. MARKET FOR THE TRUST'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS........................................7
ITEM 6. SELECTED FINANCIAL DATA........................................................................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..............................................................................................................9
General..............................................................................................................9
Fiscal year 1996 compared to 1995...................................................................................10
Fiscal year 1995 compared to 1994...................................................................................10
Liquidity and Capital Resources.....................................................................................10
ITEM 8. FINANCIAL STATEMENTS...........................................................................................12
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................................................22
PART III...............................................................................................................23
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS...............................................................................23
ITEM 11. EXECUTIVE COMPENSATION........................................................................................25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................................26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................................27
PART IV................................................................................................................28
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K........................................................28
</TABLE>
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PART I
ITEM 1. BUSINESS
General
Angeles Participating Mortgage Trust ("APART") is a California business
trust which qualifies as a real estate investment trust or "REIT" for Federal
income tax purposes. APART was formed in April 1988. APART's capital structure
consists of Shares of Class A Common Stock ("Class A Shares") and Class B Common
Stock ("Class B Shares"). The Class A Shares are publicly traded on the American
Stock Exchange. As of March 24, 1997, there were 7,550,000 Class A Shares
outstanding and 3,775,000 Class B Shares (which can be converted into 77,040
Class A Shares) outstanding and owned by SAHI Partners ("SAHI"), a Delaware
general partnership, and SAHI, Inc., a Delaware Corporation. The currently
outstanding Class B Shares are entitled to a 1% equity interest and a 33% voting
interest in APART. Each of the Class A and Class B Shares are entitled to one
vote per share. APART is also the sole general partner and holds a 8.05%
interest in the APMT Limited Partnership (the "Partnership"). 4,568,944 of the
Partnership's outstanding Operating Partnership Units ("OPU") can be converted
into Class A Shares on a one-for-one basis, subject to adjustment, at any time.
History
APART was originally formed by Angeles Corporation, a California
corporation ("Angeles"), for the purpose of making various types of mortgage and
other loans to entities affiliated with Angeles. In early 1993, Angeles and its
affiliates began experiencing financial difficulties which resulted in a default
on their loans held by APART. In November 1993, APART sold all of its loans to
an unaffiliated third party and with the proceeds of such sale and cash on hand
was able to distribute $37.3 million ($14.50 per share) to the shareholders of
APART. In November 1993, APART was notified that SAHI, Inc. had acquired from an
affiliate of New Plan Realty Trust, in a privately negotiated transaction, all
of the outstanding shares of APART's Class B Shares. These Class B Shares were
sold to SAHI in March 1994. From November 1993 through February 1994, SAHI also
had accumulated through open market purchases 9.57% of the total outstanding
shares of APART's Class A Shares. Subsequently, SAHI made APART a firm offer to
obtain control of APART. Through subsequent negotiations between APART and SAHI,
it was agreed that APART would sell to SAHI and SAHI, Inc. warrants for the
purchase of additional Class A Shares and Class B Shares. On March 15, 1994,
SAHI purchased from APART for $100,000 a warrant (the "Class A Warrant") for the
right to purchase up to 5,000,000 Class A Shares at a price of $1.00 per share,
and SAHI, Inc. purchased for $1,000 a warrant (the "Class B Warrant," and
together with the Class A Warrant, the "Warrants") for the right to purchase up
to 2,500,000 Class B Shares at a price of $.01 per share. SAHI subsequently
assigned the Class A Warrant to Starwood Mezzanine Investors, L.P. ("Starwood
Mezzanine"). The Warrants were approved by holders of a majority of the Class A
and Class B Shares in September 1996. Starwood Mezzanine and SAHI, Inc.
exercised the Warrants on January 22, 1997.
In connection with the approval of the Warrants and certain other matters,
the shareholders of APART also voted in September 1996 to change the investment
policy of APART and to approve a proposal for APART to become the sole general
partner of the Partnership with Starwood Mezzanine as the initial limited
partner.
Investment Policy
Prior to September 1996, the purpose and investment policy of APART was
predominately to make mortgage loans to entities affiliated with Angeles.
However, since the liquidation of APART's portfolio in 1993, APART has not
pursued its stated investment policy. Instead, APART held most of its assets in
trust as a reserve against contingent claims. This trust was terminated on
August 12, 1996. In September 1996, the shareholders of APART voted to change
the purpose and investment policy of APART and to approve a proposal whereby
APART became the sole general partner of the Partnership. APART's restated
purpose and investment policy is to primarily (i) originate mortgage loans to,
and/or acquire mortgage loans made to, unrelated entities or acquire securities
collateralized, in whole or in part, by such mortgage loans, as well as make
equity investments in real estate and real estate- related assets, (ii) acquire
direct or indirect interests in short term, medium and long-term real
estate-related debt securities and mortgage interests under which the borrowers
are unaffiliated with APART, (iii) make, hold and dispose of purchase money
loans with respect to assets sold by APART, and (iv) acquire positions in
non-performing and
3
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sub-performing debt for the purpose of either restructuring such debt as a
performing debt or obtaining shortly thereafter primary management rights over
or equity interests in the underlying assets securing such debt (the investments
referred to in (i) through (iv) above being herein collectively referred to as
the "Diversified Portfolio"). The Diversified Portfolio may include controlling
or non-controlling equity ownership positions in any general category of real
estate assets, including, without limitation, office, industrial, mini-storage,
retail, and residential improvements and land.
APART will not make certain types of investments as a result of the
restrictions and conflicts described below (collectively, the "Investment
Restrictions"), as well as SAHI's analysis of the current investment
opportunities available to APART. Specifically, without the amendment,
termination or waiver of provisions of certain non-competition agreements
between Starwood Capital Group, L.P. and Starwood Lodging Trust, a publicly
traded hotel REIT the shares of which are paired and trade with those of
Starwood Lodging Corporation, APART and the Partnership are prohibited from: (i)
making investments in loans collateralized by hotel assets where it is
anticipated that the underlying equity will be acquired by the debt holder
within one year from the acquisition of such debt, (ii) acquiring equity
interests in hotels (other than acquisitions of warrants, equity participations
or similar rights incidental to a debt investment by APART or the Partnership or
that are acquired as a result of the exercise of remedies in respect of a loan
in which APART or the Partnership has an interest) or (iii) selling or
contributing to or acquiring any interests in Starwood Lodging Trust, including
debt positions or equity interests obtained by APART or the Partnership under,
pursuant to or by reason of the holding of debt positions.
In addition, during any period in which Starwood Mezzanine has an
interest in APART or the Partnership and Trustees that are affiliated with SAHI,
SAHI, Inc. or Starwood Mezzanine (the "SAHI Nominees") shall constitute a
majority of the Board of Trustees or SAHI, the SAHI Nominees or their respective
affiliates (individually or collectively, the "SAHI Group") collectively control
a sufficient number of voting securities to elect a majority of the Board of
Trustees, without the approval of Starwood Mezzanine (A) neither APART nor the
Partnership shall pursue any equity interests as a principal purpose, excluding
equity interests which are incidental to, or acquired pursuant to the exercise
or remedial rights with respect to, a debt instrument, (B) neither APART nor the
Partnership shall invest in real estate related debt interests issued by
obligers that are not operating companies or originate or purchase mortgage
loans issued by obligers that are not operating companies and (C) neither APART
nor the Partnership shall incur indebtedness during any period in which the
incurrence of such indebtedness would increase the amount of Unrelated Business
Taxable Income ("UBTI") to be incurred by the limited partners of Starwood
Mezzanine. Furthermore, during any period in which Starwood Mezzanine shall have
an interest in either APART or the Partnership, without the approval of Starwood
Mezzanine, neither APART nor the Partnership (a) may enter into any service
agreement any member of with the SAHI Group or (b) may acquire (by contribution
or purchase) any additional debt or equity securities from the SAHI Group.
APART currently intends to focus its acquisition efforts on assets which
exhibit one or more of the following characteristics:
- Assets owned by distressed sellers.
- Assets priced below or having a deemed value for collateralization
purposes that is less than reproduction cost.
- Equity interests in, and/or debt interests secured by, assets located
in markets or submarkets experiencing population or job growth, and
which are located near historically stable employment generator bases,
such as government, university and medical centers.
- Subject to the restrictions of Investment Company Act of 1940 (and any
other applicable Federal securities laws or the securities law of any
state), interests which are publicly traded, including other REIT
equities, limited partnership interests and debt interests.
APART currently intends to acquire assets opportunistically on an all cash
basis, through the issuance of additional Class A Shares and with financing from
institutional and other lenders or sellers. APART will also be permitted to
raise additional capital through registered public offerings as well as private
placements of both debt and equity interests. In addition, APART and/or the
Partnership may acquire additional assets through contributions from SAHI and
its affiliated entities subject to certain restrictions.
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There can be no assurance that APART will be able to acquire interests
which meet the investment criteria outlined above. Additionally, in response to
changing market conditions and opportunities, the Board of Trustees may revise
the investment criteria and the investment policies of APART (within the limits
of the Declaration of Trust), from time to time, without a vote of the
shareholders. For example, the Board of Trustees may focus APART's acquisitions
or investments exclusively on a specific class of assets, and contribute and
hold such assets through a partnership structure (such as the Partnership).
Currently, APART is not required to operate exclusively through the Partnership
and, thus, has no obligation to contribute additional cash to the Partnership
other than such cash as is necessary for APART to maintain at least a 1%
interest in the total contributed capital from time to time to the Partnership.
However, the Board of Trustees has the right to cause APART to contribute up to
substantially all of APART's uncontributed assets to the Partnership for
additional interests in the Partnership, and, to cause APART to agree to conduct
all of its real estate-related investment activities exclusively through the
Partnership.
APART currently intends that additional investments in debt or equity
interests in properties may be made by other entities created and controlled by
APART, such as the Partnership, to take advantage of the potential benefits of
structuring acquisitions through a partnership where APART would act as a
general partner and the persons contributing the interests would be limited
partners. APART currently intends that assets may be acquired by the Partnership
directly, with funds contributed by APART and/or through financing facilities
arranged for the Partnership subject to the restrictions set forth above.
The Partnership
The Partnership is a limited partnership organized under the Delaware
Revised Uniform Limited Partnership Act. APART is the sole general partner and,
initially, Starwood Mezzanine is the sole limited partner of the Partnership
with 8.05% and 91.95% interests in the Partnership, respectively. As the sole
general partner of the Partnership, APART will manage all the business and
affairs of the Partnership. Except for the Investment Restrictions, APART will
have full and complete power, authority and discretion to take all actions
necessary or appropriate to carry out the business of the Partnership.
Notwithstanding the foregoing, without the consent of all the limited partners
of the Partnership, APART will have no power to do any act in contravention of
the Partnership Agreement or possess any Partnership property for other than a
Partnership purpose. Because the Investment Restrictions do not extend to the
day to day operations of the Partnership and because the investment purposes of
APART, the Partnership and Starwood Mezzanine are substantially similar, APART
believes these restrictions do not infringe on its ability to unilaterally
control all financial affairs of the Partnership as the general partner. APART
accounts for its investment in the Partnership on a consolidated basis, in
accordance with generally accepted accounting principles. The principal
executive offices of the Partnership are located at APART's principal executive
offices.
The term of the Partnership is until December 31, 2096 unless sooner
dissolved and terminated in accordance with the Partnership Agreement.
APART has the authority in its discretion to cause the Partnership to make
distributions from time to time to the partners of the Partnership. APART is
authorized to cause the Partnership to distribute sufficient amounts to enable
APART to pay dividends to its shareholders that will satisfy the REIT
requirements and shall be in accordance with the partners' percentage interests
in the Partnership. The Partnership will reimburse APART for all expenses of
APART incurred in connection with the business of the Partnership. In the event
of a dissolution of the Partnership, the assets of the Partnership will be
liquidated and (after payment of creditors and establishment of any reserves to
provide for contingent liabilities) distributed to holders of OPU in accordance
with the positive balances in their capital accounts.
Pursuant to agreements entered into in connection with formation of the
Partnership, Starwood Mezzanine, as a holder of OPU, has certain rights to
tender all or a portion of the OPU held by it to APART in exchange for Class A
Shares and/or cash, and certain rights to require APART to register under the
Securities Act of 1933 any Class A Shares which may be issued upon such
exchange.
The Board of Trustees has the right to cause APART to contribute up to
substantially all of APART's theretofore uncontributed assets to the Partnership
for additional interests and, following any such contribution, to cause APART to
agree to conduct all of its real estate-related investment activities
exclusively through the Partnership.
5
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Loan Portfolio
The Partnership's loan portfolio as of December 31, 1996 consisted of one
mortgage loan in the form of mortgage participation certificates which represent
100% of the beneficial ownership interest in a $3,707,000 performing,
non-recourse first mortgage loan, secured by the Warwick Hotel and Apartments
("Warwick Hotel")
<TABLE>
<CAPTION>
Original Carrying Funding Payment
Property/Location Loan Principal Amount Date Term Rate
- ----------------- -------------- ------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Warwick Hotel and Apartments $8,500,000 $3,707,000 12/1/79 25 yrs 9.0%
Philadelphia, PA
</TABLE>
Warwick Hotel is a 20-story hotel and apartment complex located in
Philadelphia, PA. The mortgage has a remaining principal balance of $4.9 million
and requires monthly payments of approximately $71,000, representing principal
and interest at a rate of 9% per annum. The note was originally issued with a
face amount of $8.5 million on December 1, 1979 with the final payment due
November 30, 2004. Starwood Mezzanine acquired this note at a discount from face
value in February 1995 and has been accounting for it under the effective
interest method. This note was contributed from Starwood Mezzanine to the
Partnership on September 26, 1996.
Competition
APART and the Partnership may compete for acquisition opportunities with
entities which have substantially greater financial resources than APART and the
Partnership. These entities may generally be able to accept more risk than APART
and the partnership can prudently manage. Competition may generally reduce the
number of suitable investment opportunities and increase the bargaining power of
property owners seeking to sell. Further, APART believes that it may face
competition for acquisition opportunities from entities organized for purposes
substantially similar to the objectives of APART.
Qualification as a Real Estate Investment Trust
APART presently meets the qualification requirements of a real estate
investment trust under Sections 856-58 of the Internal Revenue Code of 1986, as
amended (the "Code"). If, as APART contemplates, such qualification continues,
APART will not be taxed on its real estate investment trust taxable income, at
least 95% of which will be distributed to its shareholders.
Unfunded Commitments
APART had no unfunded commitments as of December 31, 1996.
Employees
As of December 31, 1996 APART had no employees.
ITEM 2. PROPERTIES
None
ITEM 3. LEGAL PROCEEDINGS
In May, 1993, APART filed a proof of claim in the amount of $75,000 in
connection with the bankruptcy proceedings of one of its former borrowers.
During 1995, APART received $3,150 as payment towards this claim. During the
third quarter of 1996, APART received a second distribution of $9,750 as an
additional payment towards this claim. APART is not a party to any other pending
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR APART'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
APART had approximately 1,860 Class A Shareholders as of March
24, 1997. The Class A Shares are traded on the American Stock Exchange under the
symbol APT. All of the Class B Shares are held by SAHI and SAHI, Inc. and there
is no established public trading market for these shares.
The following table sets forth the high and low sales prices of APART's
Class A Shares for the quarters ended 1996 and 1995.
Quarter ended: High Low
- -------------- ---- ---
December 31, 1996 $ 2 1/8 $ 1 3/8
September 30, 1996 $ 1 7/8 $ 7/8
June 30, 1996 $ 1 1/8 $ 9/16
March 31, 1996 $ 5/8 $ 1/2
December 31, 1995 $ 5/8 $ 1/2
September 30, 1995 $ 5/8 $ 1/2
June 30, 1995 $ 11/16 $ 1/2
March 31, 1995 $ 3/4 $ 7/16
On March 24, 1997, the last sale price of the Class A Shares as reported by
the American Stock Exchange was $2.50.
APART has not declared any cash dividends on the Class A or Class B Shares
during the past two fiscal years. No assurances can be made as to the
declaration of, or if declared, the amount of, future distributions since such
distributions are subject to APART's cash flow from operations, earnings,
financial condition, capital requirements and such other factors as the Board of
Trustees deems relevant. The principal factor in the determination of the
amounts of distributions is the requirement of the Internal Revenue Code of
1986, as amended, that a real estate investment trust must distribute at least
95% of its taxable income.
On January 22, 1997, APART issued 5,000,000 Class A Shares to Starwood
Mezzanine upon the exercise of the Class A Warrant at an exercise price of $1.00
per share. On the same date, APART issued 2,500,000 Class B Shares to SAHI Inc.
upon exercise of the Class B Warrant at an exercise price of $.01 per share. The
Class A Shares and Class B Shares were issued by APART pursuant to an exemption
from registration under the Securities Act of 1933 provided by Section 4(2)
thereof.
The following persons/entities filed one late Form 3 in connection with the
transactions approved at the Annual Shareholder Meeting held on September 26,
1996 (which transactions are described in Part 1 above): Starwood Mezzanine
Investors, L.P. (10% Owner), Starwood Mezzanine Holdings, L.P. (10% Owner)
Starwood Capital Group I, L.P. (10% Owner), BSS Capital Partners, L.P. (10%
Owner), Sternlicht Holdings II, Inc. (10%Owner), Madison F. Grose (Trustee), Jay
Sugarman (Trustee, Officer), and Eugene A. Gorab (former Trustee). The following
persons/entities filed one late Form 4 in connection with the transactions
approved at the Annual Shareholder Meeting held on September 26, 1996 (which
transactions are described in Part 1 above): SAHI Partners (10% Owner), SAHI,
Inc. (10% Owner), SWL Acquisition Partners, L.P. (10% Owner), SWL Mortgage
Investors, Inc. (10% Owner), and Barry S. Sternlicht (10% Owner, Trustee,
Officer). Jerome C. Silvey filed one late Form 3 in connection with his
appointment, on October 15, 1996, as the Chief Financial Officer of APART.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands)
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue (1) $488 $148 $296 $2,185 $5,237
Gain from sale of mortgages (2) 0 0 0 2,545 0
Costs and expenses (3) 911 283 626 982 5,783
Minority Interest (154) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ($577) ($135) ($330) $3,748 ($546)
-------- -------- -------- -------- --------
Net income (loss)
- -per Class A Share (4) $(0.22) $(0.05) $(0.13) $1.45 $(0.21)
-------- -------- -------- -------- --------
Cash distributions
- -per Class A share (5) -- -- -- $15.01 $2.00
-------- -------- -------- -------- --------
Total assets $5,674 $2,194 $2,372 $2,680 $39,909
-------- -------- -------- -------- --------
Shareholders' equity $1,578 $2,155 $2,290 $2,519 $37,410
-------- -------- -------- -------- --------
</TABLE>
(1) Revenue, primarily interest income, increased in 1996 compared to 1995 and
1994 due to the interest received in connection to the mortgage
certificates of the Warwick Hotel. Revenue declined in 1995 and 1994 as
compared to 1993 and prior years due to the sale of APART's investment
portfolio in 1993.
(2) During 1993, APART sold its entire investment portfolio consisting of four
mortgage loans resulting in proceeds in excess of carrying values and
obligations of $2,545,000.
(3) Costs and expenses in 1996 increased to three times the amount of 1995
expenses due to legal and professional fees associated with the preparation
of the proxy and other material for APART's 1996 shareholder meeting, the
formation of the Partnership, and interest expense of $272,000 relating to
certain investment transactions. Costs and expenses in 1992 include a
write-down for in-substance foreclosed property of $5,000,000.
(4) The net income (loss) per Class A Share was based upon 2,550,000 weighted
average shares outstanding during each of five years ended December 31,
1996, after deduction of the 1% Class B Shares' interest.
(5) Includes a $14.50 per Class A Share distribution paid in December 1993 as a
result of selling APART's investment portfolio.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
APART's primary source of cash during 1994 through 1996 was from income
earned on its investments and cash and cash equivalent investments. APART's
primary source of cash in years prior to 1994 was interest or principal payments
received on participating mortgages. All of these loans were prepaid or sold in
1993 and certain of, the borrowers filed for protection under Chapter 11 of the
federal bankruptcy laws. In connection with these bankruptcy filings, APART
established the APART Contingent Claim Trust (the "Contingent Claim Trust"). The
Contingent Claim Trust was established to provide for any contingent claims
arising from the operations of APART or any liability under APART's
indemnification agreements for its Trustees. The Contingent Claim Trust
represented 95% of the assets of APART as of December 31, 1995.
The Contingent Claim Trust terminated on August 12, 1996 when its sole
trustee determined that there were no pending or threatened claims existing.
APART retained no other assets and its shareholder equity approximated the
amount of remaining cash.
During 1994 and 1995, APART's only investment activities were purchases of
government obligations. Consequently, its operations during 1994 and 1995
consisted solely of interest income from these obligations and the payment of
administrative expenses.
On March 15, 1994, APART announced that it had entered into an agreement
with SAHI and SAHI, Inc. for the sale of the Warrants for the right to purchase
five million of APART's Class A Shares at a price of $1 per share and 2,500,000
Class B Shares for a price of $0.01 per share. SAHI and SAHI, Inc. purchased the
Warrants for $101,000, which amount was applied against the purchase price for
the first Class A and Class B Shares purchased pursuant to the Warrant. On March
28, 1996, the Class A Warrants were assigned to Starwood Mezzanine.
On September 26, 1996, APART became sole general partner of the Partnership
by contributing $400,000 in cash, in exchange for a 8.05% interest in the
Partnership evidenced by 400,000 OPU. Starwood Mezzanine became the 91.95%
limited partner by contributing to the Partnership its entire interest in the
participation certificates in the Warwick Hotel mortgage note valued by APART at
approximately $4.6 million at the time of contribution. Starwood Mezzanine's
interest in the Partnership is evidenced by 4,568,944 OPU, which are convertible
into Class A Shares pursuant to an exchange rights agreement. In addition,
Starwood Mezzanine has the right to require APART to register for public sale,
any or all of the Class A Shares in the Partnership issued to it upon the
exercise of the Class A Warrant or upon exchange of the OPU issued to Starwood
Mezzanine. These OPU are convertible into Class A Shares on a one-for-one basis,
subject to certain restrictions.
On January 22, 1997, Starwood Mezzanine exercised its rights under the
Class A Warrant to acquire 5,000,000 Class A Shares. In addition, SAHI, Inc.
exercised its rights under the Class B Warrant to acquire 2,500,000 Class B
Shares. As a result of the exercise of the Warrants, APART's capital increased
by $5,025,000, and funds from this capitalization are available to be invested
in accordance with the APART business plan.
Although APART did not pursue its stated investment policy in 1994 and
1995, the investment policy of APART prior to September 26, 1996 was
predominantly to make mortgage loans to certain entities affiliated with APART's
former advisor. On September 26, 1996, the shareholders approved a Restated
Declaration of Trust which significantly changed the investment policy of APART.
APART currently intends to focus its acquisition efforts on assets which exhibit
one or more of the following characteristics: (a) assets owned by distressed
sellers; (b) assets priced below or having a deemed value for collateralization
purposes that is less than reproduction cost; (c) equity interest in, and/or
debt interests secured by, assets located in markets or submarkets experiencing
population or job growth, and which are located near historically stable
employment generator bases, such as government, university and medical centers;
(d) interests which are publicly traded, including other REIT equities, limited
partnership interests and debt interests.
9
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Fiscal year 1996 compared to 1995
Total revenues for 1996 increased 230% as a result of leveraged
acquisitions of Federal Home Loan Mortgage Corporation pass-through certificates
("Government Securities"), the formation of the Partnership as described above,
and the interest generated by the investment of the Partnership. The Government
Securities were acquired during 1996 utilizing the $2 million previously held by
the Contingent Claim Trust in order to create qualified income for the Trust to
maintain its REIT status. In conjunction with investing in the Government
Securities, APART incurred significant borrowings and interest expense in order
to generate REIT qualified income.
During the year ended December 31, 1996, APART received approximately
$9,750 as a result of a $75,000 claim filed in connection with the bankruptcy of
a former borrower relating to additional interest owed to APART on one of its
loans during 1993. The $9,750 of income received during 1996 represents a second
payment towards this claim.
APART's general and administrative expense increased 126% during 1996 due
primarily to an increase in legal and professional fees. APART incurred these
fees due to the preparation of a proxy statement and related material for
APART's shareholder meeting, as well as, the formation of the Partnership.
Total assets increased to $5.6 million in 1996 from $2.2 million in 1995
primarily as a result of the contribution to the Partnership of the Warwick
Hotel mortgage participation certificates.
Fiscal year 1995 compared to 1994
APART's primary source of income during 1995 was income earned on its cash
and cash equivalents and investments in Government Securities. Investments in
Government Securities were made during 1995 utilizing the $2 million held by the
Contingent Claim Trust, in order to create qualified income for APART.
Interest income from investments decreased significantly from 1994 to 1995
and, correspondingly, interest expense decreased when compared to the same
period as a result of the significant borrowings incurred in the fourth quarter
of 1994 to generate sufficient REIT qualified income. During 1995 APART did not
borrow any funds.
During the year ended December 31, 1995, APART received interest of $3,150
as a result of the $75,000 claim filed in connection with the bankruptcy of a
former borrower.
APART's general and administrative expense decreased significantly during
1995 due primarily to a decrease in legal costs. During 1994, APART incurred
greater legal fees in conjunction with the preparation of a proxy statement and
related material for a Trust shareholder meeting.
Liquidity and Capital Resources
APART's primary source of cash is from interest earned on the mortgage note
receivable, investments and cash and cash equivalents. APART's investments and
cash of approximately $1.9 million as of December 31, 1996 were held by APART
and the Partnership. On December 31, 1995 approximately $2 million of
investments and cash were all held by the Contingent Claim Trust for the benefit
of APART. Effective August 12, 1996 the Contingent Claim Trust terminated and
all assets of the Contingent Claim Trust in the amount of approximately $1.9
million, were returned to APART.
During 1996 and 1994, in order to maintain APART's REIT status, APART
borrowed approximately $18.9 and $28 million, respectively, and invested the
proceeds from such borrowings along with other cash in Government Securities.
Such Governments Securities were pledged as collateral on the borrowing. APART
did not enter into a similar transaction in 1995, although APART did invest in
Government Securities in order to maintain its REIT status.
10
<PAGE>
APART paid no dividends during 1994, 1995, or 1996. The amount and timing
of any future cash dividends, if any, is impossible to predict at this time.
Shareholder's equity approximates the amount of remaining cash, investments, and
other assets. Based upon APART's cash and cash equivalent balance at December
31, 1996, management believes it has sufficient cash to operate as a going
concern through the 1997 fiscal year.
On January 22, 1997, Starwood Mezzanine and SAHI, Inc exercised the
Warrants and APART received a gross amount of $5,025,000. This cash is available
to be invested in accordance with the APART business plan.
APART has historically operated as a REIT and maintained its qualification
as a REIT under the Code. The Trust intends to operate so as to qualify as a
REIT under the Code.
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
ANGELES PARTICIPATING MORTGAGE TRUST
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 13
Financial Statements -- The financial statements of APART required to be
included in Item 8 are listed below:
Balance Sheets at December 31, 1996 and 1995 14
Statements of Operations for each of the three years in the period ended
December 31, 1996 15
Statements of Changes in Shareholders' Equity for each of the three years
in the period ended December 31, 1996 16
Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 17
Notes to Consolidated Financial Statements 18
</TABLE>
12
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders of Angeles Participating Mortgage Trust:
We have audited the accompanying consolidated balance sheets of Angeles
Participating Mortgage Trust ("APART") as of December 31, 1996 and 1995 and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of APART's management.
Our responsibility is to express an opinion on the financial statement schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits 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, such consolidated financial statements present fairly, in all
material respects, the financial position of APART as of December 31, 1996 and
1995 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, NY
March 15, 1997
13
<PAGE>
Angeles Participating Mortgage Trust
Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------------------------
Notes 1996 1995
----- ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents 2 $ 1,888,000 $ 863,000
Investments Mortgage note receivable 3 -- 1,196,000
Accrued interest 4 3,707,000 --
Other receivables 56,000 --
Other assets 5 8,000 10,000
15,000 125,000
------------ ------------
Total Assets $ 5,674,000 $ 2,194,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 37,000 $ 4,000
Accrued expenses 142,000 35,000
------------ ------------
Total liabilities 179,000 39,000
------------ ------------
Minority Interest 4 3,917,000 --
Shareholders' equity:
Clas A Shares (2,550,000 shares issued and outstanding,
$1.00 par value, unlimited shares authorized) 5 2,550,000 2,550,000
Class B Shares (1,275,000 shares issued and outstanding,
$.01 par value, unlimited shares authorized) 5 13,000 13,000
Additional paid in capital 42,329,000 42,329,000
Accumulated undistributed net realized gain from sale of
mortgages 2,545,000 2,545,000
Accumulated distributions in excess of cumulative net
income other than gain from sale of mortgages (45,859,000) (45,282,000)
------------ ------------
Total shareholders' equity 1,578,000 2,155,000
------------ ------------
Total liabilities and shareholders' equity
$ 5,674,000 $ 2,194,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
Angeles Participating Mortgage Trust
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------
Notes 1996 1995 1994
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Interest income from mortgage notes 4 $ 166,000 $ -- $ --
Interest income from investments 3 312,000 145,000 --
Other income 10,000 3,000 296,000
----------- ----------- -----------
Total revenue 488,000 148,000 296,000
----------- ----------- -----------
Costs and expenses:
Interest expense 272,000 -- 270,000
General and administrative 639,000 283,000 356,000
----------- ----------- -----------
Total costs and expenses 911,000 283,000 626,000
----------- ----------- -----------
Net loss before minority interest (423,000) (135,000) (330,000)
Minority Interest 4 (154,000) -- --
----------- ----------- -----------
Net loss $ (577,000) $ (135,000) $ (330,000)
=========== =========== ===========
Net loss per Class A Share $ (0.22) $ (0.05) $ (0.13)
Cash distributions per Class A Share $ -- $ -- $ --
=========== =========== ===========
Weighted average number of Class A
Shares outstanding 2,550,000 2,550,000 2,550,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
Angeles Participating Mortgage Trust
Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Distributions
Additional in Excess of
Class A Class B Paid-In Cumulative
Shares Shares Capital Net Income (1) Total
------------ ------------ ------------ ------------ -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ 2,550,000 $ 13,000 $ 42,228,000 ($42,272,000) $ 2,519,000
Net loss -- -- -- ($ 330,000) ($ 330,000)
Proceeds from sale of warrants
(Note 5) -- -- 101,000 -- $ 101,000
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 2,550,000 13,000 42,329,000 ($42,602,000) $ 2,290,000
Net loss -- -- -- ($ 135,000) ($ 135,000)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 2,550,000 13,000 42,329,000 ($42,737,000) $ 2,155,000
Net loss -- -- -- ($ 577,000) ($ 577,000)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 $ 2,550,000 $ 13,000 $ 42,329,000 ($43,314,000) $1,578,000
============ ============ ============ ============ ============
</TABLE>
(1) Balances as of December 31, 1994, 1995 and 1996 include accumulated
undistributed net realized gain from sale of mortgages of $2,545,000.
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
Angeles Participating Mortgage Trust
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (577,000) $ (135,000) $ (330,000)
Adjustments to reconcile net loss to cash flows
from operating activities:
Minority Interest 154,000 -- --
Decrease (increase) in other receivables (54,000) 6,000 (16,000)
Decrease (increase) in other assets 110,000 (12,000) 28,000
Increase (decrease) in accounts payable and accrued
expenses 140,000 (43,000) (79,000)
------------ ------------ ------------
Cash flows used by operating activities (227,000) (184,000) (397,000)
------------ ------------ ------------
Cash flows from investing activities:
Investments in securities (19,811,000) (165,000) (30,914,000)
Principal collections of investment securities 1,307,000 340,000 --
Sale of investment securities 19,700,000 -- 29,543,000
Principal collections from mortgage notes 56,000 -- --
------------ ------------ ------------
Cash flows provided (used) by investing activities 1,252,000 175,000 (1,371,000)
------------ ------------ ------------
Cash flows from financing activities:
Repayments related to investment security purchases (18,886,000) -- (27,939,000)
Borrowings related to investment security purchases 18,886,000 -- 27,939,000
Proceeds from sale of warrants -- -- 101,000
------------ ------------ ------------
Cash flows provided by financing activities -- -- 101,000
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,025,000 (9,000) (1,667,000)
Cash and cash equivalents at beginning of period 863,000 872,000 2,539,000
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,888,000 $ 863,000 $ 872,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 272,000 $ -- $ 270,000
============ ============ ============
Supplemental disclosure of non cash financing activity:
Contribution of Note Receivable $ 3,763,000 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
Angeles Participating Mortgage Trust
Notes to Consolidated Financial Statements
Note 1 - Organization
Angeles Participating Mortgage Trust ("APART") was formed as a REIT under
the Internal Revenue Code for the purpose of making and acquiring various types
of mortgage and other loans
The investment policy of APART before the adoption of the Restated
Declaration of Trust was predominantly to make mortgage loans to entities
affiliated with APART's former advisor. On September 26, 1996, the shareholders
approved a Restated Declaration of Trust which significantly changed the
investment policy of APART. APART currently intends to focus its acquisition
efforts on assets which exhibit one or more of the following characteristics:
(a) assets owned by distressed sellers; (b) assets priced below or having a
deemed value for collateralization purposes that is less than reproduction cost;
(c) equity interest in, and/or debt interests secured by, assets located in
markets or submarkets experiencing population or job growth, and which are
located near historically stable employment generator bases, such as government,
university and medical centers; (d) interests which are publicly traded,
including other REIT equities, limited partnership interests and debt interests.
The investment policy is subject to restrictions which require the approval of
certain shareholders as to certain types of investments.
In November 1993, APART was notified that SAHI, Inc. had acquired all of
APART's 1,275,000 outstanding Class B Shares. Subsequent to the acquisition of
the Class B Shares, SAHI Partners, ("SAHI") purchased the Class B Shares from
SAHI, Inc. and accumulated 244,100 Class A Shares or 9.57% of the total
outstanding Class A Shares of APART as of December 1996.
On September 26, 1996, APART became the sole general partner of the APMT
Limited Partnership ("the Partnership")(see Notes 4 and 5). Initially, APART
will not be required to operate exclusively through the Partnership and, thus,
will not have any obligation to contribute additional cash. However, due to the
exercise of the warrants (as discussed in Note 5), the Board of Trustees has the
right to cause APART to contribute substantially all of APART's uncontributed
assets to the Partnership for additional interests in the Partnership. Following
any such exercise APART must agree to conduct all of its real estate-related
investment activities exclusively through the Partnership.
Note 2 - Summary of significant accounting policies
Basis of Accounting - The accompanying consolidated financial statements of
APART include the accounts of APART and the Partnership. These financial
statements were prepared in accordance with GAAP and, therefore, revenue is
recorded as earned and costs and expenses are recorded as incurred. The
consolidated statements reflect eliminated intercompany balances. Certain prior
years amounts have been reclassified to conform to current year classifications.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash held in
bank or invested in money market funds with original maturity terms of less than
90 days. Of the cash and cash equivalents balance at December 31, 1996,
$1,888,000 is held by APART while on December 31, 1995, the entire cash balance
of $863,000 was held by the APART Contingent Claim Trust ("Contingent Claim
Trust") for the benefit of APART. Such Contingent Claim Trust was established to
provide for any contingent claims arising from the operations of APART or any
liability under APART's indemnification agreements for its Trustees. The
Contingent Claim Trust was terminated on August 12, 1996 based on the
determination by its trustee that no contingent claims exist. All assets,
including cash and cash equivalents, were returned to APART after the
termination of the Contingent Claim Trust.
The sole beneficiary of the Contingent Claim
Trust was APART and the operations of the Contingent Claim
18
<PAGE>
Trust were under the control of the chief executive officer of APART. The
Contingent Claim Trust has been accounted for by APART on the consolidated
method of accounting, since its inception in 1993, as it was deemed more
appropriate to include the assets and operations of the Contingent Claim Trust
with those of APART. As the Contingent Claim Trust is a single asset trust, the
differences had it not been accounted for under the consolidated method are
minor. The net current assets, the net current liabilities and shareholders'
equity would have been identical. The only difference within the balance sheet
is the caption of the asset which in consolidation is shown Investments versus a
receivable from the Contingent Claim Trust. The only difference in the statement
of operations is the caption relating to the interest earned on the investments
versus reporting such amount as other income.
Income taxes - APART has elected to be taxed as a Real Estate Investment
Trust ("REIT") under the Internal Revenue Code for each taxable year of
operations. As a qualified REIT, APART is subject to income taxation at
corporate rates on its REIT taxable income. However, APART is allowed a
deduction for the amount of dividends paid to its shareholders, thereby
subjecting the distributed net income of APART to taxation at the shareholder
level only. For income tax purposes, APART reports revenue and expenses on the
accrual method. No income tax provision has been shown in the accompanying
statement of operations since, in the opinion of management, APART qualifies as
a REIT under Sections 856 through 860 of the Internal Revenue Code.
Net income (loss) per Class A Share - The net income per Class A Share was
based on 2,550,000 weighted average shares outstanding during each of the three
years ending December 31, 1996, after deduction of the 1% Class B Shares'
interest (see Note 5).
Fair Market Value - The following disclosure of estimated fair market value
was determined by available market information and appropriate valuation
methodologies. However, considerable judgment is necessary to interpret market
data and develop the related estimates of fair value. Accordingly, the estimate
presented herein is not necessarily indicative of the amounts that could be
realized upon disposition of the financial instrument. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
At December 31, 1996, APART believes the mortgage note receivable and
related interest received of $3.7 million (carrying value) had a fair value of
approximately $4.5 million.
Note 3 - Investments
APART entered into a series of investments in 1996, 1995, and 1994 to
preserve its REIT status. In 1994 APART purchased and subsequently sold $30
million in Federal Home Loan Mortgage Corporation pass-through certificates
("Government Securities") which resulted in interest income, before financing
costs, of $226,000 and a $133,000 trading loss which is included with interest
expense. APART held two investments in Government Securities in 1995 that had an
8.5% coupon and matured on January 1, 1996 and June 1, 1996. In 1996, APART sold
and subsequently purchased $20 million in Government Securities which resulted
in interest income, before financing costs, of approximately $251,000 and a
$91,000 trading loss which is included with interest expense.
Note 4 - Mortgage Note Receivable
On September 26, 1996, APART became the sole general partner of the
Partnership by contributing $400,000 in cash, in exchange for 400,000 Operating
Partnership Units ("OPU")(a 8.05% interest) in the Partnership. Starwood
Mezzanine Investors, L.P. ("Starwood Mezzanine") contributed to the Partnership
its entire interest in certain mortgage participation certificates valued by
APART at approximately $4.6 million as of September 30, 1996, in exchange for
4,568,944 OPU (a 91.95% interest) in the Partnership. These OPU are convertible
into registered Class A Shares of APART on a one-for-one basis, subject to
certain restrictions.
APART and the Partnership are considered to be entities under common
control and the consolidated operations of APART and the Partnership have been
accounted in accordance with generally accepted accounting principles governing
such entities. Consequently, the mortgage note contributed by Starwood Mezzanine
into the Partnership has been reflected in these financial statements at its
predecessor basis of $3.76 million.
19
<PAGE>
The mortgage participation certificates comprise the first mortgage note on
the Warwick Hotel, a 20-story hotel and apartment complex located in
Philadelphia, PA. The mortgage has a face value of $4.9 million and requires
monthly payments of approximately $71,000, representing principal and interest
at a rate of 9% per annum. The note was originally issued with a face amount of
$8.5 million on December 1, 1979 with the final payment due November 30, 2004.
Starwood Mezzanine acquired this note at a discount from face value in February
1995 and has been accounting for it under the effective interest method.
Summary financial information for the borrower is as follows:
For the year
ended December 31, 1996
------------------------
Total Assets $9,763,874
==========
Total Liabilities 8,726,864
Partners' Capital 1,037,010
----------
Total liabilities and partners' capital $9,763,874
==========
Revenue $7,824,204
Expenses 6,926,447
----------
Net Income $ 897,757
==========
Note 5 - Shareholders' Equity
The shares of APART are of two classes: Class A Shares (par value $1.00 per
share) and Class B Shares (par value $.01 per share). There is no limit on the
number of either Class A or Class B Shares which APART is authorized to issue.
Class B Shares in an amount equal to one-half of the number of Class A Shares
outstanding have been issued by APART. Class A and Class B Shares are each
entitled to one vote per share with respect to the election of Trustees and
other matters. The Class B Shares are convertible at the option of the Class B
Shareholder into Class A Shares on the basis of 49 Class B Shares for one Class
A Share; provided that no more than 20% of the original amount of outstanding
Class B Shares (on a cumulative basis) is so convertible in any year. All
distributions of Net Cash will be distributed 99% to the Class A Shareholders
and 1% to the Class B Shareholders.
On March 15, 1994, APART announced that it had entered into an agreement
with SAHI and SAHI, Inc., for the sale of a Warrant for the right to purchase
five million shares of APART's Class A Shares at a price of $1 per share and
2,500,000 shares of Class B shares at a price of $.01 per share. SAHI and SAHI,
Inc. purchased the Warrant for $101,000, which amount will be applied against
the purchase price for the first Class A and Class B Shares purchased pursuant
to the Warrant. On March 28, 1996, the Class A Warrants were assigned to
Starwood Mezzanine. Upon exercise of the entire Class A and Class B Warrants,
SAHI, SAHI, Inc., and Starwood Mezzanine would jointly own 70% of the
outstanding Class A Shares and, with the voting interest of the Class B Shares,
would control 80% of the voting interest of APART. If these Warrants are
exercised in their entirety, APART would increase its capital by $5,025,000, and
funds
20
<PAGE>
from such capitalization would be utilized to acquire additional investments for
APART based upon the defined business plan approved by holders of a majority of
the Class A and Class B Shares, as described below.
On September 26, 1996, APART became sole general partner of the Partnership
by contributing $400,000 in cash, in exchange for a 8.05% interest in the
Partnership and 400,000 OPU. Starwood Mezzanine became the 91.95% limited
partner by contributing to the Partnership its entire interest in the
participation certificates in the Warwick Hotel mortgage note valued by APART at
approximately $4.6 million as of September 30, 1996. Starwood Mezzanine's
interest in the Partnership is evidenced by 4,568,944 OPU, which are convertible
into Class A Shares pursuant an exchange rights agreement. In addition, Starwood
Mezzanine has the right to require APART to register for public sale, any or all
of the Class A Shares in the Partnership issued to it upon the exercise of the
Class A Warrant or upon exchange of the OPU issued to Starwood Mezzanine. These
OPU are convertible into registered Class A shares of APART on a one-for-one
basis, subject to certain restrictions.
On January 22, 1997, Starwood Mezzanine exercised its rights under the
Class A Warrant to acquire 5,000,000 Class A Shares. After its exercise of the
Class A Warrant, Starwood Mezzanine beneficially owned 5,000,000 shares of Class
A Shares and 4,568,944 OPU. In addition, SAHI, Inc. exercised its rights under
the Class B Warrant to acquire 2,500,000 Class B Shares. After its exercise of
the Class B Warrant, SAHI Inc. beneficially owned 6,059,471 Shares of Class B
Shares and 244,100 shares of Class A Shares. Each share of Class A Shares and
Class B Shares is entitled to one vote per share. Upon exercise of the entire
Class A and Class B Warrants, SAHI, SAHI, Inc., and Starwood Mezzanine jointly
own 70% of the outstanding Class A Shares and, with the voting interest of the
Class B Shares, control 80% of the voting interest of APART. APART increased its
capital by $5,025,000, and funds from this capitalization will be utilized to
acquire additional investments for APART based upon the defined business plan
approved by holders of a majority of the Class A and Class B Shares.
Note 6 - Incentive Plan
On September 26, 1996, the shareholders approved an incentive plan for
Trustees and an incentive plan for employees. The Trustee plan provides for the
issuance of up to 50,000 stock options and the employee plan provides for the
grant of up to 377,500 shares in the form of stock options, share appreciation
rights, restricted shares, and deferred shares. On September 26, 1996, 2,000
stock options were granted under the plan as of December 31, 1996. The options
are fully vested and have an exercise price of $1.38 per share.
21
<PAGE>
Note 7 - Quarterly Financial Information (Unaudited)
The following table sets forth the selected quarterly financial data for
APART (in thousands except for per share amounts).
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------
1996 12/31/96 9/30/96 6/30/96 3/31/96
- ---- -------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $424 $35 $21 $8
Net loss ($75) ($246) ($59) ($197)
Net loss per Class A share ($0.02) ($0.10) ($0.02) ($0.08)
Weighted average Class A Shares outstanding 2,550 2,550 2,550 2,550
<CAPTION>
1995 12/31/95 9/30/95 6/30/95 3/31/95
- ---- -------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $38 $41 $36 $33
Net loss ($38) ($8) ($44) ($45)
Net loss per Class A share ($0.01) $0.00 ($0.02) ($0.02)
Weighted average Class A Shares outstanding 2,550 2,550 2,550 2,550
</TABLE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
22
<PAGE>
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS
The current executive officers and Trustees of APART are listed below,
together with their ages and all Trust positions held by them:
Barry S. Sternlicht 36 Trustee, Chairman, and Chief Executive Officer
Jay Sugarman 34 Trustee, President
Ronald J. Consiglio 53 Trustee
Jack E. McDonald (1) 55 Trustee
J. D'Arcy Chisholm (1) 64 Trustee
Madison F. Grose 43 Trustee
Jonathan Eilian 29 Trustee
Jerome C. Silvey 39 Chief Financial Officer
(1) Member of Audit and Compensation Committee
Mr. Barry S. Sternlicht became a Trustee of APART in March 1994 and was
elected Chairman and Chief Executive Officer in September 1996. He is founder
and General Manager of Starwood Capital Group, L.L.C. (together with its
predecessor entities "Starwood Capital") and has been the President and Chief
Executive Officer of Starwood Capital Group, L.L.C. and its predecessor entities
since its formation in 1991. Prior to forming Starwood Capital, he was Senior
Vice President of JMB Realty Corporation ("JMB"), a real estate investment firm.
Mr. Sternlicht serves on the Board of Trustees of Equity Residential Properties
Trust. In addition, Mr. Sternlicht is currently the Chief Executive Officer and
Chairman of the Board of Trustees of Starwood Lodging Trust, and a director of
Starwood Lodging Corporation, Westin Hotels & Resorts and U.S. Franchise
Systems. Mr. Sternlicht is on the Board of Governors of NAREIT and is a member
of the Urban Land Institute and of the National Multi- Family Housing Council.
Mr. Sternlicht is a member of the Board of Directors of the Council for
Christian and Jewish Understanding, and is on the Board of Directors of Junior
Achievement for Fairfield County, Connecticut. Mr. Sternlicht received a B.A.
degree from Brown University, where he was elected to Phi Beta Kappa, and an MBA
with distinction and honors from Harvard Business School in 1986.
Mr. Jay Sugarman became President and Trustee of APART in September
1996. Mr. Sugarman is a Senior Managing Director of Starwood Capital and has
been President of Starwood Mezzanine since November 1994. From 1990 through
1993, Mr. Sugarman managed a diversified, privately owned, investment fund. Mr.
Sugarman is a director of Westinghouse Communities, Inc., a residential
developer in South Florida. Mr. Sugarman received a B.A. degree, summa cum
laude, from Princeton University and is a graduate of Harvard Business School,
where he was a Baker Scholar.
Mr. Ronald J. Consiglio has been a Trustee of APART since April 1988 and
served as the Chairman, Chief Executive Officer and President of APART from May
1993 to September 1996. In September 1996, Mr. Consiglio was elected as
Secretary of APART. From January 1993 through June 1993, Mr. Consiglio served as
Executive Vice President and Chief Administrative Officer of Reynolds Kendrick
Stratton, Inc., a Los Angeles based securities brokerage firm. From 1990 through
1992, Mr. Consiglio was the Senior Vice President and Chief Financial Officer of
Cantor Fitzgerald & Co., Inc. where he was responsible for operations,
administration and finance. From 1988 through 1990 he was the Senior Vice
President of the investment banking firm of Wedbush Morgan Securities, Inc., and
from 1984 through 1988 he was Executive Vice President of a predecessor firm,
Morgan, Olmstead, Kennedy & Gardner Incorporated. He is a certified public
accountant. Mr. Consiglio is also an executive officer, Trustee and Chairman of
Angeles Mortgage Investment Trust ("AMIT") and is a business consultant.
Mr. Jack E. McDonald has been a Trustee of APART since April 1988 and
served as Chief Financial Officer from May 1993 to December 1995. Since December
1995, Mr. McDonald has been chairman of the Audit and Compensation
23
<PAGE>
Committee. He has been Chief Executive Officer of JEM Diversified Management
Company, Inc., a Los Angeles-based business consulting firm since 1989. Mr.
McDonald is a certified public accountant, certified financial planner and tax
and business consultant and received his BS in Accounting from Cal Poly
University - Pomona in 1969.
Mr. J. D'Arcy Chisholm has been a Trustee of APART since September 1989 and
is a member of the Audit and Compensation Committee. He has been a consultant to
real estate, business and educational entities. From 1980 until September 1989,
Mr. Chisholm was associated with the Institute for Pastoral and Social Ministry
at the University of Notre Dame, initially as a volunteer, then as an assistant
director from 1982 until 1986 and finally as associate director from 1986 until
1989. He holds a BA degree from the University of Notre Dame and is a graduate
of the Executive Program at UCLA's Graduate School of Business. Mr. Chisholm
also serves as a Trustee of AMIT.
Mr. Madison F. Grose was elected as a Trustee of APART in September
1996. Mr. Grose is a Managing Director of Starwood Capital and has been its
General Counsel since July 1992. Mr. Grose currently is a member of the Board of
Trustees of Starwood Lodging Trust. Mr. Grose is a graduate of Stanford
University and received his law degree from UCLA in 1978. Prior to joining
Starwood, Mr. Grose was one of eight original partners of the Los Angeles based
law firm of Messrs. Pircher, Nichols & Meeks and established and managed its
office in New York, New York from April 1985 through June 1992.
Mr. Jonathan D. Eilian became a Trustee of APART in March 1997. Mr.
Eilian is a Managing Director of Starwood Capital and has been a senior
executive since its formation in 1991. Prior to this, Mr. Eilian worked for JMB
and for Drexel Burnham Lambert. He has been a Director of Starwood Lodging
Corporation since August 1995. Mr. Eilian attended the University of
Pennsylvania and graduated, summs cum laude, with a B.A. in Economics and earned
his MBA from the Wharton Graduate School of Business.
Mr. Jerome C. Silvey was elected as Chief Financial Officer of APART in
September 1996. Mr. Silvey has been a Senior Vice President and the Chief
Financial Officer of Starwood Capital since August 1993. After 13 years at Price
Waterhouse, Mr. Silvey joined Starwood Capital in 1993 and has overall
responsibilities for Starwood Capital's administration, MIS, and finance. Mr.
Silvey is a graduate of Colgate University and received his Masters of Business
Administration from Rutgers Graduate School of Management in 1980. He is a
certified public accountant and a director of the Stamford Museum.
Information Regarding the Board of Trustees and Its Committees
Compensation Committee Interlocks and Insider Participation. The Board
of Trustees has delegated a portion of its authority to a two-member Audit and
Compensation Committee comprising independent Trustees. This Committee makes
recommendations to the Board of Trustees concerning the selection of APART's
independent auditors, oversees the financial reporting process, develops and
approves plans for the annual duties of APART, reviews fees charged by the
independent auditors, reviews the scope and results of the auditors' reports and
reviews and monitors the implementation of suggestions made by the independent
auditors. The Committee is kept apprised by management of APART's internal
control procedures. Additionally, the Committee reviews and monitors non-audit
services provided by the independent auditors and oversees, reviews and approves
the compensation of Trustees and officers of APART. The Audit and Compensation
Committee's responsibilities also include the administration of APART's
incentive plans. Messrs. Chisholm and McDonald serve on the Audit and
Compensation Committee with Mr. McDonald serving as Chairman. Mr. McDonald was
Chief Financial Officer of APART from May 1993 to December 1995.
Board of Trustees and Committee Meetings. During the fiscal year ending
December 31, 1996, APART's Board of Trustees held one regular meeting. There
were no meetings of the Committee during 1996.
24
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Remuneration of Trustees. Each Trustee who is not also an officer of APART,
receives a fee of $12,000 per year, which is paid quarterly. Each of the
unaffiliated Trustees also receives an additional fee of $1,000 for each meeting
of the Board of Trustees which he attends in person, $750 for each meeting of
the Board of Trustees which he attends telephonically, and $500 for each Audit
Committee meeting which he attends, either personally or telephonically.
Trustees are also reimbursed for any expenses incurred in attending such
meetings or incurred as a result of other work performed for APART.
In addition, all Trustees who are not officers or employees of APART are
eligible to participate in APART's 1996 Trustees' Share Incentive Plan (the
"Trustees' Plan"). Since Messrs. Grose and Gorab were part of the SAHI Group,
they have waived their rights to participate in the Trustees Plan. There are
currently two Trustees participating in the Trustee's Plan, Messrs. Chisholm and
McDonald. The Trustees' Plan permits the issuance of awards in the form of
non-qualified stock options only. Up to 50,000 shares of the Class A Shares are
reserved and available upon exercise of the options granted under the Trustees'
Plan and options to purchase 2,000 Class A Shares were granted on September 26,
1996 with an exercise price of $1.38 per share.
Each participant who was an eligible Trustee on September 26, 1996 (the
"Effective Date") received an option to purchase 1,000 Class A Shares. Each
participant who was not a Trustee on the Effective Date will receive options to
purchase Class A Shares, as follows: (i) on the date of joining the Board of
Trustees, an option to purchase 1,000 Class A Shares, and (ii) on each
anniversary date of joining the Board of Trustees, an option to purchase 1,000
Class A Shares. No participant may be granted options if such grant would cause
any one Trustee to possess in the aggregate unexercised options to purchase more
than 5,000 Class A Shares. Options granted under the Trustees' Plan will provide
for the purchase of Class A Shares at the Fair Market Value on the date the
option is granted. Fair Market Value means the closing price per share for each
Class A Share on the relevant date, as reported by the American Stock Exchange.
Options granted under the Trustees' Plan shall be exercisable at such times and
subject to such terms and conditions as set forth in the Trustees' Plan and as
provided in an option agreement.
Executive Officers' Compensation. During the year ended December 31, 1996,
Mr. Consiglio received a total of $30,000 for his services as President and
Chief Executive Officer of APART, and an additional $12,000 as compensation for
serving on the Board of Trustees. Mr. Sternlicht received no compensation for
his services as Chief Executive Officer of APART for the period of October 15 to
December 31, 1996. Mr. Sternlicht received $9,000 as compensation for serving on
the Board of Trustees for the period of January 1 through October 15, 1996 and
received no compensation thereafter. For this same time period, Messrs.
Sugarman, Grose, Gorab, and Silvey received no compensation for their services
as officers and/or members of the Board of Trustees.
SUMMARY COMPENSATION TABLE
Annual Trustee
Compensation Fees
Name and Principal Position Year Salary
--------------------------- ---- ------ --------
Ronald J. Consiglio, Chief Executive Officer 1996 $30,000 $12,000
1995 31,500 12,000
1994 41,850 12,000
Barry S. Sternlicht, Chief Executive Officer 1996 $0 $ 9,000
1995 0 12,000
1994 0 9,750
25
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 24, 1997 with
respect to any Class A Shares owned by Trustees and individual shareholders
known to be the beneficial owner of more than 5% of the issued and outstanding
voting securities of APART. There are no other Trustees or executive officers of
APART who beneficially own either Class A or Class B Shares.
<TABLE>
<CAPTION>
Amount and
Nature of Percent
Beneficial of
Title of Class Name of Beneficial Owner Ownership (1) Class
- -------------------- -------------------------------------------------------- ----------------- ----------
<S> <C> <C> <C>
Class A Shares Starwood Mezzanine Investors L.P., Three Pickwick Plaza, Suite 9,568,944 (2) 78.2%
250, Greenwich, CT 06830
Class A Shares Starwood Mezzanine Holdings, L.P., Three Pickwick Plaza, 9,568,944 (2) 78.2%
Suite 250, Greenwich, CT 06830
Class A Shares Starwood Capital Group I, L.P., Three Pickwick Plaza, Suite 9,568,944 (2) 78.2%
250, Greenwich, CT 06830
Class A Shares BSS Capital Partners, L.P., Three Pickwick Plaza, Suite 250, 9,568,944 (2) 78.2%
Greenwich, CT 06830
Class A Shares Sternlicht Holdings II, Inc., Three Pickwick Plaza, Suite 250, 9,568,944 (2) 78.2%
Greenwich, CT 06830
Class A Shares J. D'Arcy Chisholm, 340 N. Westlake Blvd., Suite 230, 1,773 -- (4)
Westlake Village, CA 91362
Class A Shares Barry Sternlicht, Three Pickwick Plaza, Suite 250, Greenwich, 9,936,706 (3) 81.2%
CT 06830
Class A Shares Ronald J. Consiglio, 340 N. Westlake Boulevard, Suite 230, 5,500 -- (4)
Westlake Village, CA 91362
Class A Shares Jack McDonald, 2315 Pier Avenue, Santa Monica, CA 90405 1,000 -- (4)
Class B Shares SAHI Partners, Three Pickwick Plaza, Suite 250, Greenwich, 2,046,576 (3) 38.7%
CT 06830
Class B Shares Barry Sternlicht, Three Pickwick Plaza, Suite 250, 6,059,471 (3) 100%
Greenwich, CT 06830
Class B Shares SAHI, Inc., Three Pickwick Plaza, Suite 250, Greenwich, CT 6,059,471 (3) 100%
06830
Class B Shares SWL Acquisition Partners, L.P., Three Pickwick Plaza, 6,059,471 (3) 100%
Greenwich, CT 06830.
Class B Shares SWL Mortgage Investors, Inc., Three Pickwick Plaza, 6,059,471 (3) 100%
Suite 250, Greenwich, CT 06830
Class A Shares All Executive Officers and Trustees as a group (8 persons) 9,944,979 (3) 81.2%
Class B Shares All Executive Officers and Trustees as a group (8 persons) 6,059,471 (3) 100%
</TABLE>
- ----------------------------
(1) Except as otherwise indicated and subject to applicable community property
laws and similar statutes, the person listed as beneficial owner of shares has
sole voting power and dispositive power with respect to the shares.
(2) Represents 5,000,000 Class A Shares currently held by Starwood Mezzanine as
a result of the exercise of the Class A Warrant and 4,568,944 OPU which are
exchangeable for 4,568,944 Class A Shares pursuant to an exchange rights
agreement. Sternlicht Holdings II, Inc. ("Sternlicht Holdings") is the general
partner of BSS Capital Partners, L.P. ("BSS"), which is the general partner of
Starwood Capital Group I, L.P., which is a general partner of Starwood Mezzanine
and the general partner of Starwood Holdings, which is the other general partner
of Starwood Mezzanine.
(3) Represents 244,100 Class A Shares currently held by SAHI, 1,275,000 Class B
Shares currently held by SAHI which are presently convertible
26
<PAGE>
into 26,020 Class A Shares, 2,500,000 Class B Shares held by SAHI, Inc. as a
result of the exercise of the Class B Warrant which are presently convertible
into 51,020 Class A Shares, 1,512,895 Class B Shares issuable to SAHI, Inc. and
771,576 Class B Shares issuable to SAHI, convertible into 30,875 and 15,746
Class A Shares, respectively. These Class B Shares are issuable in accordance
with Article VI of the Restated Declaration of Trust upon the exchange by
Starwood Mezzanine of 4,568,944 OPU for a like number of Class A Shares pursuant
to an exchange rights agreement. SAHI, Inc. and SWL Acquisition Partners, L.P.,
a Delaware limited partnership ("SWL Partners"), are the sole general partners
of SAHI Partners. SWL Mortgage Investors, Inc., a Delaware corporation ("SWL
Mortgage"), is the sole general partner of SWL Partners. Mr. Sternlicht is the
sole stockholder of SWL Mortgage and the controlling stockholder of SAHI, Inc.
By virtue of such holdings and relationships, Mr. Sternlicht, SAHI, Inc., SWL
Partners and SWL Mortgage may be deemed to have an indirect pecuniary interest
in the Class A Shares and Class B Shares held by SAHI Partners to the extent of
his or its proportionate direct or indirect partnership interest, as the case
may be; however, Mr. Sternlicht, SAHI, Inc., and SWL Mortgage have expressly
disclaimed such beneficial ownership. Also represents 5,000,000 Class A Shares
currently held by Starwood Mezzanine as a result of the exercise of the Class A
Warrant and 4,568,944 OPU which are exchangeable for 4,568,944 Class A Shares
pursuant to an exchange rights agreement. Mr. Sternlicht is the sole stockholder
of Sternlicht Holdings, which is the general partner of BSS, which is the
general partner of Starwood Capital Group I, L.P., which is a general partner of
Starwood Mezzanine and the general partner of Starwood Holdings, which is the
other general partner of Starwood Mezzanine.
(4) Less than 1% of the class (a total of 7,550,000 Class A Shares are issued
outstanding). Includes options to purchase 1,000 Class A Shares held by Messrs.
Chisholm and McDonald.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 15, 1994, APART entered into an agreement with SAHI and SAHI, Inc.
for the sale of the Warrants. SAHI and SAHI, Inc. purchased the Warrants for an
aggregate of $101,000 which amount was applied against the purchase price of the
Class A and Class B Shares received upon exercise of the Warrants. The Class A
Warrant was assigned to Starwood Mezzanine by SAHI in March 1996. Each of
Messrs. Sternlicht, Sugarman, Grose and Silvey are affiliated with SAHI, SAHI,
Inc. and Starwood Mezzanine. SAHI, SAHI, Inc. and Starwood Mezzanine jointly own
70% of the outstanding Class A Shares and 100% of the outstanding Class B
Shares, on an aggregate basis, such shareholders control 80% of the voting
interest of APART and, upon conversion of the OPU of the Partnership, would own
87.3% of the voting interest of APART.
On September 26, 1996, APART became sole general partner of the Partnership
by contributing $400,000 in cash, in exchange for an 8.05% interest in the
Partnership and 400,000 OPU. Starwood Mezzanine became the 91.95% limited
partner by contributing to the Partnership its entire interest in the
participation certificates in the Warwick Hotel mortgage note valued by APART at
approximately $4.6 million as of September 30, 1996. Starwood Mezzanine's
interest in the Partnership evidenced by 4,568,944 OPU, which are convertible
into Class A Shares pursuant to an exchange rights agreement with APART. In
addition, Starwood Mezzanine has the right to require APART to register for
public sale, any or all of the Class A Shares in the Partnership issued to it
upon the exercise of the Class A Warrant or upon exchange of the OPU issued to
Starwood Mezzanine. These OPU are convertible into registered Class A shares of
APART on a one-for-one basis, subject to certain restrictions.
On January 22, 1997, Starwood Mezzanine exercised its rights under the
Class A Warrant to acquire 5,000,000 Class A Shares. After its exercise of the
Class A Warrant, Starwood Mezzanine beneficially owned 5,000,000 shares of Class
A Shares and 4,568,944 shares of OPU. In addition, SAHI Inc. exercised its
rights under the Class B Warrant to acquire 2,500,000 Class B Shares. After its
exercise of the Class B Warrant, SAHI Inc. beneficially owned 6,059,471 Shares
of Class B Shares and 244,100 shares of Class A Shares. Each share of Class A
Shares and Class B Shares is entitled to one vote per share. Upon exercise of
the entire Class A and Class B Warrants, SAHI, SAHI, Inc., and Starwood
Mezzanine jointly own 70% of the outstanding Class A Shares and, with the voting
interest of the Class B Shares, control 80% of the voting interest of APART.
APART increased its capital by $5,025,000, and funds from this capitalization
will be utilized to acquire additional investments for APART based upon the
defined business plan approved by holders of a majority of the Class A and Class
B Shares.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements filed as part of this 10-K
and herein included.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Balance Sheets at December 31, 1996 and 1995 15
Statements of Operations for each of the three years in the period ended
December 31, 1996 16
Statements of Changes in Shareholders' Equity for each of the three years
in the period ended December 31, 1996 17
Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 18
Notes to Consolidated Financial Statements 19
(b) A report on Form 8-K was filed during the last quarter of the year
ending December 31, 1996 as follows: --
NONE
(c) Listed below are Warwick financial statements filed as exhibits and herein included.
Balance Sheets at December 31, 1996 and 1995 A-2
Statements of Operations for each of the three years in the period ended
December 31, 1996 A-3
Statements of Changes in Shareholders' Equity for each of the three years
in the period ended December 31, 1996 A-4
Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 A-5
Notes to Financial Statements A-7
Balance Sheets at December 31, 1995 and 1994 B-2
Statements of Operations for each of the three years in the period ended
December 31, 1995 B-3
Statements of Changes in Shareholders' Equity for each of the three years
in the period ended December 31, 1995 B-4
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
Statements of Cash Flows for each of the three years in the period ended
December 31, 1995 B-5
Notes to Financial Statements B-7
(c) Exhibits required by Item 601 of Regulation S-K: --
Refer to Exhibit Index on page 31 of this report.
(d) Supplemental schedules required by Regulation S-X are omitted because they --
are not applicable or because the required information is shown in the financial
statements.
</TABLE>
29
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
Exhibit Index
Exhibit Number Description of Exhibit
3.1 Restated Declaration of Trust of Angeles Participating Mortgage
Trust. (3)
10.1 Class A Share Purchase Warrant dated March 15, 1994 issued by
APART to SAHI Partners. (1)
10.2 Class B Share Purchase Warrant dated March 15, 1994 issued by
APART to SAHI Inc. (1)
10.3 Shareholders Agreement dated as of March 15, 1994 by and among
APART, SAHI Partners and SAHI Inc. (1)
10.4 Assignment of Class A Share Purchase Warrant dated as of March
15, 1996 by SAHI Partners to Starwood Mezzanine Investors, L.P..
(2)
10.5 Amendment No. 1 to the Shareholders Agreement dated as of March
15, 1996 by and among SAHI Partners, SAHI, Inc., Starwood
Mezzanine Investors, L.P. and Angeles Participating Mortgage
Trust. (2)
10.6 Agreement of Limited Partnership of APMT Limited Partnership
dated September 26, 1996. (2)
10.7 Exchange Rights Agreement dated September 26, 1996 between
Angeles Participating Mortgage Trust and Starwood Mezzanine
Investors, L.P.. (2)
10.8 Registration Rights Agreement dated September 26, 1996 between
Angeles Participating Mortgage Trust and Starwood Mezzanine
Investors, L.P.. (2)
10.9 Formation Agreement dated September 26, 1996 between Angeles
Participating Mortgage Trust and Starwood Mezzanine Investors,
L.P.. (2)
10.10 Assignment and Assumption Agreement dated as of September 26,
1996 between Starwood Mezzanine Investors, L.P. and APMT Limited
Partnership. (2)
10.11 Angeles Participating Mortgage Trust 1996 Trustees' Share
Incentive Plan. (3)
10.12 Angeles Participating Mortgage Trust 1996 Share Incentive Plan.
(3)
(1) Filed as an exhibit to APART's Form 10-K dated December 31, 1993 and
incorporated herein by reference.
(2) Filed as an exhibit to APART's Form 8-K dated September 26, 1996 and
incorporated herein by reference.
(3) Filed as an exhibit to APART's Form 10-Q dated September 30, 1996 and
incorporated herein by reference.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, APART has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ANGELES PARTICIPATING MORTGAGE TRUST
Registrant
Date March 29, 1997 /s/ Barry S. Sternlicht
---------------------------------------
Barry S. Sternlicht
Chairman of the Board of Trustees
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of APART and in
the capacities and on the dates indicated.
Date March 29, 1997 /s/ Barry S. Sternlicht
---------------------------------------
Barry S. Sternlicht
Trustee and Chief Executive Officer
(Chief Executive Officer)
Date March 29, 1997 /s/ Ronald J. Consiglio
---------------------------------------
Ronald J. Consiglio
Trustee and Secretary
Date March 29, 1997 /s/ Jay Sugarman
---------------------------------------
Jay Sugarman
Trustee and President
Date March 29, 1997 /s/ Jack E. McDonald
---------------------------------------
Jack E. McDonald
Trustee
Date March 29, 1997 /s/ Jerome C. Silvey
---------------------------------------
Jerome C. Silvey
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date March 29, 1997 /s/ Madison Grose
---------------------------------------
Madison Grose
Trustee
Date March 29, 1997 /s/ J. D'Arcy Chisholm
---------------------------------------
J. D'Arcy Chisholm
Trustee
Date March 29, 1997 /s/ Jonathan Eilian
---------------------------------------
Jonathan Eilian
Trustee
<PAGE>
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
FRANKEL-WARWICK LIMITED
PARTNERSHIP
DECEMBER 31, 1996 AND 1995
<PAGE>
Independent Auditors' Report
The Partners
Frankel-Warwick Limited Partnership
Philadelphia, Pennsylvania
We have audited the accompanying balance sheets of Frankel-Warwick
Limited Partnership as of December 31, 1996 and 1995 and the related statements
of operations, changes in Partners' capital and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Frankel-Warwick
Limited Partnership as of December 31, 1996 and 1995 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ASHER & COMPANY, Ltd.
March 10, 1997
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
----------- -----------
<S> <C> <C>
LAND, BUILDING, IMPROVEMENTS AND EQUIPMENT
Land $ 700,000 $ 700,000
Building and improvements 14,327,668 14,123,445
Furniture and fixtures 3,537,489 3,453,263
Equipment 1,134,011 995,238
----------- -----------
19,699,168 19,271,946
Less accumulated depreciation 11,612,242 10,801,310
----------- -----------
8,086,926 8,470,636
OTHER ASSETS
Cash and cash equivalents 293,173 196,238
Investments 523,500 --
Escrowed cash 163,324 154,591
Due from Affiliate 16,242 15,597
Tenant and guses receivables 255,491 150,640
Insurance proceeds receivable 152,363 --
Other receivables 208,922 175,527
Prepaid expenses and deposits 38,363 58,976
Deferred costs, net of accumulated amortization of
$65,430 in 1996 and $61,790 in 1995 25,570 29,210
Other -- 46,508
----------- -----------
1,676,948 827,287
----------- -----------
Total Assets $ 9,763,874 $ 9,297,923
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage notes payable $ 4,834,172 $ 5,235,256
Accounts payable and accrued expenses 658,595 581,093
Due to Affiliates 76,484 82,062
Loans from Affiliates 3,000,000 3,114,250
Tenants' security deposits 157,613 146,009
----------- -----------
8,726,864 9,158,670
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 1,037,010 139,253
----------- -----------
Total Liabilities and Partners' Capital $ 9,763,874 $ 9,297,923
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-A-2-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
Revenue
Rental
Apartments $ 1,982,982 $ 2,053,514
Hotel rooms 5,326,449 4,407,267
Commercial 66,396 56,717
Restaurant and caterer 81,148 32,667
Ancillary hotel services, net 220,096 166,010
----------- -----------
7,677,071 6,716,175
Other
Telephone, net 76,494 87,906
Interest 11,201 1,145
Miscellaneous 59,438 68,200
----------- -----------
147,133 157,251
----------- -----------
Total revenue 7,824,204 6,873,426
Operating expenses
General and administrative 443,299 355,884
Payroll and related expenses 2,180,004 2,270,425
Advertising, rental and selling 410,516 449,610
Depreciation and amortization 774,308 820,596
Utilities 566,890 582,408
Repairs and maintenance 327,551 370,219
Interest 451,888 680,083
Interest - related parties 220,440 79,838
Insurance 153,649 84,875
Real estate taxes 340,637 408,962
Ground rent -- 85,938
Management fees 384,478 340,432
Other 672,787 533,337
----------- -----------
Total operating expenses 6,926,447 7,062,607
----------- -----------
Income (loss) before extraordinary item 897,757 (189,181)
Extraordinary item
Gain on forgiveness of indebtedness -- 812,732
----------- -----------
NET INCOME $ 897,757 $ 623,551
=========== ===========
The accompanying notes are an integral part of these
financial statements.
-A-3-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
General
Partner Limited Partners
-------- -------------------------------------
Elizabeth
William Benjamin Thomas F. Klein Andrew Alan A.
Frankel Frankel Frankel Trust Frankel Steinberg Total
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ (21,151) $ (21,151) $ (7,051) $ (7,050) $ (7,051) $(420,844) $ (484,298)
Net income 184,758 184,758 61,584 61,584 61,584 69,283 623,551
--------- --------- --------- --------- --------- --------- -----------
Balance, December 31, 1995 163,607 163,607 54,533 54,534 54,533 (351,561) 139,253
Net income 266,005 266,005 88,666 88,666 88,666 99,749 897,757
--------- --------- --------- --------- --------- --------- -----------
Balance, December 31, 1996 $ 429,612 $ 429,612 $ 143,199 $ 143,200 $ 143,199 $(251,812) $ 1,037,010
========= ========= ========= ========= ========= ========= ===========
Profit and loss sharing
percentages 29.6300% 29.6300% 9.8763% 9.8764% 9.8763% 11.1110% 100.0000%
========= ========= ========= ========= ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-A-4-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
OPERATING ACTIVITIES
Net income $ 897,757 $ 623,551
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for uncollectible receivables 20,864 18,907
Depreciation 810,932 847,930
Amortization 3,640 3,640
Gain on forgiveness of indebtedness -- (812,732)
Changes in:
Escrowed cash (8,733) (2,380)
Receivables and due from Affiliate (312,118) 198,401
Prepaid expenses and deposits 20,613 (14,277)
Other assets 46,508 (46,508)
Accounts payable, accrued expenses and
due to Affiliates 71,924 (154,372)
Tenants' security deposits 11,604 5,558
----------- -----------
Net cash provided by operating activities 1,562,991 667,718
INVESTING ACTIVITIES
Purchase of building, improvements and equipment (427,222) (413,156)
Purchases of investments (595,447) --
Proceeds from maturities of investments 71,947 --
----------- -----------
Net cash utilized by investing activities (950,722) (413,156)
FINANCING ACTIVITIES
Borrowings from (repayments to) Affiliates (114,250) 2,245,000
Repayment of mortgage notes payable (401,084) (2,502,965)
----------- -----------
Net cash utilized by financing activities (515,334) (257,965)
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 96,935 (3,403)
Cash and cash equivalents, beginning of year 196,238 199,641
----------- -----------
Cash and cash equivalents, end of year $ 293,173 $ 196,238
=========== ===========
-Continued-
-A-5-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1996 1995
----------- -----------
Cash paid for interest during the year $ 675,336 $ 776,493
=========== ===========
The accompanying notes are an integral part of these
financial statements.
-A-6-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business activity
Frankel-Warwick Limited Partnership (the Partnership) is a Pennsylvania
limited partnership which was formed in 1977 to purchase, improve, own and
operate the Warwick Hotel in Philadelphia, Pennsylvania.
The following is a summary of significant accounting policies applied by
management in the preparation of the accompanying financial statements.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Building, improvements and equipment
Building, improvements and equipment are carried at cost. Depreciation is
provided by the straight-line method over the following assets' estimated
useful lives:
Building and improvements 34 years
Furniture and fixtures 5-10 years
Equipment 5-10 years
Cash and cash equivalents
The Partnership considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Marketable securities
On January 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." SFAS No. 115 requires a change from the lower
of cost or market method of accounting for certain investments to a method
which measures certain categories of investments at market value. Under
this method, certain investments are categorized at acquisition, and
subsequently reassessed at each reporting date, according to the
Partnership's intent and ability to hold to maturity each individual
security. There was no effect on Partners' capital or net income in 1996 as
a result of adopting SFAS No. 115.
-A-7-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of credit risk
The Partnership maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Partnership has not
experienced any losses in such accounts. The Partnership believes it is not
exposed to any significant credit risk on cash and cash equivalents.
Deferred costs
Fees and costs incurred in the acquisition of the permanent financing were
deferred and are being amortized using the straight-line method over the
term of the first mortgage note payable.
Income taxes
Frankel-Warwick Limited Partnership is not a taxpaying entity for either
Federal or state income tax purposes. Instead, the Partners are liable for
individual Federal and state income taxes on their respective shares of the
Partnership's taxable income and may include, subject to certain
limitations, their respective shares of the Partnership's net operating
loss in their individual income tax returns.
Due to the Partnership's policy of capitalizing certain construction period
costs for financial reporting purposes and expensing these items for
Federal income tax reporting purposes and the use of accelerated and
straight-line depreciation methods for Federal income tax reporting
purposes, the net book value of the building, improvements and equipment
for income tax reporting purposes is approximately $4,000,000 and
$3,700,000 less than the net book value in the accompanying financial
statements at December 31, 1996 and 1995, respectively.
Partners' allocations
In accordance with the partnership agreement, the Partners are allocated
profits and losses in proportion to their respective ownership interests.
NOTE B - MARKETABLE SECURITIES
As of December 31, 1996, 100% of marketable securities held by the
Partnership are classified as held to maturity and invested in obligations
of individual states and their political subdivisions. The securities are
stated at amortized cost which approximates fair value. There were no
marketable securities held by the Partnership at December 31, 1995.
-A-8-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE B - MARKETABLE SECURITIES (Continued)
At December 31, 1996, investments classified as held to maturity mature as
follows: $298,884 within one year and $224,616 within one to five years.
There were no realized gains or losses.
NOTE C - RESTRUCTURING AND FORGIVENESS OF INDEBTEDNESS
On December 1, 1995, the Partnership restructured mortgage debt of
$2,249,010. Under the terms of the agreement, the Partnership paid
$2,200,000 exercising its option under the operating lease to purchase the
land for $700,000 (See Note E) and in full settlement of the second
mortgage note payable plus accrued interest of $63,722. As a result of the
forgiveness of indebtedness, the Partnership recognized income in the
amount of $812,732 which is reflected as an extraordinary item in the
Statement of Operations.
NOTE D - MORTGAGE NOTES PAYABLE
The Partnership has a mortgage note payable to a bank which bears interest
at 9% and is payable in monthly installments of $71,332, including
interest. Under the terms of the mortgage note, the mortgagee has the
option to require repayment of the outstanding principal on November 30,
1999. Unless this option is exercised, the mortgage note payable is due in
2004. The outstanding balance of this mortgage note is $4,834,172 and
$5,235,256 at December 31, 1996 and 1995, respectively.
The building, improvements, equipment and furniture and fixtures are
pledged as collateral for the mortgage note.
As part of the debt restructuring on December 1, 1995 (See Note C), the
Partnership obtained financing from a related party in the amount of
$2,200,000. The note is unsecured and bears interest at 7.2% annually.
Interest only is payable monthly and the principal matures on November 30,
1998. Interest expense of $161,040 and $13,640 is included in the Statement
of Operations for 1996 and 1995, respectively. In addition, the Balance
Sheets include $13,640 of accrued interest as an unsecured advance from
related parties at December 31, 1996.
-A-9-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE D - MORTGAGE NOTES PAYABLE (Continued)
Approximate aggregate maturities of long-term debt, including related party
debt (See Note H), for the five years subsequent to December 31, 1996 are
as follows:
Years Ending December 31, Amount
------------------------- ------
1997 $ 439,000
1998 2,680,000
1999 524,000
2000 574,000
2001 628,000
NOTE E - OPERATING LEASE
In 1978, the Partnership sold the land under the building and improvements
to the holder of the second mortgage payable and leased it back for a term
of 99 years. The lease provides for a minimum annual rental payment of
$93,750 plus an additional payment equal to 50% of the cash available for
distribution, as defined. The cash available for distribution, as defined,
includes a deduction for repayment of capital improvement loans. Rental
expense amounted to $85,937 for the year ended December 31, 1995. The
operating lease contained an option for the Partnership to purchase the
land on or before December 31, 1997 for $700,000 plus the outstanding
principal balance on the second mortgage note payable. As part of the debt
restructuring on December 1, 1995 (See Note C), the Partnership exercised
its option to purchase the land.
NOTE F - RENTALS UNDER OPERATING LEASES
Minimum future rentals expected to be received from noncancellable
commercial operating leases are approximately as follows:
Years Ending December 31, Amount
------------------------- ------
1997 $ 184,000
1998 185,000
1999 166,000
2000 131,000
2001 132,000
Thereafter 577,000
----------
$1,375,000
==========
-A-10-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE F - RENTALS UNDER OPERATING LEASES (Continued)
A lease with a commercial tenant provides for contingent rentals based on
an increase in sales revenue over a specific amount as defined in the lease
agreement. There was no contingent rental income for 1996 and 1995.
No tenant accounted for more than 10% of rental revenue in 1996 or 1995.
NOTE G - RETIREMENT PLANS
In connection with its collective bargaining agreements with the
International Brotherhood of Firemen, Oilers, Powerhouse Operators and
Maintenance Mechanics Union and the Hotel Employees and Restaurant
Employees Union, the Partnership participates with other companies in
defined contribution pension plans. Contributions to the plans are made at
rates of $27.73 and $46.40, respectively, per leased union employee per
month. The plans cover all employees leased by the Partnership, as defined,
who are members of the unions. The pension expense, representing the
Partnership's required contributions to the plans, amounted to $17,605 and
$19,986 for the years ended December 31, 1996 and 1995, respectively.
The Company has a profit sharing plan available to all eligible employees,
under Section 401(k) of the Internal Revenue Code. The Company will make a
matching contribution up to 20% of an employee's contribution which is
limited to 15% of the employee's compensation. The Company's contribution
was $5,235 and $1,766 for 1996 and 1995, respectively. At the discretion of
the Partners, the Company may make additional contributions to the plan. No
such additional contributions were made in 1996 or 1995. Employees are
fully vested in the Company's contributions upon completion of seven years
of service.
NOTE H - RELATED PARTY TRANSACTIONS
Restaurant operations
A related party entity leases space in the hotel for its restaurant
operations. The Partnership funded the net operating shortfalls of the
related entity managing the restaurant and will more than likely continue
to fund future operating deficits although no written agreement exists
which requires payment of such costs. These costs amounted to $190,000 and
$100,000 during 1996 and 1995, respectively.
-A-11-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE H - RELATED PARTY TRANSACTIONS (Continued)
Management contract
The Partnership has entered into a contract with an affiliated company to
provide for the operation and general management of the property. The
agreement is for an unspecified term and provides for a fee equal to 5% of
gross income. Under the terms of the agreement, the managing agent provides
all employees necessary for the operation of the property except for the
salary and benefits of the manager and is reimbursed by the Partnership for
its costs, including related employee benefits. The contract labor and
related employee benefits are included in the accom panying financial
statements as operating expenses under the appropriate expense
classifications. In 1996 and 1995, management fees were approximately
$384,000 and $340,000, respectively.
Advances
The Partnership has unsecured advances from related parties of $500,000 at
December 31, 1996 and 1995 to help fund certain building improvements.
These advances are due on demand and bear interest at the prime rate.
Interest expense was $36,000 and $40,120 for 1996 and 1995, respectively.
The Partnership has unsecured advances from an affiliate amounting to
$300,000 and $325,000 in principal at December, 31, 1996 and 1995,
respectively, and $44,250 of accrued interest at December 31, 1995. These
advances are due on demand and accrue interest at the prime rate. Interest
expense was $23,400 and $26,077 for 1996 and 1995, respectively.
Rental income
The Partnership leases commercial and residential space to individuals who
are related to the Partners. Rental income from these leases amounted to
$48,000 and $25,725 in 1996 and 1995, respectively.
-A-12-
<PAGE>
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
FRANKEL-WARWICK LIMITED
PARTNERSHIP
DECEMBER 31, 1995 AND 1994
<PAGE>
Independent Auditors' Report
The Partners
Frankel-Warwick Limited Partnership
Philadelphia, Pennsylvania
We have audited the accompanying balance sheets of Frankel-Warwick
Limited Partnership as of December 31, 1995 and 1994 and the related statements
of operations, changes in Partners' capital and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsi bility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Frankel-Warwick
Limited Partnership as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ASHER & COMPANY, Ltd.
March 20, 1996
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
----------- ------------
<S> <C> <C>
LAND, BUILDING, IMPROVEMENTS AND EQUIPMENT
Land $ 700,000
Building and improvements 14,123,445 $ 13,804,896
Furniture and fixtures 3,453,263 3,432,972
Equipment 995,238 920,922
----------- ------------
19,271,946 18,158,790
Less accumulated depreciation 10,801,310 9,953,380
----------- ------------
8,470,636 8,205,410
OTHER ASSETS
Cash and cash equivalents 196,238 199,641
Escrowed cash 154,591 152,211
Due from Affiliate 15,597 13,311
Tenant and guest receivables 150,640 253,482
Other receivables 175,527 292,279
Prepaid expenses and deposits 58,976 44,699
Deferred costs, net of accumulated amortization of
$61,790 in 1995 and $58,150 in 1994 29,210 32,850
Other 46,508 --
----------- ------------
827,287 988,473
----------- ------------
Total Assets $ 9,297,923 $ 9,193,883
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage notes payable $ 5,235,256 $ 7,850,953
Accounts payable and accrued expenses 581,093 803,234
Due to Affiliates 82,062 14,293
Loans from Affiliates 3,114,250 869,250
Tenants' security deposits 146,009 140,451
----------- ------------
9,158,670 9,678,181
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 139,253 (484,298)
----------- ------------
Total Liabilities and Partners' Capital $ 9,297,923 $ 9,193,883
=========== ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-B-2-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
----------- -----------
Revenue
Rental
Apartments $ 2,053,514 $ 1,973,096
Hotel rooms 4,407,267 4,002,070
Commercial 56,717 54,718
Restaurant and caterer
Base 32,667 22,500
Excess -- 5,668
Ancillary hotel services, net 166,010 218,193
----------- -----------
6,716,175 6,276,245
Other
Telephone, net 87,906 77,659
Interest 1,145 7,651
Miscellaneous 68,200 56,093
----------- -----------
157,251 141,403
----------- -----------
Total revenue 6,873,426 6,417,648
Operating expenses
General and administrative 355,884 435,113
Payroll and related expenses 2,270,425 2,205,572
Advertising, rental and selling 449,610 456,590
Depreciation and amortization 820,596 761,703
Utilities 582,408 537,414
Repairs and maintenance 370,219 412,030
Interest 680,083 728,872
Interest - related parties 7-9,838 57,349
Insurance 84,875 137,284
Real estate taxes 408,962 407,876
Ground rent 85,938 93,750
Management fees 340,432 313,047
Litigation settlement -- 290,000
Other 533,337 581,188
----------- -----------
Total operating expenses 7,062,607 7,417,788
----------- -----------
Loss before other income and extraordinary item (189,181) (1,000,140)
Other income
Gain on fire insurance proceeds -- 280,427
----------- -----------
Loss before extraordinary item (189,181) (719,713)
Extraordinary item
Gain on forgiveness of indebtedness 812,732 --
----------- -----------
NET INCOME (LOSS) $ 623,551 $ (719,713)
=========== ===========
The accompanying notes are an integral part of these
financial statements.
-B-3-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
General
Partner Limited Partners
-------- -------------------------------------------------------
Leonard Elizabeth
William E. J. Frankel Benjamin Frankel Thomas F. Klein Andrew Alan A.
Frankel Trust Frankel Trust Frankel Trust Frankel Steinberg Total
--------- ------- -------- -------- ------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1994 $(348,426) $(348,427) $(348,427) $(348,427) $(340,878) $(1,734,585)
Net loss (182,150) (93,297) (182,150) -- $(60,716) $(60,717) $(60,717) (79,966) (719,713)
Capital contributions 635,833 62,500 635,834 -- 211,944 211,945 211,944 -- 1,970,000
Partner transfers (126,408) 379,224 (126,408) 348,427 (158,279) (158,278) (158,278) -- --
--------- ------- -------- -------- ------- ------- ------- --------- --------
December 31, 1994 (21,151) -- (21,151) -- (7,051) (7,050) (7,051) (420,844) (484,298)
Net income 184,758 -- 184,758 -- 61,584 61,584 61,584 69,283 623,551
--------- ------- -------- -------- ------- ------- ------- --------- --------
December 31, 1995 $ 163,607 $ -- $163,607 $ -- $54,533 $54,534 $54,533 $(351,561) $139,253
========= ======= ======== ======== ======= ======= ======= ========= ========
Profit and loss
sharing
percentages 29.6300% --% 29.6300% --% 9.8763% 9.8764% 9.8763% 11.1110% 100.0000%
========= ======= ======== ======== ======= ======= ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-B-4-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 623,551 $(719,713)
Adjustments to reconcile net income (loss) to net cash
provided (utilized) by operating activities:
Provision for uncollectible receivables 18,907 61,614
Depreciation 847,930 779,326
Amortization 3,640 3,640
Gain on fire insurance proceeds -- (280,427)
Gain on forgiveness of indebtedness (812,732) --
Changes in:
Escrowed cash (2,380) (23,078)
Receivables and due from Affiliate 198,401 (243,258)
Prepaid expenses and deposits (14,277) 95,875
Other assets (46,508) 7,500
Accounts payable, accrued expenses and
due to Affiliates (154,372) 34,150
Tenants' security deposits 5,558 16,285
----------- ---------
Net cash provided (utilized) by operating activities 667,718 (268,086)
INVESTING ACTIVITIES
Purchase of building, improvements and equipment (413,156) (993,763)
Insurance proceeds received, net -- 732,972
----------- ---------
Net cash utilized by investing activities (413,156) (260,791)
FINANCING ACTIVITIES
Capital contributions -- 250,000
Borrowings from Affiliates 2,245,000 670,000
Repayment of mortgage notes payable (2,502,965) (335,239)
----------- ---------
Net cash provided (utilized) by financing activities (257,965) 584,761
----------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,403) 55,884
Cash and cash equivalents, beginning of year 199,641 143,757
----------- ---------
Cash and cash equivalents, end of year $ 196,238 $ 199,641
=========== =========
</TABLE>
-Continued-
-B-5-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1995 1994
----------- ---------
Cash paid for interest during the year $ 776,493 $ 749,900
=========== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
During the year ended December 31, 1994, loans from affiliates aggregating
$1,720,000 were converted to equity and are reflected as capital
contributions in the Statement of Changes in Partners' Deficit.
During the year ended December 31, 1994, the Partnership received net
insurance proceeds in the amount of $732,972 of which $300,605 is reflected
as a reduction in the basis of building, improvements and equipment.
Proceeds of $280,427 are reflected as a gain on fire insurance proceeds,
and proceeds of $151,940 are reflected as a liability for anticipated
future costs. The previously deferred proceeds of $151,940 are reflected as
a reduction in the basis of building improvements and equipment and
expenses in 1995.
The accompanying notes are an integral part of these
financial statements.
-Continued-
-B-6-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies applied by
management in the preparation of the accompanying financial statements.
Business activity
Frankel-Warwick Limited Partnership (the Partnership) is a Pennsylvania
limited partnership which was formed in 1977 to purchase, improve, own and
operate the Warwick Hotel in Philadelphia, Pennsylvania.
Building, improvements and equipment
Building, improvements and equipment are carried at cost. Depreciation is
provided by the straight-line method over the following assets' estimated
useful lives:
Building and improvements 34 years
Furniture and fixtures 5-10 years
Equipment 5-10 years
Cash and cash equivalents
The Partnership considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Concentration of credit risk
The Partnership maintains cash accounts in commercial banks. Total cash
deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up
to $100,000 per bank. As of December 31, 1995, the uninsured cash balances
are approximately $178,000.
Deferred costs
Fees and costs incurred in the acquisition of the permanent financing were
deferred and are being amortized using the straight-line method over the
term of the first mortgage note payable.
-B-7-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Income taxes
Frankel-Warwick Limited Partnership is not a taxpaying entity for either
Federal or state income tax purposes. Instead, the Partners are liable for
individual Federal and state income taxes on their respective shares of the
Partnership's taxable income and may include, subject to certain
limitations, their respective shares of the Partnership's net operating
loss in their individual income tax returns.
Due to the Partnership's policy of capitalizing certain construction period
costs for financial reporting purposes and expensing these items for
Federal income tax reporting purposes and the use of accelerated and
straight-line depreciation methods for Federal income tax reporting
purposes, the net book value of the building, improvements and equipment
for income tax reporting purposes is approximately $3,700,000 and
$4,100,000 less than the net book value in the accompanying financial
statements at December 31, 1995 and 1994, respectively.
Partners' allocations
In accordance with the partnership agreement, the Partners are allocated
profits and losses in proportion to their respective ownership interests.
NOTE B - RESTRUCTURING AND FORGIVENESS OF INDEBTEDNESS
On December 1, 1995, the Partnership restructured mortgage debt of
$2,249,010. Under the terms of the agreement, the Partnership paid
$2,200,000, exercising its option under the operating lease to purchase the
land for $700,000 (See Note D) and in full settlement of the second
mortgage note payable plus accrued interest of $63,722. As a result of the
forgiveness of indebtedness, the Partnership recognized income in the
amount of $812,732 which is reflected as an extraordinary item in the
Statement of Operations.
-B-8-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE C - MORTGAGE NOTES PAYABLE
The Partnership has a mortgage note payable to a bank which bears interest
at 9% and is payable in monthly installments of $71,332, including
interest. Under the terms of the mortgage note, the mortgagee has the
option to require repayment of the outstanding principal on November 30,
1999. Unless this option is exercised, the mortgage note payable is due in
2004. The outstanding balance of this mortgage note is $5,235,256 and
$5,601,943 at December 31, 1995 and 1994, respectively.
The Partnership had a second mortgage note payable at December 31, 1994.
The outstanding balance was $2,249,010. As discussed in footnote B, this
mortgage was extinguished on December 1, 1995.
The building, improvements, equipment and furniture and fixtures are
pledged as collateral for the mortgage note.
Approximate aggregate maturities of long-term debt for the five years
subsequent to December 31, 1995 are as follows:
Years Ending December 31, Amount
------------------------- ------
1996 $401,000
1997 439,000
1998 480,000
1999 524,000
2000 574,000
NOTE D - OPERATING LEASE
In 1978, the Partnership sold the land under the building and improvements
to the holder of the second mortgage payable and leased it back for a term
of 99 years. The lease provides for a minimum annual rental payment of
$93,750 plus an additional payment equal to 50% of the cash available for
distribution, as defined. The cash available for distribution, as defined,
includes a deduction for repayment of capital improvement loans. Rental
expense amounted to $85,937 and $93,750 for the years ended December 31,
1995 and 1994, respectively. The operating lease contained an option for
the Partnership to purchase the land on or before December 31, 1997 for
$700,000 plus the outstanding principal balance on the second mortgage note
payable. As part of the debt restructuring on December 1, 1995 (See Note
B), the Partnership exercised its option to purchase the land.
-B-9-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE E - RENTALS UNDER OPERATING LEASES
Minimum future rentals expected to be received from noncancellable
commercial operating leases are approximately as follows:
Years Ending December 31, Amount
------------------------- ------
1996 $171,000
1997 137,000
1998 121,000
1999 107,000
2000 55,000
Thereafter 130,000
A lease with a commercial tenant provides for contingent rentals based on
an increase in sales revenue over a specific amount as defined in the lease
agreement. There was no contingent rental income for 1995. Contingent
rental income of $5,668 is included in rental income for the year ended
December 31, 1994.
No tenant accounted for more than 10% of rental revenue in 1995 or 1994.
NOTE F - RETIREMENT PLANS
In connection with its collective bargaining agreements with the
International Brotherhood of Firemen, Oilers, Powerhouse Operators and
Maintenance Mechanics Union and the Hotel Employees and Restaurant
Employees Union, the Partnership participates with other companies in
defined contribution pension plans. Contributions to the plans are made at
rates of $27.73 and $36.00, respectively, per leased union employee per
month. The plans cover all employees leased by the Partnership, as defined,
who are members of the unions. The pension expense, representing the
Partnership's required contributions to the plans, amounted to $19,986 and
$17,199 for the years ended December 31, 1995 and 1994, respectively.
The Company has a profit sharing plan available to all eligible employees,
under Section 401(k) of the Internal Revenue Code. The effective date of
the Plan was January 1, 1994. The Company will make a matching contribution
up to 20% of an employee's contribution which is limited to 15% of the
employee's compensation. The Company's contribution was $1,766 and $1,152
for 1995 and 1994, respectively. At the discretion of the Partners, the
Company may make additional contributions to the plan. No such additional
contributions were made in 1995 or 1994. Employees are fully vested in the
Company's contributions upon completion of seven years of service.
-B-10-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE G - RELATED PARTY TRANSACTIONS
A related party entity leases space in the hotel for its restaurant
operations. The Partnership funded the net operating shortfalls of the
related entity managing the restaurant and will more than likely continue
to fund future operating deficits although no written agreement exists
which requires payment of such costs. These costs, amounting to $100,000
and $142,225 during 1995 and 1994, respectively, are included in other
operating expenses in the Statement of Operations. For the period April
1994 through August 1994, an unrelated entity managed and funded the
operating costs of the restaurant.
The Partnership has entered into a contract with an affiliated company to
provide for the operation and general management of the property. The
agreement is for an unspecified term and provides for a fee equal to 5% of
gross income. Under the terms of the agreement, the managing agent provides
all employees necessary for the operation of the property except for the
salary and benefits of the manager and is reimbursed by the Partnership for
its costs, including related employee benefits. The contract labor and
related employee benefits are included in the accompanying financial
statements as operating expenses under the appropriate expense
classifications. In 1995 and 1994, management fees of $340,000 and
$313,000, respectively, are included in general and administrative
expenses, in the accompanying financial statements.
As part of the debt restructuring on December 1, 1995 (See Note B), the
Partnership obtained financing from a related party in the amount of
$2,200,000. The note is unsecured and bears interest at 7.2% annually.
Interest only is payable monthly and the principal matures on November 30,
1998. Interest expense of $13,640 is included in the Statement of
Operations for 1995.
The Partnership has unsecured advances from related parties of $500,000 at
December 31, 1995 and 1994 to help fund certain building improvements.
These advances are due on demand and bear interest at the prime rate.
Interest expense of $40,120 and $34,757 is included in the Statement of
Operations for 1995 and 1994, respectively.
The Partnership has unsecured short-term advances from a related party in
the amount of $45,000 to fund operations. The advances are due on demand
and are non-interest bearing.
The Partnership has unsecured advances from an affiliate amounting to
$325,000 in principal and $44,250 of accrued interest at December 31, 1995
and 1994. These advances are due on demand and accrue interest at the prime
rate. Interest expense of $26,077 and $22,592 is included in the Statement
of Operations for 1995 and 1994, respectively.
The Partnership leases commercial and residential space to individuals who
are related to the Partners. Rental income from these leases amounted to
$25,725 and $46,700 in 1995 and 1994, respectively.
-B-11-
<PAGE>
FRANKEL-WARWICK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Any changes in these assumptions could significantly affect
these estimates. Therefore, the estimated fair values of the financial
instruments are not necessarily indicative of the amounts the Partnership
might realize in actual market transactions.
The fair value of the Partnership's mortgage note payable is based on the
borrowing rates currently available to the Partnership for bank loans with
similar terms and average maturities. The fair value of the mortgage note
payable approximates carrying value.
Due to the unique terms, conditions, restrictions, sources and purposes of
the advances and loans to and from Affiliates, there may not be comparable
marketplace financial instruments. Accordingly, it was not practicable to
estimate the fair value of these financial instruments.
NOTE I - OTHER ITEMS
In 1994 the Partnership agreed to an out-of-court settlement resulting from
an alleged wrongful termination suit by a former controller against the
Partnership. The settlement resulted in a payment of $290,000 to the former
employee.
In 1994 the Warwick Hotel suffered from a fire and resulting water damage.
The gain of $280,427 represents that portion of insurance proceeds in
excess of replacement costs of the damaged property.
-B-12-
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