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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-
12
ANGELES PARTICIPATING MORTGAGE TRUST
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
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ANGELES PARTICIPATING MORTGAGE TRUST
THREE PICKWICK PLAZA
SUITE 250
GREENWICH, CONNECTICUT 06830
February 11, 1998
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Angeles Participating Mortgage Trust, a California business trust (the
"Trust"), to be held at the American Stock Exchange, 86 Trinity Place, New
York, New York on March 13, 1998 at 10:30 a.m. Eastern Standard Time (the
"Annual Meeting").
At the Annual Meeting, the shareholders of the Trust (the "Shareholders")
will be asked to consider and vote on proposals pursuant to which, among other
things, (a) the Trust will pay $28.5 million of cash and issue approximately
55,148,000 Class A Shares of the Trust (the "Class A Shares"), subject to
adjustment, at a price of $2.50 per share to Starwood Mezzanine Investors,
L.P. ("Starwood Mezzanine") in exchange for the contribution by Starwood
Mezzanine to the Trust of its entire interest in a portfolio of mortgage and
partnership loans secured by residential, hotel, office and mixed use real
estate and other assets (collectively, the "Starwood Mezzanine Interests");
and (b) the Trust will pay $313.0 million of cash and issue 247,074,800 Class
A Shares, subject to adjustment, at a price of $2.50 per share to Starwood
Opportunity Fund IV, L.P. ("SOFI IV") in exchange for the contribution by SOFI
IV to the Trust of $17.9 million of cash, its rights under certain letters of
intent to purchase or originate debt interests (the "Letters of Intent"), its
entire interest in a portfolio of mortgage loans and leases secured by hotel,
office and mixed use real estate and other assets (collectively, the "SOFI IV
Interests" and, together with the Starwood Mezzanine Interests, the
"Interests") and a portfolio of first mortgage loans (the "First Mortgage
Portfolio") (each of the proposals set forth in (a) and (b) above are referred
to collectively as the "Contribution Proposal" and the contribution of cash,
the Letters of Intent, the Interests and the First Mortgage Portfolio to the
Trust is referred to as the "Contribution"). See "CONTRIBUTION PROPOSAL" and
"DESCRIPTION OF THE INTERESTS." For a description of the adjustments and
prorations, if any, with respect to the contributions by the parties and the
Class A Shares to be issued to each party, see "CONTRIBUTION PROPOSAL--
Contribution Agreement--Calculation of Class A Shares to Be Issued;
Adjustments."
If the Contribution Proposal is approved, the Trust will enter into an
Advisory Agreement (the "Advisory Agreement") with Starwood Financial
Advisors, L.L.C. (the "Advisor") pursuant to which the Advisor will manage the
investment affairs of the Trust. The Shareholders will be asked to consider
and vote on a proposal to amend the Trust's Amended and Restated Declaration
of Trust ("Declaration of Trust") to reflect the terms of the Advisory
Agreement, including, among other things, conforming provisions in the
Declaration of Trust with respect to the termination of the Advisory
Agreement, and revising the provisions with respect to the independence of
certain members of the Board of Trustees from requiring that not more than 49%
of the total number of Trustees may be affiliated with the Advisor to
requiring that a minimum of the greater of (i) 33 1/3% of the total number of
Trustees and (ii) three (3) members of the Board of Trustees be unaffiliated
with the Advisor or Starwood Capital Group, L.L.C. (the proposals to amend the
Declaration of Trust to reflect the terms of the Advisory Agreement are
collectively referred to as the "Advisory Agreement Proposal"). See "ADVISORY
AGREEMENT PROPOSAL."
If the Contribution Proposal and the Advisory Agreement Proposal are
approved, the Shareholders will be asked to consider and vote on a proposal to
further amend the Declaration of Trust to, among other things: (a) change the
name of the Trust to Starwood Financial Trust; (b) change the purpose and
investment policy of the Trust (i) to allow the Trust to originate or acquire
certain mortgage loans made to borrowers that are affiliated with the Trust
and to acquire certain securities and investments that are collateralized by
or made to borrowers that are affiliated with the Trust, (ii) to clarify that
the primary purpose of the Trust is to acquire a diversified portfolio of debt
or debt like interests in real estate related assets, the Trust generally will
not obtain management rights over equity interests in the assets underlying
non-performing or sub-performing debt unless the Trust's efforts to
restructure such debt into performing debt are unsuccessful and the Trust's
powers with respect to its
<PAGE>
purpose and investment policy and (iii) to include certain investment
restrictions; (c) require the approval of Shareholders holding two-thirds of
the voting shares of the Trust prior to any sale, transfer or other
disposition of all or substantially all of the assets of the Trust; (d)
eliminate cumulative voting of Shareholders; (e) establish a classified Board
of Trustees with two classes having terms of two years each and to increase
the required number of members on the Board of Trustees from three to seven;
(f) amend the "Excess Share" provision of the Declaration of Trust to reduce
the risk that the Trust could fail to qualify as a real estate investment
trust ("REIT") for federal income tax purposes; (g) to eliminate certain
limitations on the indemnification by the Trust of its Trustees, and certain
others performing duties for the Trust; and to clarify certain provisions with
respect to Shareholder liability and indemnification; (h) to permit amendments
to the Declaration of Trust to facilitate a change in the Trust's domicile or
to change the form of the Trust to a corporation without Shareholder approval
if the Board of Trustees determines that such amendments do not materially and
adversely affect the rights of the Shareholders; and (i) effect certain
technical amendments and clarifications. See "TRUST AMENDMENTS PROPOSAL."
Elimination of cumulative voting, establishment of a classified board,
requiring approval of Shareholders holding two-thirds of the voting shares
prior to certain asset transfers, certain amendments relating to the issuance
of additional securities and increasing the Shareholder vote required to
terminate the Advisory Agreement may be characterized in the view of the
Securities and Exchange Commission as "anti-takeover measures" and could have
the effect of delaying, discouraging or preventing a change in control of the
Trust even if Shareholders holding a majority of the voting shares believed
such change of control was in their best interests. See "PROXY STATEMENT
SUMMARY--Anti-Takeover Effects," "RISK FACTORS--Certain Anti-Takeover
Provisions May Inhibit a Change in Control," "ADVISORY AGREEMENT PROPOSAL" and
"TRUST AMENDMENTS PROPOSAL--Anti-Takeover Effects."
If the Contribution Proposal, the Advisory Agreement Proposal and the
amendments to the Declaration of Trust are approved, the Shareholders will be
asked to consider and vote on proposals to approve a reverse split of the
capital stock of the Trust (the "Reverse Split") and to authorize the Board of
Trustees to determine the magnitude and timing of the Reverse Split. See
"REVERSE SPLIT."
If the Contribution Proposal, the Advisory Agreement Proposal, the
amendments to the Declaration of Trust and the Reverse Split are approved, the
Shareholders will also be asked to elect eight (8) trustees to the Board of
Trustees. If all of the foregoing proposals are approved, the Shareholders
will also be asked to consider and vote on a proposal to approve the Amended
and Restated Starwood Financial Trust 1996 Share Incentive Plan (the
"Incentive Plan") and to increase the number of Class A Shares available for
issuance upon exercise of options and other awards granted thereunder and a
proposal to ratify the appointment of Price Waterhouse LLP as the Trust's
independent public accountants for the year ended December 31, 1997. See
"ELECTION OF TRUSTEES," "INCENTIVE PLAN PROPOSAL" and "RATIFICATION OF
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS."
Details of the proposals to be voted on at the Annual Meeting (the
"Proposals") and other important matters are contained in the attached Proxy
Statement, which you are encouraged to read carefully. The adoption and
implementation of the Proposals will have the effects, and subject the
Shareholders to the risks, conflicts of interest and other factors set forth
under "RISK FACTORS" in the Proxy Statement, including the following:
. The voting interests of the holders of the Trust's Class A Shares (the
"Class A Shareholders") not affiliated with SAHI Partners, L.P. ("SAHI
Partners"), SAHI, Inc., Starwood Mezzanine or SOFI IV (collectively,
"Starwood") will be decreased from 20.36% to .49%, subject to
adjustment, if the Contribution Proposal is approved and consummated.
See "CONTRIBUTION PROPOSAL."
. The percentage ownership interest in the Trust of the Class A
Shareholders not affiliated with Starwood will be decreased from 30.54%
to .73%, subject to adjustment, if the Contribution Proposal is approved
and consummated. See "CONTRIBUTION PROPOSAL."
. The number of Class A Shares issued to Starwood Mezzanine and SOFI IV
and the amount of cash to be paid to Starwood Mezzanine and SOFI IV upon
consummation of the Contribution Proposal were determined based on
negotiations between the Trust and each of Starwood Mezzanine and SOFI
IV
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and were determined using a price per Class A Share of $2.50 per share.
The price per share of the Class A Shares as quoted by the American
Stock Exchange at the close of trading on February 6, 1998 was $5.25.
See "RISK FACTORS--Conflicts of Interests."
. The consummation of the Contribution is subject to the satisfaction or
waiver by the Trust and/or Starwood Mezzanine and SOFI IV of a number of
conditions precedent, including approval of all of the Proposals by the
Shareholders, approval by the limited partners of Starwood Mezzanine and
SOFI IV and the absence of any event that would have a material adverse
effect on the Trust, the Interests or the First Mortgage Portfolio. The
closing of the Contribution and the other transactions described in this
Proxy Statement is also subject to receipt of written confirmation by
the Internal Revenue Service that the Trust is able to elect to qualify
as a REIT for its taxable year ending December 31, 1998. There can be no
assurance that the conditions precedent will be satisfied or waived and
therefore that the Contribution will be consummated. See "CONTRIBUTION
PROPOSAL--Contribution Agreement."
. There will be an increase in the real estate investment risks as a
result of the consummation of the Contribution, including the effect of
economic and other conditions on property values, the general
illiquidity of real estate investments, the risks of default in respect
of mortgage or other debt covenants (and risks attendant thereto, such
as delays frequently encountered by lenders in enforcing remedies or in
gaining control over the real estate collateral), the abilities of the
properties collateralizing debt instruments held by the Trust or
properties which are owned by the Trust to generate revenues sufficient
to meet operating expenses and to pay scheduled debt service, the risk
that prepayment restrictions may be insufficient to deter prepayments,
the existence of junior mortgages that may affect the Trust's rights,
the effect of competition from properties owned by others, liability
associated with uninsurable losses and unknown environmental
liabilities.
. Elimination of cumulative voting, establishment of a classified board,
requiring approval of Shareholders holding two-thirds of the voting
shares prior to certain asset transfers, certain amendments relating to
the issuance of additional securities and increasing the Shareholder
vote required to terminate the Advisory Agreement may be characterized
in the view of the Securities and Exchange Commission as "anti-takeover
measures" and could have the effect of delaying, discouraging or
preventing a change in control of the Trust even if Shareholders holding
a majority of the voting shares believed such change of control was in
their best interests.
. The amendments to the Declaration of Trust may increase potential
conflicts of interests by permitting the Trust to originate or acquire
mortgage loans made to borrowers affiliated with the Trust and to
acquire securities and investments that are collateralized by or made to
borrowers affiliated with the Trust.
. Messrs. Sternlicht, Eilian, Grose and Sugarman, four of the seven
current Trustees and Messrs. Dishner and Kleeman, nominees for Trustee,
have indirect economic interests in properties that may compete with
properties which the Trust may acquire or which may collateralize debt
investments of the Trust in the future, thus creating a conflict of
interest between the Trust and such Trustees. Messrs. Sternlicht,
Eilian, Grose, Sugarman, Dishner and Kleeman are not required to present
any investment opportunities to the Trust or invest in any type of
assets through the Trust. Messrs. Sternlicht, Eilian and Sugarman have
been nominated for re-election to the Board of Trustees.
. Conflicts of interests between the Trust and the Advisor in relation to
business decisions regarding the Trust could result in decisions that do
not fully reflect the interests of all of the Shareholders. In addition,
certain Trustees and executive officers of the Trust are also directors
and executive officers of the Advisor and have a substantial economic
and voting interest in the Advisor.
. There can be no assurance that the transactions contemplated by the
Letters of Intent will be consummated and, if not consummated that
suitable alternative investment opportunities will be available.
. The Trust must rely on the experience of the Advisor's employees
generally, and in particular the Trustees not affiliated with the
Advisor or Starwood must rely on information provided by the Advisor to
review transactions of the Trust.
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. Lack of experience of the Advisor in managing a mortgage REIT may have
an adverse effect on the Trust.
. Sales of Class A Shares by Starwood Mezzanine or SOFI IV or their
respective partners (or the perception that such sales could occur)
could adversely affect the trading prices for the Class A Shares.
. The Board of Trustees has reviewed the assets being contributed pursuant
to the Contribution Proposal and will monitor these assets and the
Trust's future investments with the intent of maintaining the Trust's
status as a REIT. However, the Trust may be limited in the types of
investments it may make in the future since qualification as a REIT
depends on the Trust continuing to satisfy several asset and income
tests as well as other tests, which in turn will be dependent in part on
the Trust's operating results.
. There will be an increased risk that the Trust will be a "pension-held
REIT" and therefore that any qualified pension plan owning 10% or more
of the Trust's shares, by value, might have a portion of its dividend
income from the Trust taxed as unrelated business taxable income
("UBTI").
The Board of Trustees has appointed an Independent Committee (the
"Independent Committee") comprised of the Trustees who are not affiliated with
Starwood or the Advisor to evaluate the Proposals. The Independent Committee
and the Board of Trustees believe that the Proposals, taken as a whole, are in
the best interests of both the Trust and the Shareholders. In presenting the
Proposals to the Board of Trustees, representatives of Starwood Mezzanine and
SOFI IV informed the Trustees that the Contribution Proposal, the Advisory
Agreement Proposal and the Trust Amendments Proposals were prepared and
negotiated over a long period of time with a number of different parties,
including the Independent Committee and the partners of Starwood Mezzanine and
SOFI IV, with an objective of carefully, reasonably and fairly balancing and
responding to the concerns and interests of all parties, including the Trust
and its Shareholders. Consequently, the overall transaction was presented to
the Trust and the Board of Trustees as a single proposal and package and not
as a series independent and separate components. While the Board of Trustees
determined to provide the Shareholders an opportunity to vote on these
proposals separately, Starwood Mezzanine and SOFI IV's obligation to
consummate the Contribution is conditioned upon approval by the Shareholders
of each of the Proposals.
While the Board of Trustees did explore other alternatives to the
Contribution Proposal, the Advisory Agreement Proposal and the Declaration of
Trust Proposal, the Board of Trustees concluded that acquiring the Letters of
Intent, the Interests and the First Mortgage Portfolio and adopting the
Advisory Agreement provides Shareholders with a potential for growth of their
investment and overall return. The Board's conclusion was based on: (a) the
fact that, on a pro forma basis for the consummation of the Contribution
Proposal, on December 31, 1997 the net tangible book value per Class A Share
on a fully diluted basis would have been $2.36 per Class A Share, an increase
of $1.47 per Class A Share or 165.1% from the actual net tangible book value
per Class A Share on a fully diluted basis on such date of $0.89 per Class A
Share; (b) the ability of the Trust to implement its purpose and investment
policy through the consummation of the Contribution; (c) the increase in the
real estate related assets owned by the Trust upon acquisition of the Letters
of Intent, the Interests and the First Mortgage Portfolio from approximately
$10 million to over $1 billion; and (d) the experience and track record of
Starwood in making real-estate related investments. The Board of Trustees
placed significant weight on written material and oral presentations received
from the independent financial advisor, the investment banking firm of
Houlihan Lokey Howard & Zukin ("Houlihan"), and the opinion given by Houlihan
that the Contribution Proposal is fair from a financial point of view to the
Trust and its Shareholders. In making its recommendation, the Independent
Committee and the Board of Trustees also considered a number of factors which
they deemed to be material, including: (i) a consideration of other strategic
and financial alternatives available to the Trust; (ii) the Trustees'
knowledge of the business, operations, properties, assets, earnings, financial
condition, capital needs and future prospects of the Trust; (iii) the
presentations of Houlihan regarding the valuation of the Interests and the
fairness of the Contribution Proposal; (iv) the terms and conditions of the
Contribution Agreement, the Advisory Proposal and the Trust Amendments
Proposal, taken as a whole; (v) the
<PAGE>
recent historical trading prices of the Trust's Class A Shares; (vi)
Houlihan's opinion that the Contribution Proposal is fair, from a financial
point of view, to the Trust and its Shareholders; (vii) the Trust's compliance
with the Shareholders Agreement which contains certain provisions designed to
protect Shareholders not affiliated with Starwood; and (viii) the fact that
Shareholders who desire to liquidate their investment can do so by selling
their Class A Shares on AMEX.
YOUR BOARD OF TRUSTEES HAS CONCLUDED THAT THE CONTRIBUTION PROPOSAL, THE
ADVISORY AGREEMENT PROPOSAL, THE AMENDMENTS TO THE DECLARATION OF TRUST, THE
REVERSE SPLIT, THE ELECTION OF THE NOMINEES AS TRUSTEES, THE INCENTIVE PLAN
AND THE RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP AS THE TRUST'S
INDEPENDENT PUBLIC ACCOUNTANTS, TAKEN AS A WHOLE, ARE IN THE BEST INTERESTS OF
BOTH THE TRUST AND THE SHAREHOLDERS. THE BOARD OF TRUSTEES RECOMMENDS THAT YOU
VOTE FOR APPROVAL OF ALL OF THE PROPOSALS.
All Shareholders are cordially invited to attend the Annual Meeting in
person. Any Shareholder attending the Annual Meeting may vote in person even
if he or she previously returned a proxy.
Sincerely,
/s/ Barry S. Sternlicht
Barry S. Sternlicht
Chairman of the Board
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Angeles
Participating Mortgage Trust, a California business trust (the "Trust"), will
be held at the American Stock Exchange, 86 Trinity Place, New York, New York
on March 13, 1998 at 10:30 a.m. Eastern Standard Time (the "Annual Meeting"),
for the following purposes as further described in the accompanying Proxy
Statement:
1. At the Annual Meeting, the shareholders of the Trust (the "Shareholders")
will be asked to consider and vote on proposals pursuant to which, among other
things, (a) the Trust will pay $28.5 million of cash and issue approximately
55,148,000 Class A Shares of the Trust (the "Class A Shares"), subject to
adjustment, at a price of $2.50 per share to Starwood Mezzanine Investors,
L.P. ("Starwood Mezzanine") in exchange for the contribution by Starwood
Mezzanine to the Trust of its entire interest in a portfolio of mortgage and
partnership loans secured by residential, hotel, office and mixed use real
estate and other assets (collectively, the "Starwood Mezzanine Interests");
and (b) the Trust will pay $313.0 million of cash and issue 247,074,800 Class
A Shares, subject to adjustment, at a price of $2.50 per share to Starwood
Opportunity Fund IV, L.P. ("SOFI IV") in exchange for the contribution by SOFI
IV to the Trust of $17.9 million of cash, its rights under certain letters of
intent to purchase or originate debt interests (the "Letters of Intent"), its
entire interest in a portfolio of mortgage loans and leases secured by hotel,
office and mixed use real estate and other assets (collectively, the "SOFI IV
Interests" and, together with the Starwood Mezzanine Interests, the
"Interests") and a portfolio of first mortgage loans (the "First Mortgage
Portfolio") (each of the proposals set forth in (a) and (b) above are referred
to collectively as the "Contribution Proposal" and the contribution of cash,
the Letters of Intent, the Interests and the First Mortgage Portfolio to the
Trust is referred to as the "Contribution"). See "CONTRIBUTION PROPOSAL" and
"DESCRIPTION OF THE INTERESTS." For a description of the adjustments and
prorations, if any, with respect to the contributions by the parties and the
Class A Shares to be issued to each party, see "CONTRIBUTION PROPOSAL--
Contribution Agreement--Calculation of Class A Shares to Be Issued;
Adjustments."
2. If the Contribution Proposal is approved, the Trust will enter into an
Advisory Agreement (the "Advisory Agreement") with Starwood Financial
Advisors, L.L.C. (the "Advisor") pursuant to which the Advisor will manage the
investment affairs of the Trust. The Shareholders will be asked to consider
and vote on proposals (collectively, the "Advisory Agreement Proposal") to
amend the Trust's Amended and Restated Declaration of Trust ("Declaration of
Trust") including the following:
(a) A proposal to amend the Declaration of Trust to revise provisions
with respect to the termination of the Advisory Agreement to limit the
ability of the Board of Trustees to terminate the Advisory Agreement to
specified termination events (which generally include violations of the
Advisory Agreement by the Advisor, a bankruptcy event of the Advisor or the
imposition of a material liability on the Trust as a result of the
Advisor's bad faith, willful misconduct, gross negligence or reckless
disregard of duties) and to increase the required Shareholder vote to
terminate the Advisory Agreement from requiring approval of Shareholders
holding a majority of the voting shares to requiring approval of
Shareholders holding two-thirds of the voting shares; and
(b) A proposal to amend the Declaration of Trust to revise the
requirements with respect to the independence of certain members of the
Board of Trustees from requiring that not more than 49% of the total number
of Trustees may be affiliated with the Advisor to requiring that a minimum
of the greater of (i) 33 1/3% of the total number of Trustees and (ii)
three (3) members of the Board of Trustees be unaffiliated with the Advisor
or Starwood Capital Group, L.L.C.
Approval of the proposals listed in 2(a) and 2(b) is contingent upon
approval of both of the proposals listed in 2(a) and 2(b). See "ADVISORY
AGREEMENT PROPOSAL."
3. If the Contribution Proposal and the Advisory Agreement Proposal are
approved, the Shareholders will consider and vote on the following proposals
to further amend the Declaration of Trust:
(a) to change the name of the Trust to Starwood Financial Trust;
<PAGE>
(b) to amend the purpose of the Trust (i) to allow the Trust to originate
or acquire certain mortgage loans made to borrowers that are affiliated
with the Trust and to acquire certain securities and investments that are
collateralized by or made to borrowers that are affiliated with the Trust,
(ii) to clarify that (1) the primary purpose of the Trust is to acquire a
diversified portfolio of debt or debt like interests in real estate related
assets, (2) the Trust generally will not obtain management rights over
equity interests in the assets underlying non-performing or sub-performing
debt unless the Trust's efforts to restructure such debt into performing
debt are unsuccessful, (3) the Trust's authority with respect to its asset
portfolio includes the power to acquire, hold, own, develop, redevelop,
construct, improve, maintain, operate, manage, sell, lease, rent, transfer,
encumber, mortgage, convey, exchange and otherwise dispose of or deal with
its asset portfolio and that its asset portfolio may be held directly or
indirectly and (4) the Board of Trustees has exclusive authority over the
management of the Trust, the conduct of its affairs and the management and
disposition of its property and (iii) to include certain investment
restrictions;
(c) to require the approval of Shareholders holding two-thirds of the
voting shares of the Trust prior to any sale, transfer or other disposition
of all or substantially all of the assets of the Trust;
(d) to eliminate cumulative voting;
(e) to establish a classified Board of Trustees with two classes having
terms of two years each and to increase the minimum required number of
members of the Board of Trustees from three to seven;
(f) to amend the "Excess Share" provisions of the Declaration of Trust to
reduce the risk that the Trust could fail to qualify as a real estate
investment trust ("REIT") for federal income tax purposes;
(g) to eliminate certain limitations on the indemnification by the Trust
of its Trustees, and certain others performing duties for the Trust and to
clarify certain provisions with respect to Shareholder liability and
indemnification;
(h) to permit amendments to the Declaration of Trust to facilitate a
change in the Trust's domicile or to change the form of the Trust to a
corporation without Shareholder approval if the Board of Trustees
determines that such amendments do not materially and adversely effect the
rights of the Shareholders; and
(i) to effect certain technical amendments including reflecting the
change in the Trust's principal place of business, clarifying that
additional Class B Shares required to be issued by the Trust will be issued
only upon issuance of Class A Shares and that such issuance will be within
60 days on a pro rata basis to holders of then outstanding Class B Shares,
clarifying that (i) a merger of the Trust with and into another entity is a
termination event unless the Trust is the surviving entity or if the
purpose of the merger is primarily to change the domicile of the Trust,
(ii) that a change of the Trust's form from a business trust to a
corporation is not a termination event, (iii) that any provision of the
Declaration of Trust that sets forth a supermajority voting requirement can
only be amended by the supermajority vote set forth in such provision, (iv)
the provisions of the Declaration of Trust with respect to additional
issuances of securities, and (v) that the existence of the Trust is
perpetual.
Approval of each of the proposals listed in 3(a) through 3(i) is contingent
upon approval of all of the proposals listed in 3(a) through 3(h). See "TRUST
AMENDMENTS PROPOSAL."
The amendments to the Declaration of Trust described in paragraphs 2(a),
3(c) through 3(e) and the amendments to the Declaration of Trust relating to
the issuance of additional securities may have the effect of delaying,
discouraging or preventing a change of control of the Trust even if
Shareholders holding a majority of the voting shares believed such change of
control was in their best interests. See "PROXY STATEMENT SUMMARY--Anti-
Takeover Effects," "RISK FACTORS--Certain Anti-Takeover Provisions May Inhibit
a Change in Control," "ADVISORY AGREEMENT PROPOSAL" and "TRUST AMENDMENTS
PROPOSAL--Anti-Takeover Certain Effects."
4. If the Contribution Proposal, the Advisory Agreement Proposal and the
amendments to the Declaration of Trust are approved, the Shareholders will
also be asked to consider and vote on a proposal to approve a reverse split
(the "Reverse Split") of the Class A Shares and the Class B Shares of the
Trust and to grant the Board of
<PAGE>
Trustees the authority to determine the magnitude and timing of the Reverse
Split, subject to certain limitations, and to amend the Declaration of Trust
to effect the Reverse Split. See "REVERSE SPLIT."
5. To elect to the Board of Trustees eight (8) members to hold office until
the next Annual Meeting and until their successors have been elected and
qualified. The nominees to the Board of Trustees are Barry S. Sternlicht, Jay
Sugarman, Jeffrey G. Dishner, Jonathan D. Eilian, Merrick R. Kleeman, Robin
Josephs, William M. Matthes and Kneeland C. Youngblood. See "ELECTION OF
TRUSTEES."
6. If the foregoing proposals are approved, to consider and vote upon a
proposal to approve the Amended and Restated Starwood Financial Trust 1996
Share Incentive Plan and to increase the number of Class A Shares available
for issuance upon exercise of options and other awards granted thereunder. See
"INCENTIVE PLAN PROPOSAL."
7. If the foregoing proposals are approved, to consider and vote upon a
proposal to ratify the appointment of Price Waterhouse LLP as the Trust's
independent accountants for the fiscal year ended December 31, 1997. See
"RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS."
8. To transact such other business as may properly come before the Annual
Meeting or any postponement or adjournment thereof.
The Board of Trustees has fixed January 21, 1998 as the record date for the
determination of Shareholders entitled to receive notice of and to vote at the
Annual Meeting or any postponement or adjournment thereof, and only holders of
record of Class A Shares and Class B Shares at the close of business on that
day will be entitled to vote.
By Order of the Board of Trustees
/s/ Madison F. Grose
Madison F. Grose
Secretary of the Trust
Greenwich, Connecticut
February 11, 1998
- -------------------------------------------------------------------------------
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, TO ENSURE YOUR
REPRESENTATION AT THE ANNUAL MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE POSTAGE-PREPAID ENVELOPE
ENCLOSED FOR THAT PURPOSE.
- -------------------------------------------------------------------------------
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
THREE PICKWICK PLAZA
SUITE 250
GREENWICH, CONNECTICUT 06830
----------------
PROXY STATEMENT
----------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 13, 1998
This proxy statement (the "Proxy Statement") is being sent to shareholders
of Angeles Participating Mortgage Trust, a California business trust (the
"Trust"), on or about February 13, 1998 in connection with the solicitation by
the Board of Trustees of the Trust (the "Board of Trustees") of proxies to be
voted at the Trust's 1997 Annual Meeting of Shareholders (the "Annual
Meeting") to be held at the American Stock Exchange, 86 Trinity Place, New
York, New York, on March 13, 1998 at 10:30 a.m. Eastern Standard Time, or at
any postponement or adjournment thereof.
At the Annual Meeting, the shareholders of the Trust (the "Shareholders")
will be asked to consider and vote on proposals pursuant to which, among other
things, (a) the Trust will pay $28.5 million of cash and issue approximately
55,148,000 Class A Shares of the Trust (the "Class A Shares"), subject to
adjustment, at a price of $2.50 per share to Starwood Mezzanine Investors,
L.P. ("Starwood Mezzanine") in exchange for the contribution by Starwood
Mezzanine to the Trust of its entire interest in a portfolio of mortgage and
partnership loans secured by residential, hotel, office and mixed use real
estate and other assets (collectively, the "Starwood Mezzanine Interests");
and (b) the Trust will pay $313.0 million of cash and issue 247,074,800 Class
A Shares, subject to adjustment, at a price of $2.50 per share to Starwood
Opportunity Fund IV, L.P. ("SOFI IV") in exchange for the contribution by SOFI
IV to the Trust of $17.9 million of cash, its rights under certain letters of
intent to purchase or originate debt interests (the "Letters of Intent"), its
entire interest in a portfolio of mortgage loans and leases secured by hotel,
office and mixed use real estate and other assets (collectively, the "SOFI IV
Interests" and, together with the Starwood Mezzanine Interests, the
"Interests") and a portfolio of first mortgage loans (the "First Mortgage
Portfolio") (each of the proposals set forth in (a) and (b) above are referred
to collectively as the "Contribution Proposal" and the contribution of cash,
the Letters of Intent, the Interests and the First Mortgage Portfolio to the
Trust is referred to as the "Contribution"). See "CONTRIBUTION PROPOSAL" and
"DESCRIPTION OF THE INTERESTS." For a description of the adjustments and
prorations, if any, with respect to the contributions by the parties and the
Class A Shares to be issued to each party, see "CONTRIBUTION PROPOSAL--
Contribution Agreement--Calculation of Class A Shares to Be Issued;
Adjustments."
If the Contribution Proposal is approved, the Trust will enter into an
Advisory Agreement (the "Advisory Agreement") with Starwood Financial
Advisors, L.L.C. (the "Advisor") pursuant to which the Advisor will manage the
investment affairs of the Trust. The Shareholders will be asked to consider
and vote on a proposal to amend the Trust's Amended and Restated Declaration
of Trust ("Declaration of Trust") to reflect the terms of the Advisory
Agreement, including, among other things, conforming provisions in the
Declaration of Trust with respect to the termination of the Advisory
Agreement, and revising the provisions with respect to the independence of
certain members of the Board of Trustees from requiring that not more than 49%
of the total number of Trustees may be affiliated with the Advisor to
requiring that a minimum of the greater of (i) 33 1/3% of the total number of
Trustees and (ii) three (3) members of the Board of Trustees be unaffiliated
with the Advisor or Starwood Capital Group, L.L.C. (the proposals to amend the
Declaration of Trust to reflect the terms of the Advisory Agreement are
collectively referred to as the "Advisory Agreement Proposal"). See "ADVISORY
AGREEMENT PROPOSAL."
If the Contribution Proposal and the Advisory Agreement Proposal are
approved, the Shareholders will be asked to consider and vote on a proposal to
further amend the Declaration of Trust to, among other things: (a) change the
name of the Trust to Starwood Financial Trust; (b) change the purpose and
investment policy of
<PAGE>
the Trust (i) to allow the Trust to originate or acquire certain mortgage
loans made to borrowers that are affiliated with the Trust and to acquire
certain securities and investments that are collateralized by or made to
borrowers that are affiliated with the Trust, (ii) to clarify that the primary
purpose of the Trust is to acquire a diversified portfolio of debt or debt
like interests in real estate related assets, the Trust generally will not
obtain management rights over equity interests in the assets underlying non-
performing or sub-performing debt unless the Trust's efforts to restructure
such debt into performing debt are unsuccessful and the Trust's powers with
respect to its purpose and investment policy and (iii) to include certain
investment restrictions; (c) require the approval of Shareholders holding two-
thirds of the voting shares of the Trust prior to any sale, transfer or other
disposition of all or substantially all of the assets of the Trust; (d)
eliminate cumulative voting of Shareholders; (e) establish a classified Board
of Trustees with two classes having terms of two years each and to increase
the required number of members on the Board of Trustees from three to seven;
(f) amend the "Excess Share" provision of the Declaration of Trust to reduce
the risk that the Trust could fail to qualify as a real estate investment
trust ("REIT") for federal income tax purposes; (g) to eliminate certain
limitations on the indemnification by the Trust of its Trustees, and certain
others performing duties for the Trust and to clarify certain provisions with
respect to Shareholder liability and indemnification; (h) to permit amendments
to the Declaration of Trust to facilitate a change in the Trust's domicile or
to change the form of the Trust to a corporation without Shareholder approval
if the Board of Trustees determines that such amendments do not materially and
adversely effect the rights of the Shareholders; and (i) effect certain
technical amendments and clarifications. See "TRUST AMENDMENTS PROPOSAL."
Elimination of cumulative voting, establishment of a classified board,
requiring approval of Shareholders holding two-thirds of the voting shares
prior to certain asset transfers, certain amendments relating to the issuance
of additional securities and increasing the Shareholder vote required to
terminate the Advisory Agreement may be characterized in the view of the
Securities and Exchange Commission as "anti-takeover measures" and could have
the effect of delaying, discouraging or preventing a change in control of the
Trust even if Shareholders holding a majority of the voting shares believed
such change of control was in their best interests. See "PROXY STATEMENT
SUMMARY--Anti-Takeover Effects," "RISK FACTORS--Certain Anti-Takeover
Provisions May Inhibit a Change in Control," "ADVISORY AGREEMENT PROPOSAL" and
"TRUST AMENDMENTS PROPOSAL--Anti-Takeover Effects."
If the Contribution Proposal, the Advisory Agreement Proposal and the
amendments to the Declaration of Trust are approved, the Shareholders will be
asked to consider and vote on proposals to approve a reverse split of the
capital stock of the Trust (the "Reverse Split") and to authorize the Board of
Trustees to determine the magnitude and timing of the Reverse Split. See
"REVERSE SPLIT."
If the Contribution Proposal, the Advisory Agreement Proposal, the
amendments to the Declaration of Trust and the Reverse Split are approved, the
Shareholders will also be asked to elect eight (8) trustees to the Board of
Trustees. If all of the foregoing proposals are approved, the Shareholders
will also be asked to consider and vote on a proposal to approve the Amended
and Restated Starwood Financial Trust 1996 Share Incentive Plan (the
"Incentive Plan") and to increase the number of Class A Shares available for
issuance upon exercise of options and other awards granted thereunder and a
proposal to ratify the appointment of Price Waterhouse LLP as the Trust's
independent public accountants for the year ended December 31, 1997. See
"ELECTION OF TRUSTEES," "INCENTIVE PLAN PROPOSAL" and "RATIFICATION OF
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS.
<PAGE>
PROXY STATEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information contained elsewhere in this Proxy Statement and the Exhibits
hereto. Each Shareholder is urged to read this Proxy Statement in its
entirety.
THE TRUST
The Trust is a California business trust. Subject to the receipt by the
Trust of a written agreement from the Internal Revenue Service ("IRS") that
provides that the Trust is eligible to make an election to be taxed as a REIT
for its taxable year ending December 31, 1998, the Board of Trustees believes
that the Trust will be treated as a real estate investment trust (or "REIT")
for Federal income tax purposes for its 1998 taxable year. See "TRUST
AMENDMENTS PROPOSAL--Federal Income Tax Aspects of the Contribution Proposal
and the Change of the Trust's Purpose and Investment Policy--Closing
Agreement." The Trust was formed in April 1988. The Trust's capital structure
consists of Class A Shares and Class B Shares, $.01 par value ("Class B
Shares"). The currently outstanding Class B Shares are entitled to a 1% equity
interest and a 33% voting interest in the Trust. The Class B Shares are
convertible into Class A Shares at the option of the holder at a rate of 49
Class B Shares for one Class A Share. The Trust is required pursuant to the
Declaration of Trust to issue one Class B Share for each two Class A Shares
that are issued. The Class B Shares are issued to the Class B Shareholders for
par on a pro rata basis. If the Contribution is consummated, the Class B
Shareholders will be issued approximately 151,111,400 Class B Shares, subject
to adjustment, at a purchase price of $0.01 per share. Each of the Class A and
Class B Shares are entitled to one vote per share. The Trust is also currently
the sole general partner and as of December 31, 1997 held an 8.05% interest in
APMT Limited Partnership (the "Partnership"). Interests in the Partnership are
referred to herein as "Units." If the Contribution Proposal is approved by the
Shareholders, the Partnership will be terminated on the date that the
Contribution is consummated (the "Contribution Date") and each outstanding
Unit held by holders other than the Trust will be exchanged for the Class A
Shares, resulting in the issuance of 4,568,944 Class A Shares to Starwood
Mezzanine and the issuance of 2,284,472 Class B Shares to the current Class B
Shareholders at a price of $0.01 per share.
The Class A Shares are currently publicly traded on the American Stock
Exchange ("AMEX"). The Trust currently falls below the AMEX continued listing
guidelines and, as a result, there is no assurance that the Class A Shares
will remain listed. The Trust is hopeful that the acquisition of the Interests
and the First Mortgage Portfolio will allow its business to be sufficient to
maintain the AMEX listing of the Class A Shares.
The primary purpose and the investment policy of the Trust as currently
stated in the Declaration of Trust is to (i) originate mortgage loans to
and/or acquire mortgage loans to unrelated entities or to 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 the Trust, which may include warrants, equity participations
or similar rights incidental to a debt investment by the Trust, (iii) make,
hold and dispose of purchase money loans with respect to assets sold by the
Trust, and (iv) acquire positions in non-performing and sub-performing debt
for the purpose of either restructuring it as performing debt or of obtaining
shortly thereafter primary management rights over or equity interests in the
underlying assets securing such debt (the "Current Portfolio"). The Trust is
currently subject to certain investment restrictions discussed below. The
Trust's primary assets as of December 31, 1997 were short-term, liquid real
estate investments, cash and cash equivalents, which are held directly and
indirectly through the Trust's interest in the Partnership. See "BACKGROUND OF
THE TRUST."
If the Proposals are approved by the Shareholders of the Trust, on the
Contribution Date the Trust will acquire the Interests, the Letters of Intent,
cash and the First Mortgage Portfolio, the purpose and investment policy of
the Trust will be changed, the Partnership will be terminated and each
outstanding Unit held by holders other than the Trust will be exchanged for
one Class A Share, and the Trust will enter into the Advisory Agreement with
the Advisor. See "CONTRIBUTION PROPOSAL," "DESCRIPTION OF THE INTERESTS,"
"TRUST AMENDMENTS PROPOSAL," and "ADVISORY AGREEMENT PROPOSAL."
<PAGE>
THE PARTNERSHIP
The Partnership was formed in September 1996 with the Trust as its sole
general partner and Starwood Mezzanine as its initial limited partner. The
Partnership's primary real estate-related asset prior to October 1, 1997 was a
mortgage loan in the form of mortgage participation certificates (the "Warwick
Certificates") which represented 100% of the beneficial ownership interest in
a $3,707,000 performing, non-recourse first mortgage loan secured by the
Warwick Hotel and Apartments located in Philadelphia, Pennsylvania (the
"Warwick Hotel"). The Warwick Certificates were prepaid on October 1, 1997 and
the primary assets of each of the Trust and the Partnership as of December 31,
1997 were short-term, liquid real estate investments, cash and cash
equivalents.
As of December 31, 1997 the Trust held an 8.05% interest in the Partnership
and Starwood Mezzanine held a 91.95% interest in the Partnership. The
Partnership will be terminated and the outstanding Units held by holders other
than the Trust will be exchanged for 4,568,944 Class A Shares on the
Contribution Date. As required by the Declaration of Trust, an additional
2,284,472 Class B Shares will be issued to the current holders of Class B
Shares at a purchase price of $.01 per share in connection with the exchange.
If the Contribution Proposal is not consummated, the Partnership will not be
terminated, the Units will not be exchanged for Class A Shares and the
additional Class B Shares will not be issued. As the sole general partner of
the Partnership, the Trust currently manages the business and affairs of the
Partnership. See "BACKGROUND OF THE TRUST--The Partnership."
CONTRIBUTION OF INTERESTS
The Shareholders are being asked to consider and vote on proposals pursuant
to which (i) the Trust will pay cash and issue approximately 55,148,000 Class
A Shares, subject to adjustment, at a price of $2.50 per share to Starwood
Mezzanine in exchange for the contribution of the Starwood Mezzanine Interests
to the Trust; (ii) the Trust will pay cash and issue 247,074,800 Class A
Shares, subject to adjustment, at a price of $2.50 per share to SOFI IV in
exchange for the contribution of cash, SOFI IV's rights under the Letters of
Intent, the SOFI IV Interests and the First Mortgage Portfolio. The Trust
currently estimates that approximately $28.5 million will be paid to Starwood
Mezzanine, approximately $313.0 million will be paid to SOFI IV as
consideration for the First Mortgage Portfolio, SOFI IV will contribute
approximately $17.9 million and the Trust will issue an aggregate of
approximately 302.2 million Class A Shares, subject to adjustment for stock
splits and similar recapitalizations, to Starwood Mezzanine and SOFI IV in
exchange for the Interests. The Board of Trustees has appointed an independent
committee comprised of the three independent Trustees (the "Independent
Committee") to evaluate the Proposals on behalf of the Shareholders. The
Independent Committee has engaged an independent financial advisor to analyze
the fairness of the Contribution Proposal from a financial point of view.
While the Independent Committee, the Board of Trustees, Starwood Mezzanine and
SOFI IV ultimately determined the valuation of the Letters of Intent, the
Interests and the First Mortgages, the advice of the independent financial
advisor was a relevant factor in making such determination. The allocation of
the Class A Shares between SOFI IV and Starwood Mezzanine, the amount of cash
to be contributed by SOFI IV and the amount of any additional cash payment to
be made by the Trust to Starwood Mezzanine and SOFI IV may vary from the
estimates in this Proxy Statement, based on a number of factors including, the
repayment of any indebtedness included in the Interests and First Mortgage
Portfolio and the consummation or termination of any Letter of Intent. See "--
Fairness Opinion with Respect to the Contribution Proposal" and "CONTRIBUTION
PROPOSAL--Contribution Agreement--Calculation of Class A Shares to Be Issued;
Adjustments."
2
<PAGE>
The following is a summary description of the Interests and the First
Mortgage Portfolio:
INTERESTS AND FIRST MORTGAGE PORTFOLIO
<TABLE>
<CAPTION>
HISTORICAL COST
CURRENT ORIGINAL CARRYING BALANCE AS OF
UNDERLYING NUMBER OF BALANCE OR -------------------------- ORIGINAL INTEREST
TYPE OF PROPERTY BORROWERS COMMITMENT SEPTEMBER 30, DECEMBER 31, MATURITY ACCRUAL
LOAN/BORROWER TYPE IN CLASS AMOUNT 1997 1996 DATES RATES
------------- -------------- --------- ---------- ------------- ------------ ------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Senior Mortgages Office/Hotel/ 8(4) $502,114(4) $425,767 -- 1999 to 2004 Fixed: 8.97% to 16%
Mixed Use/ Variable: LIBOR +
Apartment 1.25 to 3.75%
Subordinate Office/Hotel/ 5(5) 175,375(5) 150,950 $151,076 2002 to 2005 Fixed: 10.0 to 15.25%
Mortgages Resort/Planned Variable: LIBOR +
Communities 1.75%
Opportunistic Office/Hotel/ 2 126,710 61,492 -- 1999 and 2007 6.0 to 17.0%
Mortgages Apartment
Unsecured Notes Office/Hotel 2 27,300 25,295 25,161 2002 and 2004 11.25% to 15.0%
Construction Assisted 2 92,390 69,728 0 1999 and 2004 12.0 to 12.5%
Loans Living/Resort
Real Estate Hotel 1 N/A(3) 170,132 -- N/A(3) N/A(3)
Under
Long-term Master
Lease
Loan Various 3 21,376 11,302 12,668 1999 and 2000 Fixed: 7.13%
Participations Variable: LIBOR +
.58 to 1.75%
Other Real Public bonds 2 40,250 40,467 -- 2002 and 2007 12.5 to 12.75%
Estate Related
Investment
--- -------- --------
Total 21 $955,133 $188,905
=== ======== ========
<CAPTION>
INTEREST
TYPE OF PAYMENT PRINCIPAL PARTICIPATION
LOAN/BORROWER RATES AMORTIZATION FEATURES
------------- --------------------- ------------ -------------
<S> <C> <C> <C>
Senior Mortgages Fixed: 8.0% to 10.82% Yes(1) Yes(2)
Variable: LIBOR +
1.25 to 3.75%
Subordinate Fixed: 10.0 to 15.25% Yes(1) Yes(2)
Mortgages Variable: LIBOR +
1.75%
Opportunistic 6.0 to 7.0% Yes(1) Yes(2)
Mortgages
Unsecured Notes 11.25% to 15.0% No Yes(2)
Construction 10.0 to 12.5% No No
Loans
Real Estate N/A(3) N/A(3) N/A(3)
Under
Long-term Master
Lease
Loan Fixed: 5.45 to 6.40% Yes(1) Yes
Participations Variable: LIBOR +
.58 to 1.75%
Other Real 12.5 to 12.75% No No
Estate Related
Investment
Total
</TABLE>
- ----
(1) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the
remaining principal due at maturity. In addition, one of the loans permits
additional annual prepayments of principal of up to $1.3 million without
penalty at the borrower's option.
(2) Under some of these loans, the lender receives additional payments
representing additional interest for participation in available cash flow
from operations of the property and the proceeds, in excess of a base
amount, arising from a sale or refinancing of the property. No cash flow
participation was earned through September 30, 1997.
(3) The lease is a triple net lease of under which the lessee pays all costs
associated with the operation of the hotels, including real estate taxes,
insurance, utilities, services and capital expenditures. The initial term
of the lease expires on December 31, 2010, and can be extended for up to
five, five-year terms at lessee's option. Rent payments under the lease
consist of base rent and additional rent based on the amount by which the
aggregate operating revenue for any given year exceeds the aggregate
operating revenue of the twelve months ended September 30, 1996.
(4) Includes a $6.1 million and a $37.0 million senior mortgage originated
subsequent to September 30, 1997 not included in the historical cost
balances as of September 30, 1997.
(5) Includes a $18.0 million subordinated mortgage originated subsequent to
September 30, 1997 not in the historical cost balances as of September 30,
1997.
3
<PAGE>
In addition to the Interests and the First Mortgage Portfolio described
above, SOFI IV is contributing to the Trust its rights under the Letters of
Intent and cash. The Letters of Intent are non-binding obligations to
originate or acquire mortgages on office, residential and hotel properties.
There can be no assurance that definitive agreements with respect to the
transactions contemplated by the Letters of Intent will be executed on the
terms set forth in the Letters of Intent or at all, and if executed that such
transactions will be consummated. If any transaction subject to a Letter of
Intent is consummated, the Trust will acquire the asset for the amount paid by
SOFI IV to acquire or originate the asset and the amount of cash contributed
by SOFI IV will be reduced by such amount. See "RISK FACTORS--Real Estate
Investment Risks," "CONTRIBUTION PROPOSAL," "DILUTION" and "DESCRIPTION OF THE
INTERESTS."
CHANGES IN THE INVESTMENT POLICY
The proposal to amend the Trust's Declaration of Trust will amend the
purpose and investment policy of the Trust as presently stated in the
Declaration of Trust. Such amendment will change the purpose and investment
policy of the Trust to (i) allow the Trust to originate or acquire certain
mortgage loans made to borrowers that are affiliated with the Trust and to
acquire certain securities and investments that are collateralized by or made
to borrowers that are affiliated with the Trust, (ii) to clarify that (a) the
primary purpose of the Trust is to acquire a diversified portfolio of debt or
debt like interests in real estate related assets, (b) the Trust generally
will not obtain management rights over equity interests in the assets
underlying non-performing or sub-performing debt unless the Trust's efforts to
restructure such debt into performing debt are unsuccessful, (c) the Trust's
authority with respect to the Diversified Portfolio includes the power to
acquire, hold, own, develop, redevelop, construct, improve, maintain, operate,
manage, sell, lease, rent, transfer, encumber, mortgage, convey, exchange and
otherwise dispose of or deal with the Diversified Portfolio and the Trust may
hold the Diversified Portfolio either directly or indirectly and (d) the Board
of Trustees has exclusive authority over the management of the Trust, the
conduct of its affairs and the management and disposition of its property and
(e) to include the Investment Restrictions described below in the Declaration
of Trust. The Trust has no present intention to originate or acquire loans
made to borrowers affiliated with the Trust.
The new primary purpose and investment policy of the Trust will be to (i)
originate mortgage loans and/or acquire mortgage loans or to acquire
securities collateralized, in whole or in part, by 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, which may include
warrants, equity participations or similar rights incidental to a debt
investment by the Trust, (iii) make, hold and dispose of purchase money loans
with respect to assets sold by the Trust, and (iv) acquire positions in non-
performing and sub-performing debt for the purpose of either restructuring it
as performing debt or, if such efforts are unsuccessful, of obtaining shortly
thereafter primary management rights over or equity interests in the
underlying assets securing such debt (the "Diversified Portfolio"). The
Trust's authority with respect to the Diversified Portfolio includes the power
to acquire, hold, own, develop, redevelop, construct, improve, maintain,
operate, manage, sell, lease, rent, transfer, encumber, mortgage, convey,
exchange and otherwise dispose of or deal with the Diversified Portfolio and
the Diversified Portfolio may be held by the Trust directly or indirectly. The
Board of Trustees has the ultimate authority over the management of the Trust,
the conduct of its affairs and the management and disposition of its property.
The Diversified Portfolio may include controlling or non-controlling
investments in or relating to any general category of real estate assets,
including without limitation, hotel, office, mixed-use, retail, industrial,
mini-storage and residential improvements to land, excluding any investments
prohibited by the Investment Restrictions described below.
The Trust is not and will not be permitted to make certain types of
investments as a result of the restrictions and conflicts described below (the
"Investment Restrictions"). Specifically, without the amendment, termination
or waiver of provisions of certain non-competition agreements between Starwood
Capital Group, L.P. ("Starwood Capital") and Starwood Hotels & Resorts Trust,
a publicly traded hotel REIT the shares of which are paired and trade with
those of Starwood Hotels & Resorts Worldwide, Inc., the Trust is prohibited
from: (i) making investments in loans collateralized by hotel assets where it
is anticipated that the underlying equity will
4
<PAGE>
be acquired by the debt holder within one (1) 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 the Trust or that are acquired as a result of the exercise of
remedies in respect of a loan in which the Trust has an interest) or (iii)
selling or contributing to or acquiring any interests in Starwood Hotels &
Resorts Trust, including debt positions or equity interests obtained by the
Trust under, pursuant to or by reason of the holding of debt positions. The
Trust is currently subject to additional restrictions that will terminate on
the Contribution Date if the Proposals are approved by the Shareholders. See
"RISK FACTORS--Conflicts of Interests," "--Changes in Policies" and "TRUST
AMENDMENTS PROPOSAL."
The Trust plans to originate and make investments in various types of income
producing commercial real estate and its current investment program emphasizes
senior and junior commercial mortgage loans, including mezzanine financing
(i.e., capital representing the level between 65% and 90% of property values),
higher yielding senior mortgage loans, non-performing or subperforming loans
and performing and non-performing subordinated interests ("Subordinated
Interests") in commercial mortgage-backed securities ("CMBS"). The Trust
anticipates that a majority of the investments to be held in its portfolio for
the long-term will be structured so that the Trust's investment is subordinate
to third party first mortgage debt but senior to the real estate
owner/operator's equity position. The Trust anticipates that it will invest in
a diverse array of real estate-related assets and enterprises that satisfy its
investment criteria including but not limited to the following:
. Mortgage Loans. The Trust will provide high-yielding first mortgage
loans to borrowers in need of flexible, custom-tailored financings.
These loans may be short, medium or long-term in duration. They may
include projects under construction, redevelopment or expansion, which
may ultimately be refinanced through more traditional sources once
capital improvements are completed.
. Mezzanine Loans. The Trust intends to take advantage of current market
opportunities to provide high-yielding loans that are subordinated to
first lien mortgage loans and secured by a second lien mortgage or a
pledge of the ownership interest in the borrowing property owner
("Mezzanine Loans"). Mezzanine Loans may also take the form of a
preferred equity investment in the borrower with substantially similar
terms.
. Opportunistic Loans and Minority Participations. The Trust intends to
acquire non-performing and sub-performing debt or minority participation
in such loans at a discount for the purpose of restructuring the debt to
a performing obligation. These assets may be priced below book value or
have a deemed book value which is less than reproduction cost.
. Triple Net Leases. The Trust may acquire properties that are subject to
long-term triple net lease arrangements with tenants that the Trust
believes to be creditworthy. In many cases, the fixed stream of payment
from such positions may have similar risk/reward characteristics as the
mortgage loans to be originated by the Trust.
. Subordinated Interests. The Trust may acquire rated and unrated
interests in short term, medium and long-term real estate-related debt
securities. In this regard, the Trust may pursue the acquisition of
performing and non-performing Subordinated Interests in CMBS including
junior non-investment grade classes as well as unrated classes.
For a more detailed description of the Trust's current investment program,
see "BACKGROUND OF THE TRUST--Investment Policy and Loan Portfolio."
ADVISORY AGREEMENT
On the Contribution Date, the Trust and the Advisor will enter into the
Advisory Agreement in substantially the form attached hereto as Exhibit E
pursuant to which the Advisor will manage the investment affairs of the Trust,
subject to the Trust's purpose and investment policy, the Investment
Restrictions and the directives of the Board of Trustees. The services to be
provided by the Advisor include the following: identifying investment
opportunities for the Trust; advising the Trust with respect to and effecting
acquisitions and dispositions of the Trust's investments; monitoring, managing
and servicing the Trust's loan portfolio; and arranging debt financing
5
<PAGE>
for the Trust. The Advisor will not act in a manner that is inconsistent with
the express direction of the Board of Trustees and will report to the Board of
Trustees and/or the officers of the Trust with respect to its activities. The
Advisor will not be responsible for the administration of the Trust.
Commencing on the 90th day after the Contribution Date, the Trust will pay
to the Advisor a quarterly base management fee of 0.3125% (1.25% per annum) of
the "Book Equity Value" of the Trust determined as of the last day of each
quarter, but estimated and paid in advance subject to recomputation. "Book
Equity Value" is defined in the Advisory Agreement and under "ADVISORY
AGREEMENT PROPOSAL--Advisory Agreement."
In addition, commencing on the 90th day after the Contribution Date, the
Trust will pay the Advisor a quarterly incentive fee of five percent (5%) of
the Trust's "Adjusted Net Income" during each quarter that the Adjusted Net
Income for such quarter restated and annualized as an annualized rate of
return on the Trust's Book Equity Value for such quarter equals or exceeds the
"Benchmark BB Rate." "Adjusted Net Income" and "Benchmark BB Rate" are defined
in the Advisory Agreement and under "ADVISORY AGREEMENT PROPOSAL--Advisory
Agreement." The Advisor will also be reimbursed for certain expenses it incurs
on behalf of the Trust. As a result of the delayed commencement of the
advisory fee, the operating results of the Trust for the 90 days after the
Contribution Date will be higher than they would have been if the advisory fee
had not been deferred and therefore may not be reflective of future operating
results of the Trust.
The Advisory Agreement has an initial term of three years subject to
automatic renewal for one year periods unless the Trust has been liquidated or
a Termination Event (as defined in the Advisory Agreement and under "ADVISORY
AGREEMENT PROPOSAL--Advisory Agreement" and which generally includes
violations of the Advisory Agreement by the Advisor, a bankruptcy event of the
Advisor or the imposition of a material liability on the Trust as a result of
the Advisor's bad faith, willful misconduct, gross negligence or reckless
disregard of duties) has occurred and is continuing. In addition, the Advisor
may terminate the Advisory Agreement on 60 days' notice to the Trust and the
Trust may terminate the Advisory Agreement upon 60 days' written notice if a
Termination Event has occurred or if the decision to terminate is based on an
affirmative vote of the holders of two-thirds or more of the voting shares of
the Trust at the time outstanding.
Certain executive officers and directors of the Advisor are also executive
officers and Trustees of the Trust. In addition, certain executive officers
and Trustees of the Trust have a substantial economic interest in the Advisor.
The executive officers of the Trust and the Trustees own a substantial
economic and voting interest in the Advisor. Various affiliates of the Advisor
have general partnership interests in and other direct or indirect ownership
of, and contractual obligations to, Starwood Mezzanine and SOFI IV, and to
their respective investors. These affiliates also have fiduciary
responsibilities to such investors. See "ADVISORY AGREEMENT PROPOSAL--Advisory
Agreement."
ANTI-TAKEOVER EFFECTS
Elimination of cumulative voting, establishment of a classified board,
requiring approval of Shareholders holding two-thirds of the voting shares
prior to certain asset transfers, certain amendments relating to the issuance
of additional securities and increasing the Shareholder vote required to
terminate the Advisory Agreement may be characterized in the view of the SEC
as "anti-takeover measures" and could have the effect of delaying,
discouraging or preventing a change in control of the Trust even if
Shareholders holding a majority of the voting shares believed such change of
control was in their best interests.
In considering the Proposals, Shareholders should be aware that the overall
effect of certain proposals is to make it more difficult for holders of a
majority of the outstanding Class A Shares and Class B Shares to change the
composition of the Board of Trustees and to remove existing management and/or
the Advisor in circumstances where the Shareholders holding a majority of the
voting shares may be dissatisfied with the performance of the incumbent
Trustees or the Advisor or otherwise desire to make changes. These provisions,
if adopted, could make a proxy contest a less effective means of removing or
replacing existing Trustees or could
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make it more difficult to make a change in control of the Trust which is
opposed by the Board of Trustees. This strengthened tenure and authority of
the Board of Trustees could enable the Board of Trustees to resist change and
otherwise thwart the desires of the Shareholders. Because these provisions may
have the effect of continuing the tenure of the current Board of Trustees and
certain of the Trustees have a substantial economic interest in the Advisor,
the Board has recognized that the individual Trustees have a personal interest
in these proposals that may differ from those of the Shareholders.
Shareholders should recognize that one of the effects of the amendments may be
to discourage a future attempt to acquire control of the Trust which is not
presented to and approved by the Board of Trustees, but which a substantial
number of Shareholders, and perhaps even Shareholders holding a majority of
the outstanding voting shares, might believe to be in their best interests or
in which Shareholders might receive a substantial premium for their shares
over the current market price. As a result, Shareholders who might desire to
participate in such transaction may not have an opportunity to do so. The
changes to the Declaration of Trust with respect to the Advisory Agreement
will make it more difficult for the Trust to terminate the Advisory Agreement
which may discourage an attempt to acquire control of the Trust. Shareholders
holding a majority of the voting shares would be unable to terminate the
Advisory Agreement in the event such Shareholders wanted to replace, without
the occurrence of a Termination Event, the Advisor or have the Trust's own
personnel manage the investment affairs of the Trust.
In addition, by increasing the probability that any person or group seeking
control of the Trust would be forced to negotiate directly with the Board of
Trustees, the proposed takeover defenses could discourage takeover bids by
means of a hostile tender offer, proxy contest or otherwise without the
approval of the Board. Thus, the principal disadvantages to the Shareholders
which result from discouraging such hostile takeover bids would be to (i)
reduce the likelihood that any acquiror would make a hostile tender offer for
the outstanding shares of stock of the Trust at a premium over the market rate
and (ii) increase the difficulty of removing the existing Board of Trustees
and management and the Advisor even if, in a particular case, removal would be
beneficial to Shareholders generally. See "ADVISORY AGREEMENT PROPOSAL--
Reasons for the Amendments to the Declaration of Trust and Effect thereof and
Board of Trustees Recommendation Regarding the Advisory Agreement Proposal"
and "TRUST AMENDMENTS PROPOSAL--Anti-Takeover Effects."
SUMMARY RISK FACTORS
Summarized below are certain risks, conflicts of interest, and other factors
that Shareholders should consider before voting on the Proposals:
. The voting interests of the holders of the Trust's Class A Shares (the
"Class A Shareholders") not affiliated with SAHI Partners, L.P. ("SAHI
Partners"), SAHI, Inc., Starwood Mezzanine or SOFI IV (collectively,
"Starwood") will be decreased from 20.36% to .49%, subject to
adjustment, if the Contribution Proposal is approved and consummated.
See "CONTRIBUTION PROPOSAL."
. The percentage ownership interest in the Trust of the Class A
Shareholders not affiliated with Starwood will be decreased from 30.54%
to .73%, subject to adjustment, if the Contribution Proposal is approved
and consummated. See "CONTRIBUTION PROPOSAL."
. The number of Class A Shares issued to Starwood Mezzanine and SOFI IV
and the amount of cash to be paid to Starwood Mezzanine and SOFI IV upon
consummation of the Contribution Proposal were determined based on
negotiations between the Trust and each of Starwood Mezzanine and SOFI
IV and were determined using a price per Class A Share of $2.50 per
share. The price per share of the Class A Shares as quoted by the
American Stock Exchange at the close of trading on February 6, 1998 was
$5.25. See "RISK FACTORS--Conflicts of Interests."
. The consummation of the Contribution is subject to the satisfaction or
waiver by the Trust and/or Starwood Mezzanine and SOFI IV of a number of
conditions precedent, including approval of all of the Proposals by the
Shareholders, approval by the limited partners of Starwood Mezzanine and
SOFI IV and the absence of any event that would have a material adverse
effect on the Trust, the Interests or the First Mortgage Portfolio. The
closing of the Contribution and the other transactions described in this
Proxy Statement is also subject to receipt of written confirmation by
the IRS that the Trust is able to elect to qualify as a REIT for its
taxable year ending December 31, 1998. There can be no assurance that
the conditions precedent will be satisfied or waived and therefore that
the Contribution will be consummated. See "CONTRIBUTION PROPOSAL--
Contribution Agreement."
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. There will be an increase in the real estate investment risks as a
result of the consummation of the Contribution, including the effect of
economic and other conditions on property values, the general
illiquidity of real estate investments, the risks of default in respect
of mortgage or other debt covenants (and risks attendant thereto, such
as delays frequently encountered by lenders in enforcing remedies or in
gaining control over the real estate collateral), the abilities of the
properties collateralizing debt instruments held by the Trust or
properties which are owned by the Trust to generate revenues sufficient
to meet operating expenses and to pay scheduled debt service, the risk
that prepayment restrictions may be insufficient to deter prepayments,
the existence of junior mortgages that may affect the Trust's rights,
the effect of competition from properties owned by others, liability
associated with uninsurable losses and unknown environmental
liabilities.
. The amendments to the Declaration of Trust may increase potential
conflicts of interests by permitting the Trust to originate or acquire
mortgage loans made to borrowers affiliated with the Trust and to
acquire securities and investments that are collateralized by or made to
borrowers affiliated with the Trust.
. Messrs. Sternlicht, Eilian, Grose and Sugarman, four of the seven
current Trustees and Messrs. Dishner and Kleeman, nominees for Trustee,
have indirect economic interests in properties that may compete with
properties which the Trust may acquire or which may collateralize debt
investments of the Trust in the future, thus creating a conflict of
interest between the Trust and such Trustees. Messrs. Sternlicht,
Eilian, Grose, Sugarman, Dishner and Kleeman are not required to present
any investment opportunities to the Trust or invest in any type of
assets through the Trust. Messrs. Sternlicht, Eilian and Sugarman have
been nominated for re-election to the Board of Trustees.
. Conflicts of interests between the Trust and the Advisor in relation to
business decisions regarding the Trust could result in decisions that do
not fully reflect the interests of all of the Shareholders. In addition,
certain Trustees and executive officers of the Trust are also directors
and executive officers of the Advisor and own a substantial economic and
voting interest in the Advisor.
. There can be no assurance that the transactions contemplated by the
Letters of Intent will be consummated and, if not consummated that
suitable alternative investment opportunities will be available.
. The Trust must rely on the experience of the Advisor's employees
generally, and in particular the Trustees not affiliated with the
Advisor or Starwood must rely on information provided by the Advisor to
review transactions of the Trust.
. Lack of experience of the Advisor in managing a mortgage REIT may have
an adverse effect on the Trust.
. Sales of Class A Shares by Starwood Mezzanine or SOFI IV or their
respective partners (or the perception that such sales could occur)
could adversely affect the trading prices for the Class A Shares.
. The Board of Trustees has reviewed the assets being contributed pursuant
to the Contribution Proposal and will monitor these assets and the
Trust's future investments with the intent of maintaining the Trust's
status as a REIT. However, the Trust may be limited in the types of
investments it may make in the future since qualification as a REIT
depends on the Trust continuing to satisfy several asset and income
tests as well as other tests, which in turn will be dependent in part on
the Trust's operating results.
. There will be an increased risk that the Trust will be a "pension-held
REIT" and therefore that any qualified pension plan owning 10% or more
of the Trust's shares, by value, might have a portion of its dividend
income from the Trust taxed as unrelated business taxable income.
CONFLICTS OF INTERESTS
The Starwood Trustees are Messrs. Sternlicht, Eilian, Grose and Sugarman.
Messrs. Dishner and Kleeman have been nominated as Trustees. In addition, each
of Messrs. Sugarman and Grose, and Jerome Silvey is an executive officer of
the Trust. Each of the Starwood Trustees and Messrs. Silvey, Dishner and
Kleeman has
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substantial direct or indirect economic interests in and may be officers of
each of Starwood Mezzanine, SOFI IV and the Advisor and will receive
substantial benefits from the consummation of the Contribution and the
Advisory Agreement Proposal that will not be received by the Shareholders. In
addition, while the Contribution Proposal and the Advisory Agreement Proposal
were approved by the Independent Committee, the Starwood Trustees were
involved in structuring and negotiating the terms of the Contribution and the
Advisory Agreement. As a result of the economic interests of the Starwood
Trustees in Starwood Mezzanine, SOFI IV and the Advisor and the economic and
other benefits to be received by the Starwood Trustees and Mr. Silvey, such
individuals may have conflicts of interests with respect to their obligations
to the Trust in determining whether the Trust should consummate the
Contribution and enter into the Advisory Agreement. The Starwood Trustees and
Messrs. Silvey, Dishner and Kleeman, may have interests that conflict with
those of others participating in the Contribution and the Advisory Agreement
and with the interests of the Shareholders. Further, each of the Starwood
Trustees and Messrs. Silvey, Dishner and Kleeman have a substantial direct
and/or indirect interest in SAHI, Inc. and SAHI Partners, each a current
Shareholder. Starwood, the Starwood Trustees and Messrs. Silvey, Dishner and
Kleeman and their affiliates are collectively referred to as the "Starwood
Group." The members of the Starwood Group have substantial investments in real
estate-related assets. In the event the Trust were to invest in debt or equity
interests in properties similar to or in close proximity to properties owned
by the Starwood Group, it is possible that the properties owned by the
Starwood Group may compete with the properties in which the Trust has such
interests in the future. In addition, the Trust, on the one hand, and the
Starwood Group, on the other hand, may possibly compete with each other in the
future with respect to the acquisition of debt and/or equity interests. Except
as set forth in the Advisory Agreement, none of the Starwood Group is required
to present any investment opportunities to the Trust or invest in any class of
assets through the Trust. The Trust is subject to the Investment Restrictions
as a result of restrictions and conflicts involving the Starwood Group.
LACK OF APPRAISAL RIGHTS
Under California law, Shareholders do not have any statutory dissenter's
rights to appraisal of their Class A Shares or Class B Shares in connection
with any of the Proposals.
THE PROPOSALS
At the Annual Meeting, the Shareholders are being asked to consider and vote
upon the following proposals:
Contribution Proposal. A proposal to approve the payment of cash and the
issuance of an aggregate of approximately 302.2 million Class A Shares,
subject to adjustment, at a price of $2.50 per share to Starwood Mezzanine and
SOFI IV in exchange for the contribution of cash, the Letters of Intent, the
Interests and the First Mortgage Portfolio. The contribution of the Letters of
Intent, the Interests and the First Mortgage Portfolio allows the Trust to
acquire a significant amount of real estate-related assets in accordance with
the Trust's purpose and investment policy. The contribution price of $2.50 per
share is accretive by $1.47 per Class A Share or 165.1% to the December 31,
1997 fully diluted net tangible book value per Class A Share of $0.89 per
share. See "CONTRIBUTION PROPOSAL."
Advisory Agreement Proposals. A proposal to amend the Declaration of Trust
to conform provisions thereof to the Advisory Agreement with respect to the
termination of the Advisory Agreement and to revise the provisions with
respect to the independence of certain members of the Board of Trustees from
requiring that not more than 49% of the total number of Trustees may be
affiliated with the Advisor to requiring that a minimum of the greater of (i)
33 1/3% of the total number of Trustees and (ii) three (3) members of the
Board of Trustees be unaffiliated with the Advisor or Starwood Capital Group,
LLC. See "ADVISORY AGREEMENT PROPOSAL."
Trust Amendment Proposals. Proposals to further amend the Declaration of
Trust to, among other things, (a) change the name of the Trust to Starwood
Financial Trust; (b) change the purpose and investment policy of the Trust (i)
to allow the Trust to originate or acquire certain mortgage loans made to
borrowers that are affiliated with the Trust and to acquire certain securities
and investments that are collateralized by or made to borrowers that are
affiliated with the Trust, (ii) to clarify that the primary purpose of the
Trust is to acquire a diversified
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portfolio of debt or debt like interests in real estate related assets, that
the Trust generally will not obtain management rights over equity interests in
the assets underlying non-performing or sub-performing debt unless the Trust's
efforts to restructure such debt into performing debt are unsuccessful and the
Trust's powers with respect to its purpose and investment policy and (iii) to
include the Investment Restrictions; (c) require the approval of Shareholders
holding two-thirds of the voting shares of the Trust prior to any sale,
transfer or other disposition of all or substantially all of the assets of the
Trust; (d) eliminate cumulative voting of Shareholders; (e) to establish a
classified Board of Trustees with two classes having terms of two years each
and increase the required number of members of the Board of Trustees from
three to seven; (f) amend the "Excess Share" provision of the Declaration of
Trust to reduce the risk that the Trust could fail to qualify as a REIT for
federal income tax purposes; (g) to eliminate certain limitations on the
indemnification by the Trust of its Trustees, and certain others performing
duties for the Trust and to clarify certain provisions with respect to
Shareholder liability and indemnification; (h) to permit amendments to the
Declaration of Trust to facilitate a change in the Trust's domicile or to
change the form of the Trust to a corporation without Shareholder approval if
the Board of Trustees determines that such amendments do not materially and
adversely effect the rights of the Shareholders; and (i) effect technical
amendments and clarifications. See "TRUST AMENDMENTS PROPOSAL."
Reverse Split Proposals. Proposals to approve the Reverse Split and to grant
the Board of Trustees authority with respect to determining the magnitude and
timing thereof, subject to certain restrictions. See "REVERSE SPLIT."
Board Election Proposal. A proposal to elect Barry S. Sternlicht, Jay
Sugarman, Jeffrey G. Dishner, Jonathan D. Eilian, Merrick R. Kleeman, Robin
Josephs, William M. Matthes and Kneeland C. Youngblood to the Board of
Trustees. See "ELECTION OF TRUSTEES."
Incentive Plan Proposal. A proposal to approve the Incentive Plan and to
increase the number of Class A Shares available for issuance upon exercise of
options and other awards granted thereunder. See "INCENTIVE PLAN PROPOSAL."
Auditors Proposal. A proposal to ratify the appointment of Price Waterhouse
LLP as the Trust's independent accountants for the fiscal year ended December
31, 1997. See "RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS."
Each of the Proposals (other than the Contribution Proposal) will not be
submitted to the Shareholders unless the Proposal(s) previously submitted to
the Shareholders at the Annual Meeting have been approved. The Board of
Trustees has been informed by Starwood Mezzanine, SAHI, Inc., SAHI Partners
and each of the Starwood Trustees that each intends to vote all of the Class A
Shares and Class B Shares it owns (representing a combined 79.64% voting
interest as of January 21, 1998) for each of the Proposals.
BOARD OF TRUSTEES' RECOMMENDATION
The Independent Committee and the Board of Trustees believe that the
Proposals, taken as a whole, are in the best interests of both the Trust and
the Shareholders. In presenting the Proposals to the Board of Trustees,
representatives of Starwood Mezzanine and SOFI IV informed the Trustees that
the Contribution Proposal, the Advisory Agreement Proposal and the Trust
Amendments Proposals were prepared and negotiated over a long period of time
with a number of different parties, including the Independent Committee and
the partners of Starwood Mezzanine and SOFI IV, with an objective of
carefully, reasonably and fairly balancing and responding to the concerns and
interests of all parties, including the Trust and its Shareholders.
Consequently, the overall transaction was presented to the Trust and the Board
of Trustees as a single proposal and package and not as a series of
independent and separate components. While the Board of Trustees determined to
provide the Shareholders an opportunity to vote on these proposals separately,
Starwood Mezzanine and SOFI IV's obligation to consummate the Contribution is
conditioned upon approval by the Shareholders of each of the Proposals.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of the Proposals.
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While the Board of Trustees did explore other alternatives to the
Contribution Proposal, the Advisory Agreement Proposal and the Declaration of
Trust Proposal, the Board of Trustees concluded that acquiring the Letters of
Intent, the Interests and the First Mortgage Portfolio and adopting the
Advisory Agreement provides Shareholders with a potential for growth of their
investment and overall return. The Board's conclusion was based on: (a) the
fact that, on a pro forma basis for the consummation of the Contribution
Proposal, the net tangible book value per Class A Share on a fully diluted
basis on December 31, 1997 would have been $2.36 per Class A Share, an
increase of $1.47 per Class A Share or 165.1% from the actual net tangible
book value per Class A Share on a fully diluted basis on such date of $0.89
per Class A Share; (b) the ability of the Trust to implement its purpose and
investment policy through the consummation of the Contribution; (c) the
increase in the real estate related assets owned by the Trust upon acquisition
of the Letters of Intent, the Interests and the First Mortgage Portfolio from
approximately $10 million to over $1 billion; and (d) the experience and track
record of Starwood in making real-estate related investments. The Board of
Trustees placed significant weight on written material and oral presentations
received from Houlihan, and the fairness opinion given by Houlihan that the
Contribution Proposal is fair from a financial point of view to the Trust and
its Shareholders. In making its recommendation, the Independent Committee and
the Board of Trustees also considered a number of factors which they deemed to
be material, including: (i) a consideration of other strategic and financial
alternatives available to the Trust; (ii) Trustee's knowledge of the business,
operations, properties, assets, earnings, financial condition, capital needs
and future prospects of the Trust; (iii) the presentations of Houlihan
regarding the valuation of the Interests and the fairness of the Contribution
Proposal; (iv) the terms and conditions of the Contribution Agreement, the
Advisory Proposal and the Trust Amendments Proposal, taken as a whole; (v) the
recent historical trading prices of the Trust's Class A Shares; (vi)
Houlihan's opinion that the Contribution Proposal is fair, from a financial
point of view, to the Trust and its Shareholders; (vii) the Trust's compliance
with the Shareholders Agreement which contains certain provisions designed to
protect Shareholders not affiliated with Starwood; and (viii) the fact that
Shareholders who desire to liquidate their investment could do so by selling
their Class A Shares on AMEX. In view of the variety of factors considered in
its evaluation of the Contribution Proposal, the Board did not find it
practical to, and did not, quantify or otherwise assign precise relative
weights to the individual items described above.
FAIRNESS OPINION WITH RESPECT TO THE CONTRIBUTION PROPOSAL
The Independent Committee has engaged Houlihan Lokey Howard & Zukin
("Houlihan"), an independent financial advisor, to analyze the fairness of the
Contribution Proposal from a financial point of view. The Independent
Committee selected Houlihan because of its experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuations for corporate purposes especially with respect to REITs and
other real estate companies. Houlihan is a nationally recognized investment
banking firm that is continuously engaged in providing financial advisory
services in connection with mergers and acquisitions, leveraged buyouts,
business valuations for a variety of regulatory and planning purposes,
recapitalizations, financial restructurings, and private placements of debt
and equity securities.
Houlihan has no material prior relationship with the Trust, Starwood
Capital, or its affiliates. Houlihan has been retained by Starwood Hotels &
Resorts Trust to provide services unrelated to the Trust. Houlihan will
receive professional fees from Starwood Hotels & Resorts Trust in connection
with such services in the amount of approximately $600,000. No portion of
Houlihan's fees, either in its services to the Trust or to Starwood Hotels &
Resorts Trust, are contingent upon the conclusions reached by Houlihan. As
compensation to Houlihan for its services in connection with the Contribution
Proposal (and related transactions disclosed here), the Trust has agreed to
pay Houlihan a fee of $425,000. No portion of Houlihan's fees are contingent
upon the successful completion of the Contribution Proposal or any related
transaction. However, Starwood Capital and its affiliates have entered into an
additional agreement with Houlihan that allows Starwood Capital and its
affiliates access to certain information prepared by Houlihan in rendering its
fairness opinion. Starwood Capital has agreed to pay Houlihan a fee of $50,000
for access to such information. Moreover, Starwood Mezzanine and SOFI IV will
reimburse the Trust for fees and expenses paid to Houlihan if the Contribution
Proposal is not consummated on or prior to June 30, 1998 other than as a
result of the Independent Committee withdrawing its approval for the
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Proposals. The Trust has also agreed to indemnify Houlihan and related persons
against certain liabilities, including liabilities under Federal securities
laws, arising out of the engagement of Houlihan, and reimburse Houlihan for
certain expenses.
Houlihan did not, and was not requested by the Trust, to make any
recommendations as to the form or amount of consideration to be paid to the
Trust pursuant to the Contribution Proposal. In arriving at its opinion,
Houlihan made its determination as to the fairness, from a financial point of
view, of the Contribution Proposal on the basis of the analyses described
below. No restrictions or limitations were imposed by the Trust or Starwood
Capital or its affiliates upon Houlihan with respect to its investigation made
or the procedures followed by Houlihan in rendering its opinion. Houlihan's
opinion is not intended to be and does not constitute a recommendation to any
Shareholders as to whether to vote in favor of the Contribution Proposal.
The following is a summary of the material financial analyses used by
Houlihan in connection with providing its fairness opinion. This summary is
qualified in its entirety by reference to the full text of such opinion, which
is attached as Exhibit A to this Proxy Statement. Shareholders are urged to
read the full text of Houlihan's opinion carefully and in its entirety.
In arriving at its opinion, Houlihan:
1. reviewed the final draft of this Proxy Statement and exhibits hereto,
including the Financial Statements included herein;
2. met with certain members of the senior management of the Trust,
Starwood Mezzanine and SOFI IV to discuss the operations, financial
condition, future prospects and projected operations and performance of the
Trust, Starwood Mezzanine and SOFI IV, and held discussions with
representatives of counsel to the Trust, Starwood Mezzanine and SOFI IV to
discuss certain matters;
3. reviewed unaudited profit and loss information with respect to the
Interests and the First Mortgage Portfolio, to the extent available, for
the period from the date of the acquisition of such asset to the period
ended approximately August 31, 1997, which the management of Starwood
Mezzanine and SOFI IV identified as being the most current financial
information available, and reviewed certain documents and agreements
relating to each asset including, to the extent available, a description of
such asset, a description of the collateral underlying such asset, a loan
agreement summary, an intercreditor agreement summary, a summary of any
first mortgage agreement on the same collateral, underlying collateral
appraisals, and financial forecasts for the underlying collateral;
4. visited certain facilities and business offices of the Trust, Starwood
Mezzanine and SOFI IV;
5. reviewed forecasts and projections prepared by management of Starwood
Mezzanine and SOFI IV with respect to the Interests and the First Mortgage
Portfolio for the months ended January 31, 1998 through the maturity of the
subject asset;
6. reviewed the historical market prices and trading volume for the Class
A Shares and reviewed the historical market prices, to the extent
available, for certain of the Interests;
7. reviewed certain other publicly available financial data for certain
companies that were deemed comparable to the Trust, both immediately prior
to and immediately after giving effect to the Contribution and related
transactions (the "Contribution Transaction");
8. reviewed certain other publicly available financial data for certain
assets, including collateralized mortgage backed securities, that were
deemed comparable to the Interests and the First Mortgage Portfolio; and
9. conducted such other studies, analyses and inquiries as were deemed
appropriate.
Houlihan used several methodologies to assess the fairness of the
Contribution Transaction from a financial point of view. These methodologies
provided (i) an estimate as to the value of the assets to be contributed, and
(ii) an estimate as to the value of the Class A Shares prior to the
consummation of the Contribution Transaction; and thus provided a basis of
comparison to the consideration given and received by the Trust in connection
with the Contribution Transaction.
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With respect to the Interests, the First Mortgage Portfolio and the Letters
of Intent (collectively, the "Contributed Assets"):
One methodology, a "Comparable Market Multiple"analysis, considered the
capitalization multiples for certain income and cash flows of a peer group of
companies comparable to the Contributed Assets and then applied a selected
capitalization multiple based on a comparative financial analysis of such
assets and the peer group of companies. This analysis resulted in an
indication of value for the Trust following the consummation of the
Contribution. This resulting aggregate value for the Trust was adjusted to
reflect the pro-forma capital structure of the Trust. A price per share was
derived by dividing the pro forma value of the Trust attributable to the Class
A Shares by the pro forma Class A Shares outstanding after the consummation of
the Contribution Transaction.
An alternative analysis was a "Yield" analysis, whereby the Trust's pro-
forma value was estimated by calculating yields for similar, alternative
investments and then applying a selected yield to the Trust's pro forma
distributable cash. A price per share was derived by dividing the pro forma
value of the Trust attributable to the Class A Shares by the pro forma Class A
Shares outstanding after consummation of the Contribution Transaction.
Finally, a "Comparable Transaction" analysis, which considered the terms and
conditions of transactions which Houlihan deemed similar to the Contribution
Transaction, was considered.
Based upon these analyses, Houlihan estimated the value of the Class A
Shares, on a pro forma basis, after giving effect to the Contribution
Transaction.
With respect to the Trust:
Due to the nature of the Trust's assets, which consist primarily of cash, an
"Adjusted Net Book Value" analysis, which considered the orderly liquidation
value of the Trust's assets and the likely net proceeds to Shareholders, was
considered. A price per share was derived by dividing the value of the Trust
attributable to the Class A Shares by the existing outstanding Class A Shares.
Additionally, the Trust's "Market Trading Price" was considered, including
the Trust's limited float, volume, lack of analyst coverage, price reaction
upon certain events and other factors.
Based upon these analyses Houlihan estimated the value of the Class A Shares
prior to the consummation of the Contribution Transaction.
In the aforementioned analyses, the estimate of the Class A Share value
prior to the consummation of the Contribution Transaction was lower than the
value of the Class A Shares after giving effect to the Contribution
Transaction, leading Houlihan to conclude that the Contribution Transaction is
fair to the existing Class A Shareholders of the Trust from a financial point
of view.
The aforementioned analyses required studies of the overall market, economic
and industry conditions in which the Trust, Starwood Mezzanine and SOFI IV
operate, and their respective operating results. Research into, and
consideration of, these conditions were incorporated into the analyses.
Houlihan's opinion is based on the business, economic, market and other
conditions as they existed as of February 11, 1998. In rendering its opinion,
Houlihan has relied upon and assumed, without independent verification, that
the financial results provided to Houlihan have been reasonably prepared and
reflect the best current available estimates of the financial results and
condition of the Trust, Starwood Mezzanine and SOFI IV. Houlihan did not
independently verify the accuracy or completeness of the information supplied
to it with respect to the Trust, Starwood Mezzanine or SOFI IV and does not
assume responsibility for the accuracy or completeness of such information.
Except as set forth above Houlihan did not make any physical inspection or
independent appraisal of the specific properties or assets of the Trust,
Starwood Mezzanine or SOFI IV.
The summary set forth above describes the material points of more detailed
analyses performed by Houlihan in arriving at its fairness opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Houlihan did not attribute any particular weight
to any analysis or factor considered by it,
13
<PAGE>
but rather made the qualitative judgements as to the significance and
relevance of each analysis and factor. Accordingly, Houlihan believes that is
analyses and the summary set forth herein must be considered as a whole and
that selecting portions of its analyses, without considering all analyses, or
portions of this summary, without considering all factors and analyses, could
create an incomplete view of the processes underlying the analyses set forth
in the Houlihan opinion. In its analysis, Houlihan made numerous assumptions
with respect to the Trust, Starwood Mezzanine and SOFI IV, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the Trust, Starwood
Mezzanine and SOFI IV. The estimates contained in such analyses are not
necessarily indicative of actual values of predictive of future results or
values, which may be more or less favorable than suggested by such analyses.
Additionally, analyses relating to the true value of businesses or securities
are not appraisals. Accordingly, such analyses and estimates are inherently
subject to substantial uncertainty.
ANNUAL MEETING AND VOTING
Shareholders of record as of the close of business on January 21, 1998 are
entitled to receive notice of and to vote at the Annual Meeting. As of January
21, 1998, there were 7,550,000 Class A Shares and 3,775,000 Class B Shares
issued and outstanding. The presence of a majority of such shares, either in
person or by proxy, shall constitute a quorum at the Annual Meeting.
As of January 21, 1998, Starwood Mezzanine, SAHI Partners and SAHI, Inc. had
the right to vote an aggregate of 5,244,100 Class A Shares and 3,775,000 Class
B Shares, representing 79.64% of the total voting interest held by Class A
Shares and Class B Shares outstanding on such date. Each of Starwood
Mezzanine, SAHI Partners and SAHI, Inc., has indicated that it intends to vote
all of Class A Shares and Class B Shares held by it for approval of each of
the Proposals. The current officers and Trustees of the Trust who owned an
aggregate of 6,273 Class A Shares on January 21, 1998 have indicated that they
intend to vote all of their Class A Shares for approval of each of the
Proposals.
Accompanying this Proxy Statement is a proxy card that may be used to
indicate a Shareholder's vote on the Proposals. If no vote is indicated on a
proxy card, the Class A Shares or Class B Shares will be voted FOR all the
Proposals. Any Shareholder who casts a vote by proxy may revoke it at any time
by giving written notice to the Secretary of the Trust expressly revoking the
proxy, by signing and forwarding to the Trust a later dated proxy, or by
attending the Annual Meeting and personally voting the shares owned of record
by such Shareholder.
Cumulative voting for the election of Trustees is available to the
Shareholders by the procedures set forth under "ANNUAL MEETING AND VOTING." In
voting upon any matter at the Annual Meeting, each Shareholder is entitled to
one vote for each Class A Share or Class B Share registered in the
Shareholder's name on the record date. Class A Shares and Class B Shares shall
be voted together as a single class, with a majority vote required for
approval and ratification of each matter.
14
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth the selected financial information for the
Trust on a historical and pro forma basis as well as the operations of
Starwood Mezzanine and SOFI IV related to the Interests and the First Mortgage
Portfolio on a historical basis as of the indicated dates or for the indicated
periods. As more fully described in "FINANCIAL STATEMENTS--Pro Forma
Consolidating Financial Statements," the pro forma information includes the
effects of the following transactions (the "Transactions") currently
contemplated by the Proposals; (i) the contribution by Starwood Mezzanine of
the Starwood Mezzanine Interests to the Trust, (ii) contribution by SOFI IV of
the SOFI IV Interests and the First Mortgage Portfolio to the Trust, (iii)
exchange of each outstanding Unit held by holders other than the Trust for one
Class A Share, and (iv) liquidation and termination of the Partnership. The
pro forma operating data for the nine months ended September 30, 1997 and the
year ended December 31, 1996 is presented as if the Transactions had been
completed on January 1, 1996 and the pro forma balance sheet data is presented
as if the Transactions had been completed on September 30, 1997.
The following selected financial information should be read in conjunction
with the discussions set forth in "MANAGEMENTS'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the financial statements
included elsewhere in this Proxy Statement. The pro forma financial
information is not necessarily indicative of what the actual financial
position and results of operations of the Trust would have been as of and for
the periods indicated, nor does it purport to represent the future financial
position or results of operations for future periods.
15
<PAGE>
THE TRUST
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------ ----------------------------------------------------
PRO PRO
FORMA HISTORICAL FORMA HISTORICAL
------- --------------- ------- --------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
------- ------- ------ ------- ------ ------ ------- -------- -------
(IN THOUSANDS EXCEPT FOR PER SHARE SUPPLEMENTAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA(1)
Interest income......... $43,721 $ 704 $ 64 $33,771 $ 478 $ 145 $ 296 $ 2,185 $ 5,237
Prepayment income....... 13,990 -- -- 750 -- -- -- -- --
Gain from sale of
mortgages.............. -- -- -- -- -- -- -- 2,545(2) --
Rental income........... 11,306 -- -- 15,000 -- -- -- -- --
Other income............ 2,915 2 -- 464 10 3 -- -- --
------- ------- ------ ------- ------ ------ ------- -------- -------
Total revenue.......... 71,932 706 64 49,985 488 148 296 4,730 5,237
------- ------- ------ ------- ------ ------ ------- -------- -------
Interest expense........ $11,267 $ -- $ -- $ 9,189 $ 272 $ -- $ 270 $ -- $ --
Depreciation and
amortization........... 4,851 -- -- 6,467 -- -- -- -- --
General and
administrative
expense................ 1,228 261 560 1,676 639 283 356 982 783
Management/advisory
fee.................... 5,792 -- -- 3,806 -- -- -- -- --
Other expenses.......... 1,548 -- -- 320 -- -- -- -- 5,000(4)
------- ------- ------ ------- ------ ------ ------- -------- -------
Total expenses......... 24,686 261 560 21,458 911 283 626 982 5,783
------- ------- ------ ------- ------ ------ ------- -------- -------
Net income (loss) before
minority interest
in Partnership......... 47,246 445 (496) 28,527 (423) (135) (330) 3,748 (546)
Minority interest in
Partnership(3)......... (19) (420) (6) -- (154) -- -- -- --
------- ------- ------ ------- ------ ------ ------- -------- -------
Net income (loss)....... $47,227 $ 25 $ (502) $28,527 $ (577) $ (135) $ (330) $ 3,748 $ (546)
======= ======= ====== ======= ====== ====== ======= ======== =======
Earnings per Class A
Share(5)............... $ 0.15 $ 0.01 $(0.19) $ 0.09 $(0.22) $(0.05) $ (0.13) $ 1.45 $ (0.21)
======= ======= ====== ======= ====== ====== ======= ======== =======
SUPPLEMENTAL DATA:
Funds from
operations(6).......... 445 (496) (423) (135) (330) 1,203 4,454
Cash flows from:
Operating activities... 504 (366) (277) (184) (397) 2,531 4,857
Investing activities... (6,474) 1,196 1,252 175 (1,371) 39,400 --
Financial activities... 4,924 -- -- -- 101 (39,503) (4,807)
Dividends.............. -- -- -- -- -- 38,639 5,162
Dividends per share.... $ -- $ -- $ -- $ -- $ -- $ 15.00(7) $ 2.00
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL HISTORICAL
AS OF AS OF AS OF DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, -----------------------------------
1997 1997 1996 1995 1994 1993 1992
------------- ------------- ------ ------ ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate
investments............ $1,067,864 $10,190 $3,707 $1,196 $1,371 $ -- $39,185
Total assets............ 1,095,064 11,111 5,674 2,194 2,372 2,680 39,909
Debt obligations........ 341,512 -- -- -- -- -- --
Minority interest in
consolidation
entities............... 19 4,340 3,917 -- -- -- --
Shareholders's equity... 749,252 6,533 1,578 2,155 2,290 2,519 37,410
</TABLE>
- --------
(1) As a result of the sale of a substantial portion of the Trust's assets and
related distribution of the proceeds in 1993, the Trust's on-going
investment operations were substantially reduced.
(2) During 1993, the Trust sold its entire remaining portfolio then consisting
of four mortgage loans resulting in proceeds in excess of carrying values
and obligations of approximately $2.5 million.
(3) Represents the minority interest in the Partnership currently held by
Starwood Mezzanine which will be converted into Class A Shares on the
Contribution Date. The Partnership will be liquidated and terminated on
the Contribution Date.
(4) Includes a write-down for in-substance foreclosed property of
approximately $5.0 million.
(5) Net income per Class A Share is calculated based on the weighted average
shares outstanding during each of the periods after deduction for the
Class B Shares 1% interest.
(6) Management and industry analysts generally consider funds from operations
to be one measure of the financial performance of a REIT which provides a
relevant basis for comparisons among REITs and it is presented to assist
investors in analyzing the performance of the Trust. Funds from operations
is defined as income before minority interest (computed in accordance with
generally accepted accounting principles), excluding gains (losses) from
debt restructuring and sales of property, provisions for losses and real
estate related depreciation and amortization (excluding amortization of
financing costs). Funds from operations does not represent cash generated
from operating activities in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available to fund
cash needs. Funds from operations should not be considered an alternative
to net income as an indication of the Trust's financial performance or as
an alternative to cash flows from operating activities as a measure of
liquidity.
(7) Includes a $14.50 per Class A Share distribution paid in December 1993
from the proceeds of the sale of as a result of the sale of substantially
all of the Trust's remaining real estate loan investments.
16
<PAGE>
STARWOOD MEZZANINE
<TABLE>
<CAPTION>
FOR THE NINE MONTHS YEAR ENDED FOR THE PERIOD
ENDED SEPTEMBER 30, DECEMBER 31, FROM INCEPTION TO
------------------- --------------- DECEMBER 31,
1997 1996 1996 1995 1994
--------- --------- ------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income........... $ 18,202 $ 25,368 $33,100 $15,169 $ 112
Prepayment income......... 13,990 350 750 -- --
Other income.............. 655 225 394 232 --
--------- --------- ------- ------- -----
Total revenue........... 32,847 25,943 34,244 15,401 112
--------- --------- ------- ------- -----
Management fees........... 1,337 1,651 2,157 2,201 367
Other expenses............ 172 165 220 223 51
--------- --------- ------- ------- -----
Total expenses.......... 1,509 1,816 2,377 2,424 418
--------- --------- ------- ------- -----
Net income (loss)......... $ 31,338 $ 24,127 $31,867 $12,977 $(306)
========= ========= ======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
AS OF AS OF DECEMBER 31,
SEPTEMBER 30, -------------------------
1997 1996 1995 1994
------------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate investments................ $144,003 $180,485 $208,464 $25,000
Total assets........................... 151,089 187,619 216,591 26,932
Divisional equity...................... $151,003 $187,574 $216,494 $ --
</TABLE>
17
<PAGE>
SOFI IV
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS FOR THE PERIOD
ENDED FROM INCEPTION TO
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING DATA:
Interest income................................ $27,890 $ 311
Rental income.................................. 6,306 --
Other income................................... 2,258 60
------- -------
Total revenue................................ 36,454 371
------- -------
Depreciation................................... 2,378 --
Management..................................... 7,530 1,546
Other expenses................................. 1,593 137
------- -------
Total expenses............................... 11,501 1,683
------- -------
Net income (loss) before minority interest..... 24,953 (1,312)
Minority interest.............................. (19) --
------- -------
Net income (loss).............................. 24,934 (1,312)
======= =======
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Real estate investments.............................. $811,130 $ 8,420
Total assets......................................... 826,406 10,915
Minority interest in consolidation entities.......... 19 --
Divisional equity.................................... $822,430 $ 8,773
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Subject to the receipt by the Trust of a written agreement from the IRS that
provides that the Trust is eligible to make an election under Section
856(c)(1) of the Internal Revenue Code of 1986, as amended (the "Code") to be
taxed as a REIT for its taxable year ending December 31, 1998, the Board of
Trustees believes that the Trust is organized and will continue to elect to
qualify as a REIT under the Code for its 1998 taxable year and, as such,
anticipates distributing annually at least 95% of its taxable income, subject
to certain adjustments. See "TRUST AMENDMENTS PROPOSAL--Federal Income Tax
Aspects of the Contribution Proposal and the Change of the Trust's Purpose and
Investment Policy--Closing Agreement." Cash for such distributions is expected
to be generated from the Trust's operations, although the Trust may borrow
funds to make distributions. The Trust's operations for any period may be
affected by a number of factors including the investment assets held, the
operations of the collateral underlying secured loans or the business of the
borrowers with respect to unsecured loans or the interest rate environment.
LIQUIDITY AND CAPITAL RESOURCES
The Trust requires capital to fund its real estate-related investments and
operating expenses. The Trust's capital sources upon consummation of the
proposed transactions with Starwood Mezzanine and SOFI IV will include cash
flow from operations, borrowings under lines of credit to be arranged,
additional bank borrowings, mortgage loans on the Trust's real estate and
future equity offerings.
Upon completion of the Transactions, the Trust believes that the Trust's
significant capital resources and access to financing will provide the Trust
with increased financial flexibility and market responsiveness at levels
sufficient to meet current and anticipated capital requirements including
expected origination or acquisition of additional investments.
The Trust is currently negotiating a bank credit agreement under which the
Trust expects to be able to borrow up to approximately $1.1 billion to fund
acquisitions, including the First Mortgage Portfolio and provide working
capital and for other general corporate purposes. The Trust expects that the
credit agreement will provide for a revolving line of credit of up to $800
million and a term loan of $300 million over a term of three years, that
borrowings will bear interest at an annual rate of LIBOR plus 150 basis points
and that the agreement would be secured by a security interest on
substantially all of the Trust's assets. Closing of the Transactions is
subject to the closing of the credit agreement.
PRO FORMA RESULTS OF OPERATIONS OF THE TRUST AND HISTORICAL RESULTS OF
OPERATIONS OF STARWOOD MEZZANINE AND SOFI IV
Pro forma results of operations for the nine-month period ended September
30, 1997 and the year ended December 31, 1996 assuming the Transactions were
completed on January 1, 1996 are included in "Financial Statements--Pro Forma
Consolidating Financial Statements." However, these pro forma operating
results are not necessarily indicative of what the actual operations of the
Trust would have been assuming that the Transactions had been completed as of
January 1, 1996, nor are they indicative of the results of operations for
future periods.
The historical operations of Starwood Mezzanine and SOFI IV are included in
"FINANCIAL STATEMENTS--Historical Financial Statements." The historical
operations of Starwood Mezzanine and SOFI IV are largely dependent on the
volume of investments outstanding in comparative periods. The majority of
Starwood Mezzanine's investments were originated or acquired during 1995 and
the majority of SOFI IV's investments were originated or acquired during late
1996 or during 1997. Accordingly, historical comparisons of operating periods
are not relatively informative to the future operations of the Trust.
It is anticipated that as the contributed investments are held for longer
periods by the Trust subsequent to the Transactions or the proceeds from
repayments reinvested, that the operating revenues will substantially increase
which will be partially offset by increased interest expenses and
administrative/advisory expenses. However, there can be no assurances that
improved operating results will actually be achieved or sustained.
19
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Boards ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128") effective for periods ending after December 15, 1997. SFAS
No. 128 simplifies the standard for computing earnings per share and makes
them comparable with international earnings per share standards. The statement
replaces primary earnings per share with basic earnings per share ("Basic
EPS") and fully diluted earnings per share with diluted earnings per share
("Diluted EPS"). Basic EPS is computed based on the income applicable to Class
A Shares (which is net loss reduced by the dividends on preferred shares)
divided by the weighted-average number of Class A Shares outstanding during
the period. Diluted EPS is based on the net earnings applicable to Class A
Shares plus dividends on convertible preferred shares, divided by the weighted
average number of Class A Shares and dilutive potential Class A Shares that
were outstanding during the period. Dilutive potential Class A Shares include
the convertible preferred shares and dilutive share options. The Trust adopted
this accounting standard effective December 31, 1997, as required.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") effective for fiscal years beginning after December
15, 1997, although earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all components of comprehensive income shall be reported in the financial
statements in the period in which they are recognized. Furthermore, a total
amount for comprehensive income shall be displayed in the financial statement
where the components of other comprehensive income are reported. The Trust was
not previously required to present comprehensive income or the components
therewith under generally accepted accounting principles. The Trust intends to
adopt the requirements of this pronouncement in its financial statements for
the year ending December 31, 1998.
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS No. 131") effective for
financial statements issued for periods beginning after December 15, 1997.
SFAS No. 131 requires disclosures about segments of an enterprise and related
information regarding the different types of business activities in which an
enterprise engages and the different economic environments in which it
operates. The Trust intends to adopt the requirements of this pronouncement in
its financial statements for the year ending December 31, 1998. The adoption
of SFAS No. 131 is not expected to have a material impact on the Trust's
financial statement disclosures.
20
<PAGE>
DILUTION
Assuming conversion of the Units currently held by Starwood Mezzanine, the
net tangible book value (tangible assets, less total liabilities of the Trust)
at December 31, 1997 was $10.8 million or $0.89 per Class A Share after
deducting 1% for the interests of the Class B Shares. After giving effect for
issuance of additional Class A Shares to Starwood Mezzanine and SOFI IV on the
Contribution Date, the pro forma net tangible book value of the Trust would
have been approximately $741.8 million or $2.36 per Class A Share after
deducting 1% for the interests of the Class B Shares. As described in the
following table, this represents an immediate increase of pro forma tangible
book value to exiting Shareholders and an immediate dilution to Starwood
Mezzanine and SOFI IV with respect to the Class A Shares to be issued on the
Contribution Date as a result of the transaction.
<TABLE>
<S> <C> <C>
Contribution price per Class A Share............................ $2.50
Net tangible book value per Class A Share assuming Unit
conversion................................................... $0.89
-----
Increase per Class A Share attributable to existing
Shareholders on Contribution Date............................ $1.47
-----
Pro forma net tangible book value per Class A Share............. $2.36
-----
Total dilution per Class A Share to Starwood Mezzanine and SOFI
IV with respect to Class A Shares issued on the Contribution
Date........................................................... $0.14
=====
</TABLE>
The following table compares, on a pro forma basis as of December 31, 1997,
the number of Class A Shares, total consideration paid, and average price per
share for (i) Class A Shares outstanding on January 21, 1998, (ii) Class A
Shares to be issued in connection with the conversion of Units currently held
by Starwood Mezzanine and (iii) additional Class A Shares to be issued to
Starwood Mezzanine and SOFI IV on the Contribution Date.
<TABLE>
<CAPTION>
AVERAGE
TOTAL CONSIDERATION PRICE
-------------------- PER
SHARES PERCENT AMOUNT PERCENT SHARE
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Existing Class A
Shareholders............. 2,550,000 0.8% $ 1,533,000 0.2% $0.60
Starwood Mezzanine--
Warrant Holders.......... 5,000,000 1.6% 5,000,000 0.6% $1.00
Starwood Mezzanine--Unit
Holders.................. 4,568,944 1.5% 4,340,000 0.6% $0.95
----------- ----- ------------ -----
12,118,944 3.9% 10,873,000 1.4%
Starwood Mezzanine--on
Contribution Date........ 55,148,000 17.5% 137,870,000 18.0% $2.50
SOFI IV--on Contribution
Date..................... 247,074,800 78.6% 617,687,000 80.6% $2.50
----------- ----- ------------ -----
302,222,800 96.1% 755,557,000 98.6%
----------- ----- ------------ -----
314,341,744 100.0% $766,430,000 100.0%
=========== ===== ============ =====
</TABLE>
The computations in the tables set forth above exclude 14,963,057 Class A
Shares at an exercise price of $2.50 issuable upon exercise of options to be
issued to the Advisor under the Incentive Plan. The exercise of these options
would not significantly affect the increase in net tangible book value per
Class A Share to the existing Shareholders or the dilution per Class A Share
to Starwood Mezzanine and SOFI IV.
21
<PAGE>
RISK FACTORS
The statements contained in this Proxy Statement that are not historical
facts, including statements containing the words "believes," "anticipates,"
"expects" and words of similar import, are forward-looking statements subject
to the safe harbor created by the Private Securities Litigation Reform Act of
1995. A number of important factors could cause the Trust's actual results for
1997 and beyond to differ materially from those expressed in any forward-
looking statements made by, or on behalf of, the Trust. These factors include,
without limitation, the factors listed below. The Proposals present a number
of risk factors and voting considerations that Shareholders should carefully
consider prior to voting, including the following:
DILUTION OF SHAREHOLDERS
While the consummation of the Contribution will increase the net tangible
book value per Class A Share of the Shareholders by $1.47 per Class A Share or
165.1% from the actual net tangible book value per Class A Share on December
31, 1997, upon approval of the Contribution Proposal and consummation of the
transactions contemplated thereby, Starwood will increase their combined
voting interests in the Trust from 79.64% to 99.51%, subject to adjustment.
Upon approval of the Contribution Proposal and consummation of the
transactions contemplated thereby, the Shareholders not affiliated with
Starwood will have their voting interests in the Trust reduced from 20.36% to
.49%, subject to adjustment. The dilution of the voting interest of the
Shareholders will substantially reduce their ability to influence decisions
regarding the operations and policies of the Trust. In addition, upon the
approval of the Contribution Proposal and consummation of the transactions
contemplated thereby, the Shareholders not affiliated with Starwood will have
their percentage ownership interest in the Trust reduced from 30.54% to .73%,
subject to adjustment. See "CONTRIBUTION PROPOSAL."
CONFLICTS OF INTERESTS
Interests in Contribution Proposal and Advisory Agreement Proposal. Each of
the Starwood Trustees and Messrs. Silvey, Dishner and Kleeman has substantial
indirect economic interests in and may be officers of each of Starwood
Mezzanine, SOFI IV and the Advisor and will receive substantial benefits from
the consummation of the Contribution and the Advisory Agreement that will not
be received by the Shareholders. In addition, while the Contribution Proposal
and the Advisory Agreement Proposal were approved by the Independent
Committee, the Starwood Trustees were involved in structuring and negotiating
the terms of the Contribution and the Advisory Agreement. As a result of the
economic interests of the Starwood Trustees in Starwood Mezzanine, SOFI IV and
the Advisory Agreement and the benefits to be received by the Starwood
Trustees and Messrs. Silvey, Dishner and Kleeman, such individuals may have
conflicts of interest with respect to their obligations to the Trust in
determining whether the Trust should consummate the Contribution and enter
into the Advisory Agreement. The Starwood Trustees and Messrs. Silvey, Dishner
and Kleeman may have interests that conflict with those of others
participating in the Contribution and the Advisory Agreement and with the
interests of the Shareholders. Further, each of the Starwood Trustees and
Messrs. Silvey, Dishner and Kleeman have a substantial direct and/or indirect
interest in SAHI, Inc. and SAHI Partners, current Shareholders.
Investment Conflicts. The Starwood Trustees and Messrs. Silvey, Dishner and
Kleeman each have substantial indirect economic interests in and are officers
of certain entities that comprise the Starwood Group. The members of the
Starwood Group have substantial investments in real estate-related assets. In
the event the Trust were to invest in debt or equity interests in properties
similar to or in close proximity to properties owned by the Starwood Group, it
is possible that the properties owned by the Starwood Group may compete with
the properties in which the Trust has such interests in the future. In
addition, the Trust, on the one hand, and the Starwood Group, on the other
hand, may possibly compete with each other in the future with respect to the
acquisition of debt and/or equity interests. Except as set forth in the
Advisory Agreement, none of the Starwood Group will be required to present any
investment opportunities to the Trust or invest in any class of assets through
the Trust. See "BACKGROUND OF THE TRUST--History" and "--Investment Policy and
Loan Portfolio."
Investment Restrictions. The Trust is restricted from making certain types
of investments as a result of restrictions and conflicts involving Starwood
and their affiliates. These restrictions may limit the flexibility of
22
<PAGE>
the Trust in implementing its investment policy. Specifically, without the
amendment, termination or waiver of provisions of certain non-competition
agreements between Starwood Capital and Starwood Hotels & Resorts Trust, the
Trust is 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 (1) 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 the Trust or that are acquired as a result of the exercise of
remedies in respect of a loan in which the Trust has an interest) or (iii)
selling or contributing to or acquiring any interests in Starwood Hotels &
Resorts Trust, including debt positions or equity interests obtained by the
Trust under, pursuant to or by reason of the holding of debt positions. The
Trust is currently subject to certain additional investment restrictions which
will be terminated on the Contribution Date. See "BACKGROUND OF THE TRUST--
Investment Policy and Loan Portfolio."
New Conflicts Resulting from the Advisory Agreement and the Amendments to
the Declaration of Trust. The adoption of the Advisory Agreement and the
amendments to the Declaration of Trust will result in the creation of certain
additional conflicts of interest between the Trust, the Advisor, Starwood
Mezzanine and SOFI IV. In addition, decreasing the number and percentage of
members of the Board of Trustees that must be unaffiliated with the Advisor
could result in decisions that do not fully reflect the interest of all of the
Shareholders as a result of the conflicts of interest between the Trust and
the Advisor. See "ADVISORY AGREEMENT PROPOSAL" and "TRUST AMENDMENTS
PROPOSAL."
CONDITIONS PRECEDENT TO CONTRIBUTION AGREEMENT AND CONTRIBUTION PROPOSAL
The consummation of the Contribution Proposal is subject to certain
conditions precedent described in "CONTRIBUTION PROPOSAL--Contribution
Agreement," including the consent of the limited partners of Starwood
Mezzanine and SOFI IV and approval by the Shareholders. In addition, the
closing of the Contribution and the other transactions described in this Proxy
Statement is also subject to receipt of written confirmation by the IRS that
the Trust is able to elect to qualify as a REIT for its taxable year ending
December 31, 1998. Further, certain of the Interests require approval of the
borrowers, senior lenders or others prior to their contribution to the Trust.
There can be no assurance that the required consents will be obtained or that
the other conditions precedent will be waived or satisfied and that the
Contribution Proposal will be consummated. See "CONTRIBUTION PROPOSAL--
Contribution Agreement."
REAL ESTATE INVESTMENT RISKS
The acquisition of the Interests involve various risks generally incident to
the ownership of debt and/or equity interests in real property. These risks
include:
Inability of Borrowers to Generate Sufficient Income. Investments in real
estate or debt interests secured by real estate typically involve a high level
of risk. One of the risks of investing in debt or equity interests secured by
real estate is the possibility that the properties securing the interests will
not generate income sufficient to meet operating expenses and/or debt service
or will generate income and capital appreciation, if any, at rates lower than
those anticipated or available through investment in comparable real estate or
other investments. Income from properties and yields from investments in
properties may be affected by many factors, including the type of property
involved, the form of investment, conditions in financial markets, over-
building, a reduction in rental income as the result of the inability to
maintain occupancy levels, adverse changes in applicable tax laws, changes in
general economic conditions, adverse local conditions (such as changes in real
estate zoning laws that may reduce the desirability of real estate in the
area) and acts of God, such as earthquakes or floods. Some or all of the
foregoing conditions may materially and adversely affect the Trust, the
Interests, the First Mortgage Portfolio and other debt and/or equity interests
in real estate acquired or originated by the Trust.
Illiquidity. Real estate investments, including the Interests and the First
Mortgage Portfolio, are relatively illiquid. Such illiquidity will tend to
limit the ability of the Trust to vary its portfolio promptly in response to
changes in economic or other conditions. In addition, federal income tax
provisions applicable to REITs may
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limit the Trust's ability to sell investments held for fewer than four years,
which may affect the Trust's ability to sell investments at a time that would
be in the best interests of the Shareholders. See "TRUST AMENDMENTS PROPOSAL--
Federal Income Tax Aspects of the Contribution Proposal and Change of the
Trust's Purpose and Investment Policy."
Operating Risks. The properties which collateralize the Interests and the
First Mortgage Portfolio are subject to all operating risks common to real
estate developments in general, any or all of which may adversely affect
occupancy or rental rates. In addition, increases in operating costs due to
inflation and other factors may not necessarily be offset by increased rents
or other revenues. If operating expenses increase, the local markets for
properties may limit the extent to which rents or other revenues may be
increased to meet increased expenses or debt service payments without
decreasing occupancy rates and can decrease or eliminate participation
payments to the Trust. If any of the above occur, the Trust's ability to make
expected distributions to Shareholders could be adversely affected and the
Trust, the Interests, the First Mortgage Portfolio and other debt and/or
equity interests in real estate acquired by the Trust could be materially and
adversely affected.
Competitive Properties. The number of competitive properties in a particular
area could have a material effect on both the ability to lease space at the
properties which collateralize the Interests and the First Mortgage Portfolio
and the rents charged or other revenues to be received.
Insurance May Be Insufficient to Cover Losses. The Trust seeks to maintain
or to require to be maintained comprehensive liability, fire and extended
coverage insurance of the type and in the amount customarily obtained for
similar properties. There are, however, certain types of losses (generally of
a catastrophic nature, such as earthquakes, floods and wars) that either may
be uninsurable or not economically insurable. Should an uninsurable loss
occur, the Trust could lose both its invested capital and anticipated future
revenues related to its equity or debt investment in the affected property.
Any such loss could materially and adversely affect the Interests, the First
Mortgage Portfolio and the Trust.
Environmental Risks. Under various federal, state and local environmental
laws, ordinances and regulations, an owner or operator of real estate may
become liable for the costs of removal or remediation of certain hazardous
substances released on or in its property (including, in certain
circumstances, a secured lender that succeeds to ownership or control of a
property). Such laws typically impose cleanup responsibility and liability
without regard to whether the owner or control party knew of or was
responsible for the presence of the contaminants. The costs of investigation,
remediation or removal of such substances may be substantial, and the presence
of such substances, or the failure to properly remediate such property, may
adversely affect the owner's or control party's ability to sell or rent or
otherwise to receive revenues from such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances also may be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether
or not such facility is owned or operated by such person. Finally, the owner
or control party of a site may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from a site.
Hotel Industry Risks. The Interests and the First Mortgage Portfolio to be
acquired by the Trust include loans secured by existing hotel properties.
Lending to the hotel industry involves industry specific risks that are not
associated with lending activities in other industries. These risks include:
the level of demand for rooms and related services; cyclical over-building in
the hotel industry; changes in travel patterns; franchise agreement risks and
the seasonability of the hotel business. The majority of the hotel properties
securing the Interests and the First Mortgage Portfolio are operated pursuant
to existing franchise or license agreements with national hotel organizations.
Franchise agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of a hotel
property in order to maintain uniformity in the system created by the
franchisor. Compliance with such standards could require a franchisee to incur
significant expenses or capital expenditures.
Greater Risks of Loss from Multifamily Residential and Commercial Lending
Activities. The Interests and the First Mortgage Portfolio to be acquired by
the Trust include loans secured by existing commercial real estate
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or multifamily residential real estate. Multifamily residential and commercial
lending is generally viewed as exposing the lender to a greater risk of loss
than residential mortgage lending in part, because it typically involves
larger loans to single borrowers or groups of related borrowers than
residential mortgage loans.
The profitable operation of multi-family properties and multi-tenant retail
office and industrial properties is also dependent on the performance and
viability of the property manager of such project. The property manager is
responsible for responding to changes in the local market, planning and
implementing the rental structure, including establishing appropriate rental
rates, and advising the borrower so that maintenance and capital improvements
can be carried out in a timely fashion, all of which may impact the borrower's
ability to make payments, which may adversely affect the timing and amount of
payments received by the Trust. There is no assurance regarding the
performance of any operators and/or managers or persons who may become
operators and/or managers upon the expiration or termination of leases or
management agreements or following any default or foreclosure under a
commercial mortgage.
Commercial mortgages generally are non-recourse to the borrower. In the
event of foreclosure on a commercial mortgage, the value of the property and
other collateral securing the commercial mortgage may be less than the
principal amount outstanding on the commercial mortgage and the accrued but
unpaid interest. Also, there may be costs and delays involved in enforcing
rights of a property owner against tenants in default under the terms of
leases with respect to commercial properties, who may seek the protection of
the bankruptcy laws which can result in termination of lease contracts all of
which may adversely affect the timing and amount of payment received by the
Trust with respect to such commercial mortgages.
Prepayment Restrictions on Mortgages May Be Insufficient to Deter
Prepayments. Many of the mortgages included in the Interests and the First
Mortgage Portfolio contain provisions restricting prepayments of such
mortgages. Such restrictions may prohibit prepayments in whole or in part
during a specified period of time and/or require the payment of a prepayment
charge in connection with the prepayment thereof. Such prepayment restrictions
can, but do not necessarily, provide a deterrent to prepayments. Prepayment
charges may be in an amount which is less than the figure which would fully
compensate for the difference in yield upon reinvestment of the prepayment
proceeds against its expected yield to maturity of the mortgage. No assurance
can be given that, at the time any prepayment charges are required to be made
in connection with a defaulted mortgage, foreclosure proceeds will be
sufficient to make such payments. The enforceability, under the laws of a
number of states, of provisions similar to the provisions in the mortgages
providing for the payment of prepayment charges upon a voluntary or
involuntary prepayment is unclear. In particular, no assurance can be given
that, at any time that any prepayment charge is required to be made in
connection with an involuntary prepayment, the obligation to pay such
prepayment charges will be enforceable under applicable law or, if
enforceable, that foreclosure proceeds will be sufficient to make such
payment.
Junior Mortgages May Affect Trust's Rights. In certain circumstances, loans
included in the Interests are secured by junior mortgages which are
subordinate to senior mortgages or deeds of trust held by other lenders or
institutional investors. In addition, in certain circumstances the Interests
may be secured by a pledge of the equity interest in the borrower, or by a
partial interest in the underlying property. Loans that are subordinate to
first liens on real estate are subject to greater risks of loss than first
lien mortgage loans and loans that are secured by a pledge of equity interest
in the borrower or a partial interest in the underlying property are subject
to even greater risks. An overall decline in the real estate market could
adversely affect the value of the property securing the loans or the equity
value of the borrower such that the aggregate outstanding balance of the loan
made by the Trust and the balance of the more senior loan on the property
exceed the value of the property. The rights of the Trust, as beneficiary
under a junior mortgage, are subordinate to those of the mortgagee or
beneficiary under the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to receive rents, hazard
insurance and condemnation proceeds. In the case where the Trust's collateral
is a pledge of equity interest it has no rights to proceeds received in a sale
of the property except to the extent received by the equity owners.
Risk from Ownership of Subordinated Interests in Pools of Commercial
Mortgage Loans. The Trust intends to acquire Subordinated Interests, including
first loss unrated, credit support Subordinated Interests. A first loss
security is the most subordinated class of a multi-class issuance of pass-
through or debt securities and
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is the first to bear the loss upon a default on the underlying collateral.
While the market values of most Subordinated Interest classes tend to react
less to fluctuations in interest rate levels than more senior, rated classes,
the market values of Subordinated Interest classes tend to be more sensitive
to changes in economic conditions than more senior, rated classes. The ratings
assigned to securities by a nationally-recognized rating agency reflect such
agency's assessment of the ability of the issuer to make timely payments of
principal and interest and the nature and quality of the collateral underlying
the obligations.
The yield to maturity on Subordinated Interests of the type the Trust
intends to acquire will be extremely sensitive to the default and loss
experience of the underlying mortgage loans and the timing of any such
defaults or losses. Because the Subordinated Interests of the type the Trust
intends to acquire generally have no credit support, to the extent there are
realized losses on the mortgage loans comprising the mortgage collateral for
such classes, the Trust may not recover the full amount or possibly any of its
initial investment in such Subordinated Interests. The Trust may acquire non-
performing (i.e., defaulted) Subordinated Interests. Such investments involve
risks that the value of the mortgage collateral will decline below the amount
necessary to provide full recovery to senior classes, in which event the
Trust's entire investment would be lost.
When the Trust acquires a Subordinated Interest, it may not acquire the
right to service the underlying mortgage loans, even those that become
defaulted, with respect to such loans. The servicer of the mortgage loans is
responsible to holders of the senior classes of CMBS, whose interests may not
be the same as those of the holder of the Subordinated Interest. Accordingly,
the underlying mortgage loans may not be serviced in the same manner as they
would be serviced by the Trust or in a manner that is most advantageous to the
Trust as the holder of the Subordinated Interest.
The subordination of Subordinated Interests to more senior classes may
adversely affect the yield on the Subordinated Interests even if realized
losses are not ultimately allocated to such classes because interest and
principal are paid on the more senior classes before interest and principal
are paid with respect to the unrated or non-investment grade credit support
classes. Typically, interest deferred on these credit support classes is
payable on subsequent payment dates to the extent funds are available, but
such deferral may not itself bear interest, which will affect adversely the
yield on the Subordinated Interests.
The yield of the Subordinated Interests also will be affected by the rate
and timing of payments of principal (including prepayments, repurchase,
defaults and liquidations) on the mortgage loans underlying a series of CMBS.
The rate of principal payments may vary significantly over time depending on a
variety of factors such as the level of prevailing mortgage loan interest
rates and economic, demographic, tax, legal and other factors.
Default Risks Associated with Opportunistic Mortgage Loans. The Trust may
purchase nonperforming and subperforming Mortgage Loans, as well as Mortgage
Loans that have had a history of delinquencies. These Mortgage Loans may
presently be in default or may have a greater than normal risk of future
defaults and delinquencies, as compared to a pool of newly originated, high
quality loans of comparable type, size and geographic concentration. Returns
on an investment of this type depend on the borrower's ability to make
required payments (or, with respect to subperforming Loans, the modified
monthly payments required under the applicable forbearance plan) or, in the
event of default, the ability of the loan's servicer to foreclose and
liquidate the Mortgage Loan. There can be no assurance that the servicer can
liquidate a defaulted Mortgage Loan successfully or in a timely fashion.
GROWTH DEPENDENT ON LEVERAGE; RISKS FROM USE OF LEVERAGE
The success of the Trust's business plan is dependent upon the Trust's
ability to grow its portfolio of invested assets through the use of leverage.
The Trust currently intends to leverage its portfolio primarily through
secured and unsecured borrowings. The Trust's ability to obtain the leverage
necessary for execution of its business plan will ultimately depend upon its
ability to maintain interest coverage ratios meeting market underwriting
standards which will vary according to lenders' assessments of the
creditworthiness of the Trust and the terms of the borrowings.
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The percentage of leverage used will vary depending on the Trust's estimate
of the stability of the portfolio's cash flow. To the extent that changes in
market conditions cause the cost of such financing to increase relative to the
income that can be derived from the assets acquired, the Trust may reduce the
amount of leverage it utilizes.
Leverage creates an opportunity for increased net income, but at the same
time creates risks. For example, leveraging magnifies changes in the net worth
of the Trust. The Trust will leverage assets only when there is an expectation
that it will enhance returns, although there can be no assurance that the
Trust's use of leverage will prove to be beneficial. Moreover, there can be no
assurance that the Trust will be able to meet its debt service obligations
and, to the extent that it cannot, the Trust risks the loss of some or all of
its assets or a financial loss if the Trust is required to liquidate assets at
a commercially inopportune time.
The Trust is currently negotiating a bank credit agreement under which the
Company expects to be able to borrow up to approximately $1.1 billion to fund
acquisitions including the acquisition of the First Mortgage Portfolio and
provide working capital and for other general corporate purposes. The Trust
expects that the credit agreement will provide for a revolving line of credit
of up to $800 million and a term loan of $300 million over a term of three
years, that borrowings will bear interest at an annual rate of LIBOR plus 150
basis points and that the agreement would be secured by a security interest on
substantially all of the Trust's assets. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources."
If the Trust were to become a "pension-held REIT" in the future and acquired
its investments in connection with which debt was incurred, or otherwise
engaged in a transaction resulting in UBTI (determined as though the Trust
were a qualified pension plan), any qualified pension plan owning 10% or more
of the Trust's shares, by value, would have a portion of its dividend income
from the Trust taxed as UBTI. See "RISK FACTORS--Taxation of Tax-Exempt
Shareholders."
YIELD ASSESSMENT RISK
Before making any investments, the Trust will consider the expected yield of
the investment and the factors that may influence the yield actually obtained
on such investment. These considerations will affect the Trust's decision
whether to purchase such an investment and the price offered for such an
investment. No assurances can be given that the Trust can make an accurate
assessment of the yield to be produced by an investment. Many factors beyond
the control of the Trust are likely to influence the yield on the Trust's
investments, including, but not limited to, competitive conditions in the
local real estate market, local and general economic conditions and the
quality of management of the underlying property.
INTEREST RATE RISK
The Trust's operating result will depend in part on the difference between
the interest income earned on its interest-earning assets and the interest
expense incurred in connection with its interest-bearing liabilities.
Competition from other providers of mezzanine capital may lead to a lowering
of the interest rate earned on the Trust's interest-earning assets that the
Trust may not be able to offset by obtaining lower interest costs on its
borrowings. Changes in the general level of interest rates prevailing in the
economy can affect the spread between the Trust's interest-earning assets and
interest-bearing liabilities. Any significant compression of the spreads of
interest rates on interest-earning assets over the interest rates on interest-
bearing liabilities could have a material adverse effect on the Trust. In
addition, an increase in interest rates could, among other things, reduce the
value of the Trust's Mortgage Loans and other interest-earning assets and its
ability to realize gains from the sale of such assets, and a decrease in
interest rates could reduce the average life of the Trust's interest-earning
assets.
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations, and other factors beyond the control of the Trust. The Trust
may employ various hedging strategies to limit the effects of changes in
interest rates on its operations, including engaging in interest rate swaps,
caps, floors and other interest rate exchange contracts.
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There can be no assurance that the profitability of the Trust will not be
adversely affected during any period as a result of changing interest rates.
In addition, hedging transactions involve certain additional risks such as
counter-party credit risk, legal enforceability of hedging contracts and the
risk that unanticipated and significant changes in interest rates will cause a
significant loss of basis in the contract. With regard to the loss of basis in
a hedging contract, indices upon which such contracts are priced may be more
or less variable than the indices upon which the hedged loans are priced,
thereby making the hedge less effective. There can be no assurance that the
Trust will be able to adequately protect against the foregoing risks and that
the Trust will ultimately realize an economic benefit from any hedging
contract it enters into.
Furthermore, only payments to a REIT under an interest rate swap, cap
agreement, option, futures contract, forward rate agreement or any similar
financial instrument entered into by the REIT to hedge its indebtedness
incurred or to be incurred (and any gain from the sale or other disposition of
these instruments) are treated as qualifying income for purposes of the 95%
gross income test (as described in "TRUST AMENDMENTS PROPOSAL--Federal Income
Tax Aspects of the Contribution Proposal and the Change of the Trust's Purpose
and Investment Policy" and "--Taxation of the Trust"). The provisions of the
Code regarding the qualification of the Trust as a REIT may restrict the
Trust's ability to enter into certain of its hedging strategies. The Board of
Trustees will monitor the Trust's compliance with the various REIT
qualification tests imposed under the Code with respect to its various hedging
strategies on a continuing basis. However, no assurance can be given that the
Trust will satisfy these tests on an ongoing basis.
CERTAIN ANTI-TAKEOVER PROVISIONS MAY INHIBIT A CHANGE IN CONTROL
Elimination of cumulative voting, establishment of a classified board,
requiring approval of Shareholders holding two-thirds of the voting shares
prior to certain asset transfers, certain amendments relating to the issuance
of additional securities and increasing the Shareholder vote required to
terminate the Advisory Agreement may be characterized in the view of the SEC
as "anti-takeover measures" and could have the effect of delaying,
discouraging or preventing a change in control of the Trust even if
Shareholders holding a majority of the voting shares believed such change of
control was in their best interest. See "ADVISORY AGREEMENT PROPOSAL" and
"TRUST AMENDMENTS PROPOSAL--Anti-Takeover Effects."
VALUATION OF INTERESTS; PRICE PER SHARE LESS THAN TRADING PRICE
The number of Class A Shares issued to Starwood Mezzanine and SOFI IV upon
consummation of the Contribution were determined based on negotiations between
the Trust and each of Starwood Mezzanine and SOFI IV, and was determined using
a price per Class A Share of $2.50. The price per share of the Class A Shares
as quoted by the American Stock Exchange at the close of trading on February
6, 1998 was $5.25. See "CONTRIBUTION PROPOSAL--Contribution Agreement."
NO ASSURANCE THAT LETTERS OF INTENT TRANSACTIONS WILL BE CONSUMMATED
There can be no assurance that the transactions contemplated by the Letters
of Intent will be consummated and, if not consummated, that suitable
alternative investment opportunities will be available. See "CONTRIBUTION
PROPOSAL."
LACK OF EXPERIENCE OF THE ADVISOR MAY HAVE AN ADVERSE EFFECT ON THE TRUST
The Trust will be dependent for the monitoring of its day-to-day investment
affairs, including, but not limited to, the selection, structuring and
monitoring of its assets and associated borrowings and on the diligence and
skill of the officers and employees of the Advisor. The Advisor is a recently
formed entity with no significant assets and no prior history of operations;
the Advisor has not previously acted as an advisor with respect to any other
company.
RELIANCE ON ADVISOR
The Trust's investment affairs will be managed by the Advisor, subject to
the supervision of the Board of Trustees. Thus, the Trust will depend on the
services of the Advisor and its officers and employees for the success of the
Trust. The Trust's success depends in part on the continuing ability of the
Advisor to hire and retain knowledgeable personnel. Finally, the Trust is
subject to the risk that the Advisor will terminate the Advisory Agreement and
that no suitable replacement can be found to manage the investment affairs of
the Trust.
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Daily operations relating to the investment affairs between the Trust and
the Advisor and its affiliates will not be required to be approved by a
majority of the Independent Trustees. Instead, the majority of the Independent
Trustees will establish general guidelines for the Trust's investments and
borrowings. The Independent Trustees will review transactions engaged in by
the Trust to monitor the activities of the Advisor on a regular basis.
Moreover, the Independent Trustees will review the Trust's investment policies
annually. In conducting this review, the Independent Trustees will rely
primarily on information provided to them by the Advisor.
Certain of the executive officers and Trustees of the Trust are also
executive officers and directors of the Advisor. In addition, certain of the
Starwood Trustees and Messrs. Silvey, Dishner and Kleeman own a substantial
economic and voting interest in the Advisor.
CHANGES IN POLICIES
The investment and financing policies of the Trust and its policies with
respect to all other activities, including its growth, debt, capitalization,
dividends and operating policies, will be determined by the Board of Trustees.
Although the Board of Trustees has no present intention to do so, these
policies may be amended or revised at any time and from time to time at the
discretion of the Board of Trustees, without a vote of the Shareholders. A
change in these policies could adversely affect the Trust's financial
condition or results of operations or the market price of the Class A Shares.
See "TRUST AMENDMENTS PROPOSAL--Purpose and Investment Policy."
ADVERSE CHANGES IN GENERAL ECONOMIC CONDITIONS CAN ADVERSELY AFFECT TRUST'S
BUSINESS
The Trust's success is dependent upon the general economic conditions in the
geographic areas in which a substantial number of its investments are located.
Adverse changes in national economic conditions or in the economic conditions
of the regions in which the Trust conducts substantial business likely would
have an adverse effect on real estate values, interest rates and, accordingly,
the Trust's business.
DEPENDENCE ON AVAILABLE INVESTMENTS; COMPETITION
The results of the Trust's future operations will be dependent upon the
availability of, as well as the Advisor's and management's ability to
identify, complete and realize, real estate investment opportunities. It may
take considerable time for the Advisor and the Trust to find and consummate
appropriate investments. In general, the availability of desirable investment
opportunities and the results of the Trust's operations will be affected by
the level and volatility of interest rates, by conditions in the financial
markets, and general economic conditions. No assurances can be given that the
Trust will be successful in finding and then acquiring economically desirable
assets or that the assets, once acquired, will maintain their economic
desirability.
The Trust is engaged in a highly competitive business. The Trust will be
competing for investments with many recent entrants into the business,
including numerous public and private real estate investment vehicles,
including financial institutions (such as mortgage banks, pension funds and
real estate investment trusts) and other institutional investors, as well as
individuals. The acquisition of Mortgage Loans, Mezzanine Loans and
Subordinated Interests is often based on competitive bidding. In addition, the
Trust's competitors may seek to establish relationships with the financial
institutions and other firms from whom the Trust intends to purchase such
assets. Certain of the Trust's anticipated competitors are larger than the
Trust, have established operating histories and procedures, may have access to
greater capital and other resources, may have management personnel with more
experience than the officers of the Trust, and may have other advantages over
the Trust in conducting certain businesses and providing certain services.
POSSIBLE LIABILITY OF TRUST SHAREHOLDERS
The Trust is an organization of the type commonly known as a "business
trust." The Declaration of Trust provides that no Shareholder will be
personally liable for any obligation of the Trust solely as a result of his
status as a Shareholder. The Declaration of Trust further provides that the
Trust shall indemnify each Shareholder against any claim or liability to which
the Shareholder may become subject by reason of his being or having
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been a Shareholder. In addition, it is the Trust's policy to include a clause
in its contracts which provides that Shareholders assume no personal liability
for obligations entered into on behalf of the Trust. However, with respect to
certain claims such as tort claims, contractual claims where shareholder
liability is not so negated, claims for taxes, certain environmental claims
and certain statutory liability, the Shareholders may under applicable law be
personally liable to the extent that such claims are not satisfied by the
Trust. The common law in California with respect to business trusts is limited
and does not provide clear guidance with respect to the limited liability of
the Shareholders. The Trust intends to acquire public liability insurance
which it considers adequate. After acquisition of insurance, any risk of
personal liability to Shareholders will be limited to situations in which the
Trust's assets plus its insurance coverage would be insufficient to satisfy
the claims against the Trust and its Shareholders. In addition, the Trust
currently intends to change the domicile of the Trust to a state with clear
guidance with respect to Shareholder liability.
CONSEQUENCES OF NOT QUALIFYING FOR INVESTMENT COMPANY ACT EXEMPTION
The Trust intends to invest in Subordinated Interests that may not
constitute Qualifying Interests (as defined) within the meaning of the
Investment Company Act of 1940 (the "Investment Company Act"). The Trust
intends to limit the amount of such investments in Subordinated Interests that
do not constitute Qualifying Interests ("Non-Qualifying Investments") so as to
maintain the availability of an exemption from required registration as an
investment company under the Investment Company Act. If the Trust does not
limit the amount of Non-Qualifying Investments so as to maintain the
availability of the foregoing exemption, or Subordinated Interests believed by
the Trust to be Qualifying Interests are determined by the SEC or its staff to
be Non-Qualifying Investments (and the Non-Qualifying Investments exceed
prescribed limitations), the Trust could, among other things, be required
either (a) to change the manner in which it conducts its operations to avoid
being required to register as an investment company or (b) to register as an
investment company, either of which could have a material adverse effect on
the Trust. Registration as an investment company would result in, among other
things, a significantly reduced ability to utilize leverage in the Trust's
business and significantly increased operating expenses.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The Internal Revenue Service (the "IRS") has issued a revenue ruling in
which it held that amounts distributed by a REIT to a tax-exempt employees'
pension trust do not constitute UBTI. Subject to the discussion below
regarding a "pension-held REIT," based upon such ruling and the statutory
framework of the Code, distributions by the Trust to a Shareholder that is a
tax-exempt entity should not constitute UBTI, provided that the tax exempt
entity has not financed the acquisition of its shares with "acquisition
indebtedness" within the meaning of the Code, that the shares are not
otherwise used in an unrelated trade or business of the tax-exempt entity, and
that the Trust, consistent with its present intent, does not hold a residual
interest in a real estate mortgage investment conduit ("REMIC") that is an
entity or arrangement that satisfies the standards set forth in Section 860D
of the Code.
If any pension or other retirement trust that qualifies under Section 401(a)
of the Code (a "qualified pension trust") holds more than 10% by value of the
interests in a "pension-held REIT" at any time during a taxable year, a
portion of the dividends paid to the qualified pension trust by such REIT may
constitute UBTI. For these purposes, a "pension-held REIT" is defined as a
REIT (i) which would not have qualified as a REIT but for the provisions of
the Code which look through such a qualified pension trust in determining
ownership of shares of the REIT and (ii) as to which at least one qualified
pension trust holds more than 25% by value of the interests of such REIT or
one or more qualified pension trusts (each owning more than a 10% interest by
value in the REIT) hold in the aggregate more than 50% by value of the
interests in such REIT.
Based upon a review of the ownership of the Trust as a result of the
Contribution Proposal, the Trust does not expect that it will be a "pension-
held REIT." However, notwithstanding the Trust's current belief that it will
not be a "pension-held REIT," no assurance can be given that the Trust will
not become a "pension-held REIT" in the future.
EFFECT OF SALES OF CLASS A SHARES
Sales of Class A Shares by Starwood Mezzanine or SOFI IV or their respective
partners (or the perception that such sales could occur) could adversely
affect the trading prices for the Class A Shares.
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LACK OF INDEPENDENT REPRESENTATION
The Board of Trustees has not retained an independent representative or
representatives to act on behalf of the Shareholders in connection with the
Proposals. No group of Shareholders was empowered to negotiate on behalf of
the Trust the terms and conditions of the transactions relating to the
Proposals or to determine what procedures should be in place to safeguard the
rights and interests of the Shareholders. In addition, no investment banker,
attorney, financial consultant or expert was engaged to represent the
interests of the Shareholders. On the contrary, the Board of Trustees has been
responsible for structuring all such terms and conditions on behalf of the
Trust. If an independent representative or representatives had been retained
for the Shareholders, the terms and conditions of the transactions relating to
the Proposals might have been different, and possibly more favorable to the
Shareholders.
The Board of Trustees, prior to determining the structure of the terms and
conditions of the transactions relating to the Proposals, consulted with legal
counsel. These deliberations were critical to the structuring of the Proposals
and, although the advice and counsel of such advisors were not binding upon
the Board of Trustees, affected the manner in which the transactions relating
to the Proposals were structured. With respect to the Contribution Proposal,
the Trust has received an opinion from Houlihan that states that the
Contribution Proposal is fair to the Trust from a financial point of view
which opinion is in form and substance acceptable to the Independent
Committee. Because the Board of Trustees fully analyzed the Proposals and
exercised its business judgment in determining whether the Proposals were in
the best interests of the Trust and the Shareholders, it did not believe it
was necessary to engage an independent representative to represent the
interests of the Shareholders. The Independent Trustees have approved the
Proposals, taken as a whole. See "CONTRIBUTION PROPOSAL--Opinion of
Independent Financial Advisor."
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ANNUAL MEETING AND VOTING
Only holders of record of the Class A Shares and Class B Shares at the close
of business on January 21, 1998 (the "Record Date") are entitled to receive
notice of and to vote at the Annual Meeting or at any postponement or
adjournment thereof. On the Record Date, the issued and outstanding shares of
the Trust were 7,550,000 Class A Shares and 3,775,000 Class B Shares. The
presence, either in person or by proxy, of the holders of a majority of the
outstanding Class A Shares and a majority of the Class B Shares on the Record
Date is necessary to constitute a quorum at the Annual Meeting.
Class A Shares and Class B Shares represented by a proxy in the accompanying
form, if such proxy is properly executed and is received by the Trust prior to
voting at the Annual Meeting, will be voted in the manner specified on the
proxy. If no such specification is made, the Class A Shares and Class B Shares
will be voted FOR the Proposals as described herein and as recommended by the
Board of Trustees with regard to all other matters in its discretion. Any
Shareholder of the Trust who casts a vote by proxy may revoke it at any time
before it is voted by giving written notice to the Secretary of the Trust
expressly revoking the proxy, by signing and forwarding to the Trust a later
dated proxy, or by attending the Annual Meeting and personally voting the
Class A Shares or Class B Shares owned of record by such Shareholder.
In connection with the election of Trustees, the Shareholders are entitled
to cumulate their votes so that each Shareholder is entitled to cast a number
of votes equal to the number of such Class A Shares or Class B Shares
registered in the Shareholder's name on the record date multiplied by the
number of Trustees to be elected. The Shareholder may cumulate such votes for
Trustees by casting all such votes for one candidate or by distributing the
votes to which such Shareholder is entitled among as many candidates as the
Shareholder chooses. Discretionary authority to cumulate votes is being
solicited by this Proxy Statement such that the proxy holders named in the
accompanying proxy card may allocate the cumulated votes for which they have
been given proxies among the nominees in such proportions as they deem
advisable.
In voting upon any matter which may come before the Annual Meeting, each
Shareholder is entitled to one vote for each Class A Share or Class B Share
registered in the Shareholder's name on the record date. All Shareholders of
both Class A Shares and Class B Shares shall vote together as a single class,
with a majority vote of the outstanding Class A Shares and Class B Shares
required for approval and ratification of each matter.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the election inspectors appointed for the meeting and who will determine
whether or not a quorum is present. The election inspectors will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as unvoted for purposes of
determining the approval of any matter submitted to the Shareholders for a
vote. If a broker indicates on the proxy that it does not have discretionary
authority as to certain shares to vote on a particular matter, those shares
will not be considered as present and entitled to vote with respect to that
matter.
The Trust will pay the cost of soliciting proxies from its Shareholders. In
addition to solicitation by mail, certain trustees, officers and regular
employees of the Trust may solicit the return of proxies by telephone,
facsimile, personal interview or otherwise without additional remuneration.
The Trust will also reimburse brokerage firms and other persons representing
the beneficial owners of Class A Shares for their reasonable expenses in
forwarding proxy solicitation material to such beneficial owners in accordance
with the proxy solicitation rules and regulations of the SEC and AMEX, on
which the Class A Shares are traded under the symbol "APT."
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BACKGROUND OF THE TRUST
The Trust is a California business trust. Subject to the receipt by the
Trust of a written agreement from the IRS that provides that the Trust is
eligible to make an election under Section 856(c)(1) of the Code to be taxed
as a REIT for its taxable year ending December 31, 1998, the Board of Trustees
believes that the Trust will be treated as a REIT for Federal income tax
purposes for its 1998 taxable year. See "TRUST AMENDMENTS PROPOSAL--Federal
Income Tax Aspects of the Contribution Proposal and the Change of the Trust's
Purpose and Investment Policy--Closing Agreement." The Trust was formed in
April 1988. The Trust's capital structure consists of shares of Class A Shares
and Class B Shares. The currently outstanding Class B Shares are entitled to a
1% equity interest and a 33% voting interest in the Trust. The Class B Shares
are convertible into Class A Shares at the option of the holder at a rate of
49 Class B Shares for 1 Class A Share. The Trust is required pursuant to the
Declaration of Trust to issue one Class B Share for each two Class A Shares
that are issued. The Class B Shares are issued to the Class B Shareholders for
par on a pro rata basis. If the Contribution is consummated and all
outstanding Units are exchanged for Class A Shares, the Class B Shareholders
will be issued approximately 153.4 million Class B Shares, subject to
adjustment, for a purchase price of $0.01 per share. Each of the Class A and
Class B Shares are entitled to one vote per share. The Trust is also currently
the sole general partner and as of December 31, 1997 held an 8.05% interest in
the Partnership. If the Contribution Proposal is approved by the Shareholders,
the Partnership will be terminated on the Contribution Date and each
outstanding Unit held by holders other than the Trust will be exchanged for
one Class A Share, resulting in the issuance of 4,568,944 Class A Shares to
Starwood Mezzanine and the issuance of 2,284,472 Class B Shares to the current
Class B Shareholders at a price of $.01 per share.
The Class A Shares are currently publicly traded on AMEX. The Trust
currently falls below the AMEX continued listing guidelines and, as a result,
there is no assurance that the Class A Shares will remain listed. The Trust is
hopeful that the acquisition of the Interests and First Mortgage Portfolio
will allow its business to be sufficient to maintain the AMEX listing of the
Class A Shares.
The purpose and the investment policy of the Trust as currently stated in
the Declaration of Trust is to predominantly to invest in the Current
Portfolio. The Trust is currently subject to the Investment Restrictions as
well as the investment restrictions discussed below. The Trust's primary
assets as of December 31, 1997 were short-term, liquid real estate
investments, cash and cash equivalents, which are held directly and indirectly
through the Trust's interest in the Partnership.
If the Proposals are approved by the Shareholders of the Trust, on the
Contribution Date, the Trust will acquire the Interests, the Letters of
Intent, cash and the First Mortgage Portfolio, the purpose and investment
policy of the Trust will be changed, the Partnership will be terminated and
each outstanding Unit will be exchanged for one Class A Share, and the Trust
will enter into the Advisory Agreement with the Advisor. See "CONTRIBUTION
PROPOSAL," "ADVISORY AGREEMENT PROPOSAL" and "TRUST AMENDMENTS PROPOSAL."
HISTORY
The Trust was originally formed by Angeles Corporation ("Angeles") for the
purpose of making various types of mortgage and other loans primarily 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 the Trust. In November 1993, the Trust 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 the Trust. In November 1993, the Trust was notified that SAHI,
Inc. had acquired from a shareholder of the Trust in a privately negotiated
transaction, all of the outstanding Class B Shares. These Class B Shares were
sold to SAHI Partners in March 1994. From November 1993 through February 1994,
SAHI Partners also had accumulated through open market purchases 9.57% of the
total outstanding Class A Shares. Subsequently, SAHI Partners made the Trust a
firm offer to obtain control of the Trust. Through subsequent negotiations
between the Trust and SAHI Partners, it was agreed that the Trust would sell
to SAHI Partners and SAHI, Inc. warrants for the purchase of additional Class
A Shares and Class B Shares. On March 15, 1994, SAHI Partners purchased from
the Trust for $100,000 a warrant to purchase 5,000,000 Class A Shares at $1.00
per share (the "Class A Warrant") and SAHI, Inc. purchased for $1,000 a
warrant to purchase 2,500,000 Class B Shares at $.01 per
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share (the "Class B Warrant" and together with the Class A Warrant, the
"Warrants"). SAHI Partners subsequently assigned the Class A Warrant to
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 the Trust also voted in September 1996 to change the
investment policy of the Trust and to approve a proposal for the Trust to
become the sole general partner of the Partnership with Starwood Mezzanine as
the initial limited partner.
SAHI, Inc. and SAHI Partners have agreed to transfer on the Contribution
Date all of the outstanding Class B Shares to B Holdings, L.L.C., a
Connecticut limited liability company ("BLLC") that is owned 50% by Starwood
Capital LLC and 50% by Starwood Opportunity Fund II, L.P.
INVESTMENT POLICY AND LOAN PORTFOLIO
Prior to September 1996, the purpose and investment policy of the Trust was
predominately to make mortgage loans primarily to entities affiliated with
Angeles. However, during the period from the liquidation of the Trust's
portfolio in 1993 to September 1996, the Trust did not pursue its stated
investment policy. Instead, the Trust held most of its assets in trust as a
reserve against contingent claims. This contingent claims trust was terminated
on August 12, 1996. In September 1996, the Shareholders voted to change the
purpose and investment policy of the Trust and to approve a proposal whereby
the Trust became the sole general partner of the Partnership. The Trust's
current purpose and investment policy is to predominantly invest in the
Current Portfolio, subject to the Investment Restrictions and the other
restrictions described below.
The Trust's primary assets as of December 31, 1997 were short-term, liquid
real estate investments, cash and cash equivalents and its interest in the
Partnership. The Partnership's primary assets as of December 31, 1997 were
short-term, liquid real estate investments, cash and cash equivalents. Prior
to October 1, 1996, the Partnership owned the Warwick Certificates which
represented 100% of the beneficial ownership interest in a $4,900,000
performing, non-recourse first mortgage loan, secured by the Warwick Hotel.
The Warwick Certificates were prepaid on October 1, 1997.
The Board of Trustees currently proposes to change the investment focus of
the Trust (i) to allow the Trust to originate or acquire certain mortgage
loans that are made to borrowers affiliated with the Trust and to acquire
certain securities and investments that are collateralized in whole or in part
by or made to borrowers that are affiliated with the Trust, (ii) to clarify
that (1) the primary purpose of the Trust is to acquire a diversified
portfolio of debt or debt like interests in real estate related assets, (2)
the Trust generally will not obtain management rights over or equity interests
in assets underlying non-performing or sub-performing debt unless the Trust's
efforts to restructure such debt into performing debt are unsuccessful, (3)
the Trust's authority with respect to the Diversified Portfolio includes the
power to acquire, hold, own, develop, redevelop, construct, improve, maintain,
operate, manage, sell, lease, rent, transfer, encumber, mortgage, convey,
exchange and otherwise dispose of or deal with the Diversified Portfolio and
that the Trust may hold the Diversified Portfolio either directly or
indirectly and (4) the Board of Trustees has exclusive authority over the
management of the Trust, the conduct of its affairs and the management and
disposition of its property and (iii) to include the Investment Restrictions.
The Trust has no present intention to originate or acquire loans made to
borrowers that are affiliated with the Trust. The Board of Trustees believes
that this change in investment focus and the consummation of the Contribution
offers the Shareholders an increased opportunity to participate in Trust
investments with the potential for appreciation. See "CONTRIBUTION PROPOSAL"
and "TRUST AMENDMENTS PROPOSAL."
In addition to the Investment Restrictions, the Trust is currently subject
to the additional restrictions described below. These restrictions will be
terminated on the Contribution Date. Currently during any period in which the
Starwood Trustees shall constitute a majority of the Board of Trustees or
SAHI, Inc., SAHI Partners, Starwood Mezzanine, the Starwood Trustees or their
respective affiliates (individually or collectively, the "Current Starwood
Group") collectively control a sufficient number of voting securities to elect
a majority of the Board and Starwood Mezzanine shall have an interest in
either the Trust or the Partnership (i) without the
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approval of the limited partners of Starwood Mezzanine (A) neither the Trust
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 of remedial rights with respect to, a debt instrument and (B)
neither the Trust nor the Partnership shall invest in real estate related debt
interests issued by obligors that are not operating companies or originate or
purchase mortgage loans issued by obligors that are not operating companies
and (ii) neither the Trust nor the Partnership shall incur indebtedness during
any period in which the incurrence of such indebtedness would increase the
amount of UBTI to be incurred by the limited partners of Starwood Mezzanine
without the prior written consent of Starwood Mezzanine. Furthermore, during
any period in which Starwood Mezzanine shall have an interest in either the
Trust or the Partnership, without the approval of the limited partners of
Starwood Mezzanine, neither the Trust nor the Partnership may acquire (by
contribution or purchase) any additional debt or equity securities from the
Current Starwood Group, subject to further restrictions. The implementation of
the Contribution Proposal necessitates approval of the proposal outlined under
"CONTRIBUTION PROPOSAL" and certain amendments to the Declaration of Trust
outlined under "TRUST AMENDMENTS PROPOSAL."
The Trust will focus its acquisition efforts on assets which exhibit one or
more of the following characteristics:
Mortgage Loans. The Trust will pursue opportunities to originate and fund
Mortgage Loans to real estate owners and property developers who require
flexible, custom-tailored financings. While the Trust anticipates that its
Mortgage Loans will generally be medium to long-term, the Trust may make
Mortgage Loans that are short term in duration. Generally, Mortgage Loans will
require a balloon payment of principal and interest at maturity. These types
of loans are intended to be higher-yielding loans with higher interest rates.
The Trust may sell or refinance the senior portion of the Mortgage Loan,
individually or in a pool, and retain a Mezzanine Loan.
Mezzanine Loans. The Trust intends to take advantage of opportunities to
provide or acquire mezzanine financing on commercial property that is subject
to first lien mortgage debt. The Trust believes that there is a growing need
for mezzanine capital (i.e., capital representing the level between 65% and
90% of property value) as a result of current commercial mortgage lending
practices setting loan-to-value targets as low as 65%. The Trust's mezzanine
financing may take the form of subordinated loans, commonly known as second
mortgages, or, in the case of loans originated for securitization, partnership
loans (also known as pledge loans) or preferred equity investments. For
example, on a commercial property subject to a first lien mortgage loan with a
principal balance equal to 70% of the value of the property, the Trust could
lend the owner of the property (typically a partnership) an additional 15% to
20% of the value of the property. The Trust believes that as a result of (i)
the significant changes in the lending practices of traditional commercial
real estate lenders, primarily relating to more conservative loan-to-value
ratios, and (ii) the significant increase in securitized lending with strict
loan-to-value ratios imposed by the rating agencies, there will be increasing
demand for mezzanine capital by property owners.
Typically, as security for its debt to the Trust, in a Mezzanine Loan, the
owner would pledge to the Trust either the property subject to the first lien
(giving the Trust a second lien position that may be subject to an
intercreditor agreement) or the limited partnership and/or general partnership
interest in the owner. If the owner's general partnership interest is pledged,
then the Trust would be in a position to take over the operation of the
property in the event of a default by the owner.
Although Mezzanine Loans secured by mortgages on real property generally
constitute qualifying assets and generally generate qualifying income for
purposes of the 75% gross income test (as described in "TRUST AMENDMENTS
PROPOSAL--Federal Income Tax Aspects of the Contribution Proposal and the
Change of the Trust's Purpose and Investment Policy" and "--Taxation of the
Trust"), Mezzanine Loans secured by limited partnership and/or general
partnership interests in the borrower may not qualify as such in the absence
of appropriate circumstances.
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The Trust expects that Mezzanine Loans will generally provide the Trust with
the right to receive a stated interest rate on the loan balance. In certain
instances, the Trust may negotiate to receive a percentage of net operating
income or gross revenues from the property, payable to the Trust on an ongoing
basis, and a percentage of any increase in value of the property, payable upon
maturity or refinancing of the loan, or the Trust may otherwise seek terms to
allow the Trust to charge an interest rate that would provide an attractive
risk-adjusted return. Under the REIT tax rules, any amount received or
accrued, directly or indirectly, with respect to any obligation is generally
not includible as qualifying interest income if the determination of the
amount depends in whole or in part on the income or profits of any person
(whether or not derived from property secured by the obligation). Although
amounts received by the Trust that are determined with reference to the
operating income of a borrower generally do not constitute qualifying income
for purposes of the REIT tax rules, certain of such amounts received will
constitute qualifying income if the borrower derives substantially all of its
gross income from the related property through the leasing of substantially
all of its interests in the property, to the extent the amounts received from
the borrower are attributable to amounts that would be characterized as
qualified rents from real property under the REIT tax rules. The provisions of
the Code regarding the qualification of the Trust as a REIT may restrict the
Trust's ability to originate or acquire certain Mezzanine Loans. The Board of
Trustees will monitor the Trust's compliance with the various REIT
qualification tests imposed under the Code with respect to investing in
Mezzanine Loans. However, no assurance can be given that the Trust will
satisfy these tests on a continuing basis.
Opportunistic Mortgages and Minority Participations. The Trust currently
intends to purchase sub-performing or non-performing loans or minority
participations in such loans (collectively, "Opportunistic Investments"). The
Interests include Opportunistic Investments. The Trust believes that
Opportunistic Investments often represent attractive investments on a total
return basis and may present opportunities for the origination of new mortgage
loans. Although the period during which the Trust will hold Opportunistic
Investments will vary considerably from asset to asset, the Trust believes
that most such investments will be held in its portfolio no more than five
years.
Triple Net Leases. The Trust may acquire properties that are subject to
long-term triple net lease arrangements with tenants that the Trust believes
to be creditworthy. In many cases, the fixed stream of payment from such
positions may have similar risk/reward characteristics as the mortgage loans
to be originated by the Trust.
Subordinated Interests. The Trust may acquire rated and unrated, short term,
medium and long-term real estate related debt securities, including performing
and non-performing Subordinated Interests in CMBS issued in public or private
transactions. CMBS typically are divided into two or more classes, sometimes
called "tranches." The senior classes are higher rated securities, which are
rated from low investment grade (BBB) to higher investment grade (AA or AAA).
The junior, subordinated classes typically include a lower rated, non-
investment grade BB and B class, and an unrated, higher-yielding, credit
support class (which generally is required to absorb the first losses on the
underlying mortgage loans). The Trust currently anticipates that it may invest
in the non-investment grade tranches of CMBS.
CMBS generally are issued either as commercial mortgage obligations ("CMOS"
or "CMO Bonds") or pass-through certificates ("Pass-Through Certificates").
CMO Bonds are debt obligations of special purpose corporations, owner trusts
or other special purpose entities secured by commercial mortgage loans or
CMBS. Pass-Through Certificates evidence interests in trusts, the primary
assets of which are mortgage loans. CMO Bonds and Pass-Through Certificates
may be issued or sponsored by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage bankers,
commercial banks, investment banks and other entities.
Each class of CMBS may be issued with a specific fixed or variable coupon
rate and has a stated maturity or final scheduled distribution date. Principal
prepayments on the mortgage loans comprising the mortgage collateral (i.e.,
mortgage pass-through securities or pools of whole loans securing or backing a
series of CMBS) ("Mortgage Collateral") may cause the CMBS to be retired
substantially earlier than their stated maturities or
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final scheduled distribution dates, although, with respect to commercial
mortgage loans, there generally are penalties for or limitations on the
ability of the borrower to prepay the loan.
The credit quality of CMBS depends on the credit quality of the underlying
Mortgage Collateral. CMBS are backed generally by a limited number of
commercial or multifamily mortgage loans with larger principal balances than
those of single family mortgage loans. As a result, a loss on a single
mortgage loan underlying a CMBS will have a greater negative effect on the
yield of such CMBS, especially the Subordinated Interests in such CMBS.
Subordinated Interests carry significant credit risks. Typically, in a
"senior-subordinated" structure, the Subordinated Interests provide credit
protection to the senior classes by absorbing losses from loan defaults or
foreclosures before such losses are allocated to senior classes. Moreover,
typically, as long as the more senior tranches of securities are outstanding,
all prepayments on the mortgage loans generally are paid to those senior
tranches, at least until the end of a lock-out period, which typically is five
years or more. In some instances, particularly with respect to Subordinated
Interests in commercial securitizations, the holders of Subordinated Interests
are not entitled to receive scheduled payments of principal until the more
senior tranches are paid in full or until the end of a lock-out period.
Because of this structuring of the cash flows from the underlying mortgage
loans, Subordinated Interests in a typical securitization are subject to a
substantially greater risk of non-payment than are those more senior tranches.
Accordingly, the Subordinated Interests are assigned lower credit ratings, or
no ratings at all.
Unlike the owner of mortgage loans, the owner of Subordinated Interests in
CMBS ordinarily does not control the servicing of the underlying mortgage
loans. The servicer of the mortgage loans is responsible to holders of the
senior classes of CMBS, whose interests may not be the same as those of the
holder of the Subordinated Interest. Accordingly, the underlying mortgage
loans may not be serviced in the same manner as they would be serviced by the
Trust or in a manner that is most advantageous to the Trust as the holder of
the Subordinated Interest. See "RISK FACTORS--Real Estate Investment Risks--
Risk of Ownership of Subordinated Interests in Pools of Commercial Mortgage
Loans."
The Trust's qualification and taxation as a REIT in the future will depend
on the Trust's ability to meet through actual operating results, various
qualification tests on an interim basis, including asset composition and gross
income tests imposed under the Code. The Trust will review compliance with
these tests on a continuing basis. However, no assurance can be given that the
Trust will satisfy such tests on a continuing basis. See "TRUST AMENDMENTS
PROPOSAL--Taxation of the Trust."
The Trust believes that it will not be, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act. The Investment Company Act generally exempts entities
that are "primarily engaged in purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate" ("Qualifying Interests"). The
Trust intends to rely on current interpretations by the staff of the SEC in an
effort to qualify for this exemption. To comply with the foregoing guidance,
the Trust, among other things, must maintain at least 55% of its assets in
Qualifying Interests and also may be required to maintain an additional 25% in
Qualifying Interests or other real estate-related assets. Generally, the
Mortgage Loans and certain of the Mezzanine Loans in which the Trust may
invest constitute Qualifying Interests. While Subordinated Interests generally
do not constitute Qualifying Interests, the Trust may seek to structure such
investments in a manner where the Trust believes such Subordinated Interests
may constitute Qualifying Interests. The Trust may seek, where appropriate,
(i) to obtain foreclosure rights or other similar arrangements with respect to
the underlying mortgage loans, although there can be no assurance that it will
be able to do so on acceptable terms or (ii) to acquire Subordinated Interests
collateralized by whole pools of mortgage loans. As a result of obtaining such
rights or whole pools of mortgage loans as collateral, the Trust believes that
the related Subordinated Interests will constitute Qualifying Interests for
purposes of the Investment Company Act. The Trust does not intend, however, to
seek an exemptive order, no-action letter or other form of interpretive
guidance from the SEC or its staff on this position. Any decision by the SEC
or its staff advancing a position with respect to whether such Subordinated
Interests constitute Qualified Interests that differs from the position
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taken by the Trust could have a material adverse effect on the Trust. See
"RISK FACTORS--Consequences of Not Qualifying for Investment Company Act
Exemption."
The Trust currently intends to acquire additional assets opportunistically
on an all cash basis, through the issuance of additional Class A Shares and/or
with financing from institutional and other lenders or sellers. The Trust is
also permitted to raise additional capital through registered public offerings
as well as private placements of both debt and equity interests. In addition,
the Trust may acquire additional assets through contributions from Starwood
subject to certain restrictions.
There can be no assurance that the Trust will be able to acquire additional
assets 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 the
Trust (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 the Trust's acquisitions or investments exclusively on a specific class
of assets. As of the Contribution Date, the Trust will be advised by the
Advisor. See "ADVISORY AGREEMENT PROPOSAL--Advisory Agreement."
THE PARTNERSHIP
The Partnership is a limited partnership organized under the Delaware
Revised Uniform Limited Partnership Act. The Partnership will be terminated on
the Contribution Date and each outstanding Unit will be exchanged for one
Class A Share. The Trust is the sole general partner and Starwood Mezzanine is
the sole limited partner of the Partnership as of December 31, 1997 with an
8.05% and 91.95% interests in the Partnership, respectively. As the sole
general partner of the Partnership, the Trust manages the business and affairs
of the Partnership. Except for the Investment Restrictions and other
restrictions that are terminating on the Contribution Date and compliance with
the purpose and investment policy of the Trust, the Trust has full and
complete power, authority and discretion to take all actions necessary or
appropriate to carry out the business of the Partnership. The Trust accounts
for its investment in the Partnership on a consolidated basis, in accordance
with generally accepted accounting principles. Pursuant to agreements entered
into in connection with formation of the Partnership, Starwood Mezzanine, as a
holder of Units, has certain rights to tender all or a portion of the Units
held by it to the Trust in exchange for Class A Shares and/or cash, and
certain rights to require the Trust to register under the Securities Act any
Class A Shares which may be issued upon such exchange.
CONTROL OF THE TRUST
As of January 21, 1998, Starwood owned an aggregate of 5,244,100 Class A
Shares and 3,775,000 Class B Shares representing a 79.64% voting interest in
the Trust. Because Starwood controls the Trust, the Board of Trustees has
taken certain actions to protect the rights and interests of the public
Shareholders. First, the Contribution Proposal and the Advisory Agreement
Proposal are being submitted to a vote of the holders of Class A Shares and
Class B Shares. Second, the Board of Trustees has obtained an opinion as to
the fairness of the Contribution Proposal from a financial point of view prior
to the consummation of the Contribution. See "CONTRIBUTION PROPOSAL--Opinion
of Independent Financial Advisor." Third, the Trust has complied with the
Shareholders Agreement which was designed to protect the interests of the
public Shareholders of the Trust. See "CONTRIBUTION PROPOSAL--Shareholders
Agreement." Fourth, the Independent Trustees have approved all of the
Proposals, taken as a whole.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
In considering the recommendation of the Board of Trustees with respect to
certain proposals contained herein and in considering the named nominees for
election to the Board of Trustees, the Shareholders should be aware that
certain members of the Board of Trustees some of whom are up for re-election
have certain interests which may present them with potential or actual
conflicts of interest in connection with such proposals. Each of the Starwood
Trustees and Messrs. Silvey, Dishner and Kleeman has substantial direct and
indirect economic interests in and certain of such individuals are officers of
each of Starwood Mezzanine, SOFI IV and the Advisor and will receive
substantial benefits from the consummation of the Contribution and entry into
the Advisory Agreement that will not be received by the Shareholders.
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In addition to the benefits the Starwood Trustees will receive as a result
of their direct and indirect interests in Starwood Mezzanine, SOFI IV and the
Advisor in connection with the contribution of the Letters of Intent, the
Interests and the First Mortgage Portfolio in exchange for Class A Shares and
cash and the entry into the Advisory Agreement, the Starwood Trustees and
Messrs. Silvey, Dishner and Kleeman will receive additional benefits as a
result of the following: (i) Starwood Mezzanine will obtain improved liquidity
of its investment in the Partnership as a result of the exchange of its Units
for Class A Shares, (ii) Starwood Mezzanine and SOFI IV will obtain improved
liquidity of its debt investments as a result of the contribution of the
Interests, the First Mortgage Portfolio and the Letters of Intent in exchange
for cash and Class A Shares and (iii) the holders of all of the Class B Shares
who are members of the Starwood Group, will be issued 151,111,400 Class B
Shares for a purchase price of $0.01 per share as required by the Declaration
of the Trust. The Starwood Trustees and Messrs. Silvey, Dishner and Kleeman
have substantial economic interests in the members of Starwood, including, as
directors, officers, employees and in some cases direct or indirect owners of
interests in such entities. As such, the Starwood Trustees have a significant
interest in the Shareholders' approval of the Contribution Proposal, the
Advisory Agreement Proposal and the Trust Amendments Proposal which would
facilitate the transfer of additional ownership interest in and control of the
Trust to Starwood as a result of the contribution of the Interests and other
contributed assets in exchange for Class A Shares. Further, each of the
Starwood Trustees and Messrs. Silvey, Dishner and Kleeman is affiliated with
and has a substantial economic interest in the Advisor who will receive fees
and other remuneration pursuant to the Advisory Agreement. Finally, certain of
the proposed amendments to the Declaration of Trust may have the effect of
delaying, discouraging or preventing a change in control of the Trust, even if
Shareholders holding a majority of the voting shares believed such a change of
control was in their best interest. Each of the Starwood Trustees, in his
capacity as a Trustee, voted to recommend the Contribution Proposal, the
Advisory Agreement Proposal, the Trust Amendments Proposal and to elect the
named nominees including the Starwood Trustees who are up for re-election.
Additionally, all of the named nominees for the Board of Trustees who are not
also officers of the Trust have an interest in the approval of the amendments
to the Incentive Plan, as each will participate in such plan and may benefit
financially from its implementation. See "RISK FACTORS--Conflicts of
Interests."
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CONTRIBUTION PROPOSAL
The Board of Trustees is asking the Shareholders to consider and vote upon a
proposal pursuant to which (a) the Trust will pay $28.5 million of cash and
issue approximately 55,148,000 Class A Shares, subject to adjustment, at a
price of $2.50 per share to Starwood Mezzanine in exchange for the
contribution by Starwood Mezzanine to the Trust of the Starwood Mezzanine
Interests and (b) the Trust will pay $313.0 million of cash and issue
247,074,800 Class A Shares, subject to adjustment, at a price of $2.50 per
share to SOFI IV in exchange for the contribution by SOFI IV to the Trust of
cash, its rights under the Letters of Intent, the SOFI IV Interests and the
First Mortgage Portfolio. As required by the Declaration of Trust, the holders
of the Class B Shares who are members of the Starwood Group will be issued
153,395,872 Class B Shares, subject to adjustment, for a purchase price of
$0.01 per share as a result of the issuance of the Class A Shares in the
Contribution and the exchange of outstanding Units for Class A Shares. The
following description of the Contribution Proposal and related matters
describes certain provisions of the relevant agreements and does not purport
to be complete and is qualified in its entirety by reference to the actual
agreements.
STARWOOD MEZZANINE AND SOFI IV
Starwood Mezzanine is an investment fund that originates and purchases
mortgage loans and invests and/or manages real estate-related debt interests.
As of December 31, 1997, Starwood Mezzanine had outstanding investments of
$144 million, net of prepaid loans and excluding its ownership interest in the
Trust and the Partnership, consisting of a variety of hotel, office, mixed
use, and condominium/assisted living projects, all of which are to be
contributed to the Trust. Starwood Capital Group, L.P. is the managing general
partner of Starwood Mezzanine. The limited partners of Starwood Mezzanine
primarily include corporate pension funds. Starwood Mezzanine's principal
place of business is Three Pickwick Plaza, Suite 250, Greenwich, CT 06830.
SOFI IV is an investment fund that originates and purchases mortgage loans,
acquires equity interests in real estate, and lends or participates as a
partner in real-estate related ventures. As of December 31, 1997, SOFI IV had
$1,170 million of investments comprised of $367 million of equity investments
and $803 million of debt investments including office, hotel, residential
land, retail, and mixed-use properties. All of SOFI IV's debt investments are
to be contributed to the Trust. SOFI IV Management, L.L.C., a Connecticut
limited liability company, is the general partner of SOFI IV. The limited
partners primarily include a variety of public and private pension funds, life
insurance companies, and endowment funds. SOFI IV's principal place of
business is Three Pickwick Plaza, Suite 250, Greenwich, CT 06830. The limited
partnership interests of Starwood Mezzanine and SOFI IV are not publicly
traded.
CONTRIBUTION AGREEMENT
The consummation of the Contribution Proposal is subject to the conditions
precedent described below, including the consent of the limited partners of
Starwood Mezzanine and SOFI IV, and approval by the Shareholders. In addition,
the closing of the Contribution and the other transactions described in this
Proxy Statement is also subject to receipt of written confirmation by the IRS
that the Trust is able to elect to qualify as a REIT for its taxable year
ending December 31, 1998. In addition, certain of the Interests and First
Mortgage Portfolio require approval of the borrower, the senior lender or
others prior to their contribution to the Trust. There can be no assurance
that the required consents will be obtained or that the other conditions
precedent will be waived or satisfied and that the Contribution Proposal will
be consummated.
The following summary of the material terms of the Contribution Agreement
(the "Contribution Agreement") is qualified in its entirety by reference to
the Contribution Agreement attached as Exhibit B. The Contribution Agreement
sets forth the terms and conditions upon which the cash, Interests, the
Letters of Intent and the First Mortgage Portfolio (collectively, the
("Contributed Assets") will be contributed to the Trust if the Contribution
Proposal is approved by the Shareholders and the other conditions precedent
are satisfied or waived. Pursuant to the Contribution Agreement, on the
Contribution Date, the parties have agreed that (i) the Partnership will be
terminated and each outstanding Unit held by holders other than the Trust will
be exchanged for one Class A Share, (ii) Starwood Mezzanine will contribute
its entire interest in the Starwood Mezzanine Interests to the Trust in
exchange for approximately $28.5 million of cash and 55,148,000 Class A
Shares, subject to adjustment, at a price of $2.50 per share, (iii) SOFI IV
will contribute $17.9 million in cash, certain Letters of
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Intent, its entire interest in the SOFI IV Interests and the First Mortgage
Portfolio to the Trust in exchange for approximately $313.0 million in cash
and 247,074,800 Class A Shares at a price of $2.50 per share, both subject to
adjustment, (iv) the Exchange Rights Agreement between the Trust and Starwood
Mezzanine (the "Exchange Rights Agreement") will be terminated, (v) the Trust,
BLLC, Starwood Mezzanine, SAHI Partners and SOFI IV will execute and deliver
an Amended and Restated Registration Rights Agreement (the "Registration
Rights Agreement"), and (vi) the Trust, BLLC, SAHI Partners, Starwood
Mezzanine and SOFI IV will execute and deliver an Amended and Restated
Shareholders Agreement (the "Shareholders Agreement").
Conditions to Contribution. The respective obligations of each of the Trust,
Starwood Mezzanine and SOFI IV to issue the Class A Shares, and contribute the
Contributed Assets will be subject to the satisfaction or waiver of the
following conditions: (i) the Shareholders and the limited partners of
Starwood Mezzanine and SOFI IV shall have approved the Proposals (as required
by the partnership agreement of each); (ii) the absence of injunctions or
other legal restraints or prohibitions; (iii) the receipt of all necessary
governmental and regulatory approvals and consents; (iv) execution of the
Registration Rights Agreement and the Shareholders Agreement by each party
thereto; and (v) receipt of written confirmation by the IRS that the Trust is
able to elect to qualify as a REIT for its taxable year ending December 31,
1998. There are no material federal and state regulatory requirements that
must be complied with or approval that must be obtained prior to the
consummation of the Contribution.
The obligations of the Trust to consummate the Contribution will also be
subject to the satisfaction or waiver of the following conditions: (i) the
accuracy of the representations and warranties of Starwood Mezzanine and SOFI
IV contained in the Contribution Agreement; (ii) the absence of a material
adverse effect with respect to SOFI IV, Starwood Mezzanine and the Interests,
the First Mortgage Portfolio or the collateral therefor between the date of
the Contribution Agreement and the Contribution Date; (iii) the receipt by the
Trust of certain legal opinions and certificates; and (iv) the termination of
the Partnership and the Exchange Rights Agreement. In addition, the
obligations of Starwood Mezzanine and SOFI IV to consummate the Contribution
will also be subject to the satisfaction or waiver of the following
conditions: (i) the accuracy of the representations and warranties of the
Trust contained in the Contribution Agreement; (ii) the approval of the
Proposals by the Shareholders; (iii) the absence of a material adverse effect
on the Trust or the Partnership between the date of the Contribution Agreement
and the Contribution Date; and (iv) the receipt by Starwood Mezzanine and SOFI
IV of certain legal opinions and certificates.
Calculation of Class A Shares to Be Issued; Adjustments. The number of Class
A Shares to be issued to Starwood Mezzanine in exchange for the Starwood
Mezzanine Interests will be calculated by dividing (i) the value of the
Starwood Mezzanine Interests as of the date of December 31, 1997 as determined
by the Board of Trustees less $28.5 million by (ii) $2.50. The number of Class
A Shares to be issued to SOFI IV in exchange for the SOFI IV Interests, the
cash, the Letters of Intent and the First Mortgage Portfolio will be
calculated by subtracting the number of Class A Shares issued to Starwood
Mezzanine from 302,222,800. The amount of cash to be paid by the Trust to SOFI
IV will be calculated by subtracting from the aggregate value of the cash, the
Letters of Intent, the SOFI IV Interests and the First Mortgage Portfolio as
of December 31, 1997 the sum of (1) the aggregate number of Class A Shares
issued to SOFI IV multiplied by (2) $2.50. The value of Contributed Assets
will be reduced in the event of a reduction in dollar value of the Interests
and the First Mortgage Portfolio between January 1, 1998 and the Contribution
Date (the "Adjustment Period") as a result of principal repayments. The dollar
value of the Interests and the First Mortgage Portfolio shall be reduced by
the contribution value established in the Contribution Agreement in the case
of total payment of principal and by the amount of the principal repayment in
the event of partial prepayments. In addition, the value of the Contributed
Assets will be adjusted in the event that principal draws by borrowers exceed
or fall short of anticipated draws by the amount of such excess or shortfall.
With respect to SOFI IV only, any reduction in dollar value of the Interests
and the First Mortgage Portfolio during the Adjustment Period shall first be
offset by the cash portion of the Purchase Price and then by a reduction in
the amount of Class A Shares to be issued in exchange for the Contributed
Assets. A reduction in the number of Class A Shares to be issued in exchange
for the Contributed Assets will be calculated by dividing (i) the amount of
any additional reduction in dollar value of the Contributed Assets during the
Adjustment Period (ii) $2.50. If cash adjustments result in a decrease of the
cash paid to SOFI IV below $313.0 million, SOFI IV may, at its option, elect
to reduce the number of Class A Shares that it will
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acquire as set forth above and instead of issuing Class A Shares the Trust
will pay cash to SOFI IV equal to the number of Class A Shares of SOFI IV
elects not to receive multiplied by $2.50, provided that SOFI IV may not elect
to receive cash in excess of the threshold stated above. Interest which has
accrued on the Interests during the Adjustment Period shall be paid by
Starwood Mezzanine or SOFI IV, as applicable, to the Trust on the Contribution
Date and interest which has accrued but not yet been paid on the First
Mortgage Portfolio shall be paid by the Trust to SOFI IV on the Contribution
Date. All interest accruing on the Interests and the First Mortgage Portfolio
subsequent to the Contribution Date shall be payable to the Trust. The
Contributed Assets will be contributed to the Trust free and clear of all
liens, claims, encumbrances or indebtedness.
If the transactions contemplated by any Letter of Intent are consummated
prior to the Closing Date, the asset acquired or originated will be
contributed to the Trust in place of the Letter of Intent and the cash
required to consummate the transaction to which it relates. The value of the
acquired or originated asset shall be equal to the value of the amount of cash
paid by SOFI IV to acquire or originate the asset. In addition, Starwood
Mezzanine and SOFI IV have right to contribute additional assets in the event
the aggregate value of the Contributed Assets fall below the aggregate value
of the Contributed Assets on the date the Contribution Agreement is executed
as a result of principal repayment; provided that the additional assets to be
contributed must be reasonably acceptable to the Trust.
Amendment; Termination and Costs. The Contribution Agreement may be
terminated (including the obligations of the parties thereunder to effect the
transactions contemplated thereby) prior to the Contribution Date (i) by the
mutual consent of the Trust, Starwood Mezzanine and SOFI IV; (ii) by the Trust
upon a material breach of the Contribution Agreement by Starwood Mezzanine or
SOFI IV (after the breaching party has been given a reasonable opportunity to
cure such breach) or if any condition to the consummation of the transactions
contemplated by the Contribution Agreement by the Trust is not satisfied or
waived at such time as it is no longer possible to satisfy such condition;
(iii) by Starwood Mezzanine or SOFI IV upon a material breach by the Trust of
the Contribution Agreement (after the breaching party has been given a
reasonable opportunity to cure such breach) or if any condition to Starwood
Mezzanine's or SOFI IV's consummation of the transactions contemplated by the
Contribution Agreement is not satisfied or waived at such time as it is no
longer possible to satisfy such condition including if, between the date of
the execution and delivery of the Contribution Agreement and the Contribution
Date, AMEX shall delist or take any action to delist the Class A Shares; (iv)
by the Trust, Starwood Mezzanine or SOFI IV if the transactions contemplated
by the Contribution Agreement are not consummated on or before March 31, 1998
(the "Outside Date"), except that on or after the Outside Date no party may
terminate the Contribution Agreement pursuant to such provision if that party
is then in material breach of its representations, warranties or covenants in
the Contribution Agreement; or (v) upon 15 days' written notice, by the Trust,
Starwood Mezzanine or SOFI IV if the Trust enters into an agreement with any
party other than Starwood Mezzanine, SOFI IV or any other entity controlled by
Starwood Capital, Starwood Capital, LLC or their principals (a "Starwood
Controlled Party") which is not consistent with the obligations of the Trust
set forth in the Contribution Agreement or with the consummation of the
transactions contemplated by the Contribution Agreement. For purposes of the
Contribution Agreement, an agreement with a party other than Starwood
Mezzanine, SOFI IV or a Starwood Controlled Party will be deemed to be
inconsistent with the obligations of the Trust set forth in the Contribution
Agreement in the event that such agreement would impose any exclusivity or
non-competition agreements on the Trust or would require a commitment of the
Trust capital in excess of $1,000,000, in the aggregate.
The Contribution Agreement provides that except as described below, each of
the parties thereto will bear its own costs and expenses incurred in
connection with the Contribution Proposal. If the Contribution Agreement is
terminated pursuant to clause (v) in the preceding paragraph, then Starwood
Mezzanine and SOFI IV shall be entitled to the reimbursement of their
reasonable, out-of-pocket expenses incurred in connection with the
implementation of the Contribution Agreement (including the negotiation,
execution and delivery of the Contribution Agreement). If the Contribution
Proposal is not consummated prior to June 30, 1998 other than as a result of
the Independent Committee withdrawing its approval of the Proposals, Starwood
Mezzanine and SOFI IV will reimburse the Trust for fees and expenses paid to
Houlihan.
Representations and Warranties; Indemnification. The Contribution Agreement
contains various representations and warranties of the Trust. These include
representations and warranties with respect to (i) its organization, good
standing and power to carry on its business, (ii) its authorized and
outstanding shares, (iii) its
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authority to enter into and consummate the transactions contemplated by the
Contribution Agreement and the enforceability of the agreements relating to
the transactions described herein entered into by the Trust, (iv) the absence
of certain conflicts with certain documents, agreements and instruments
arising from the transactions contemplated by the Contribution Agreement, (v)
the absence of material undisclosed litigation or proceedings with respect to
the Trust, and (vi) the accuracy of reports and statements filed with the SEC
since September 26, 1996 and of the financial statements included therein. In
addition, the Contribution Agreement contains a representation and warranty of
the Trust as to its capitalization, the absence of subsidiaries, the absence
of finders fees, the absence of defaults and breaches under the Shareholders
Agreement, the amount of its assets and property and as to its eligibility to
qualify to elect to be taxed as a REIT for its taxable year ending December
31, 1998.
The Contribution Agreement also contains representations and warranties of
each of Starwood Mezzanine and SOFI IV, including representations and
warranties by each as to (i) its organization, good standing and power to
carry on its business, (ii) its authority to enter into and consummate the
transactions contemplated by the Contribution Agreement and the enforceability
of the agreements relating to the transactions described herein entered into
by each, (iii) the absence of undisclosed litigation or proceedings, (iv) the
absence of certain conflicts with certain documents, agreements and
instruments arising from the transactions contemplated by the Contribution
Agreement, (v) its status as an accredited investor and the acquisition of the
Class A Shares by each for investment purposes, and (vi) the accuracy of
information and financial statements supplied by each for inclusion in this
Proxy Statement. In addition, the Contribution Agreement contains
representations and warranties of each regarding the Contributed Assets, the
absence of finders fees, the compliance of each with the Employee Retirement
Income Security Act of 1974, as amended, and the absence of any knowledge by
either of any environmental law violation.
The Contribution Agreement also contains representations and warranties of
each of Starwood Mezzanine and SOFI IV as to each of their good title and sole
ownership of the Contributed Assets, free and clear of any and all adverse
claims, liens, pledges, assignments, charges or security interests.
Each of the Trust, Starwood Mezzanine and SOFI IV has agreed to indemnify
and hold harmless each other and the Partnership (and their respective
subsidiaries, affiliates and successors) from all liabilities, losses or
damages and reasonable out-of-pocket expenses incurred in connection with (i)
its respective breach or failure to perform its obligations in the
Contribution Agreement or any other agreement entered into by it in connection
with the Contribution Agreement and (ii) any breach of any representation or
warranty or misrepresentation or material omission made by it respectively in
the Contribution Agreement, this Proxy Statement or any other agreement
entered into by it in connection with the Contribution Agreement. The
indemnification obligation of each of Starwood Mezzanine and SOFI IV is
limited to the value of the Class A Shares and the cash received on the
Contribution Date.
The Contribution Agreement provides that the representations and warranties
contained in the Contribution Agreement will survive until the first
anniversary of the Contribution Date, at which time such representations
terminate, and that any claim in respect of those representations and
warranties must be asserted in writing prior to such termination.
Covenants Prior to the Closing. The Trust has agreed to cause this Proxy
Statement to comply with the Securities Exchange Act of 1934, as amended, and
rules and regulations promulgated thereunder (the "Exchange Act") and cause
this Proxy Statement, at all relevant times, to be accurate and not misleading
(except to the extent any inaccuracy is a result of information supplied by
Starwood Mezzanine or SOFI IV). Starwood Mezzanine and SOFI IV have each
agreed to furnish to the Trust all information required for this Proxy
Statement, and to cooperate in connection with any necessary amendment or
supplement to this Proxy Statement. Prior to the Closing, the Trust has agreed
not to amend or delete certain of the Proposals without the approval of
Starwood Mezzanine and SOFI IV. The Board of Trustees may at any time prior to
the Contribution Date withdraw, modify or change any recommendation regarding
the matters set forth in this Proxy Statement or recommend and declare
advisable any other offer, proposal or transaction if in any such case it
determines upon advice of legal counsel that the failure to so withdraw,
modify or change such recommendation could be reasonably expected to involve
it in a breach of fiduciary duties under applicable law.
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In addition, the Trust, the Partnership, Starwood Mezzanine and SOFI IV have
each agreed that prior to the Contribution Date the Trust and the Partnership
will each carry on its business and Starwood Mezzanine and SOFI IV will each
carry on its business with respect to the Contributed Assets only in the
ordinary course and each party will not enter into any material transaction
outside of the ordinary course of business with respect thereto without the
prior written consent of the Trust in the case of Starwood Mezzanine or SOFI
IV, or Starwood Mezzanine and SOFI IV in the case of the Trust, such consent
not to be unreasonably withheld.
The Trust has also agreed that, prior to the Contribution Date, except as
contemplated by the Contribution Agreement, without the prior written consent
of Starwood Mezzanine and SOFI IV, it will not (i) take or omit to take any
action to cause the Trust to fail to be eligible to elect and qualify as a
REIT for its taxable year ending December 31, 1998, (ii) acquire additional
real estate or other assets, (iii) issue or agree to issue any new debt or
equity securities, (iv) declare or pay any dividends or other distributions to
the holders of the Class A or Class B Shares other than as are necessary to
preserve the REIT status of the Trust, or (v) repay indebtedness.
Starwood Mezzanine and SOFI IV have each also agreed that they will not,
without the prior written consent of the Trust and subject to certain
restrictions, (i) voluntarily dispose of any portion of the Contributed Assets
or of the underlying collateral; (ii) release any collateral or any party from
any liability on or with respect to the Interests or the First Mortgage
Portfolio; (iii) compromise or settle any claims of any kind or character with
respect to the Contributed Assets; (iv) initiate, complete or otherwise take
any action with respect to a foreclosure on any of the property securing any
Interest or the First Mortgage Portfolio or exercise any remedies under the
related mortgage note or mortgage or the other Contributed Assets; (v) sell or
encumber, or contract to sell or encumber, the Contributed Assets, or any
portion thereof or any interest therein; (vi) agree to any amendments or
modifications to any of the Contributed Assets; (vii) subordinate any Interest
or the First Mortgage Portfolio; (viii) accept any prepayment of any Interest
or the First Mortgage Portfolio at a discount from the face amount thereof;
(ix) give any notice of default or make any demand on any borrower; (x)
accelerate the maturity of the Interests or the First Mortgage Portfolio; or
(xi) initiate any litigation against any borrower or other party to a Letter
of Intent.
The Trust, Starwood Mezzanine and SOFI IV have also agreed to (i) notify the
other parties upon becoming aware of any material lawsuit or proceedings, (ii)
cooperate with each other party to fulfill the conditions to the other
parties' obligations under the Contribution Agreement, and (iii) not make any
public announcement of the transactions contemplated by the Contribution
Agreement without the consent of the other party, except as required by law.
OPINION OF INDEPENDENT FINANCIAL ADVISOR
The Independent Committee has engaged Houlihan, an independent financial
advisor, to analyze the fairness of the Contribution Proposal from a financial
point of view. The Independent Committee selected Houlihan because of its
experience in the valuation of businesses and their securities in connection
with mergers and acquisitions, and valuations for corporate purposes
especially with respect to REITs and other real estate companies. Houlihan is
a nationally recognized investment banking firm that is continuously engaged
in providing financial advisory services in connection with mergers and
acquisitions, leveraged buyouts, business valuations for a variety of
regulatory and planning purposes, recapitalizations, financial restructurings,
and private placements of debt and equity securities.
Houlihan has no material prior relationship with the Trust, Starwood
Capital, or its affiliates. Houlihan has been retained by Starwood Hotels &
Resorts Trust to provide services unrelated to the Trust. Houlihan will
receive professional fees from Starwood Hotels & Resorts Trust in connection
with such services in the amount of approximately $600,000. No portion of
Houlihan's fees, either in its services to the Trust or to Starwood Hotels &
Resorts Trust, are contingent upon the conclusions reached by Houlihan. As
compensation to Houlihan for its services in connection with the Contribution
Proposal (and related transactions disclosed here), the Trust has agreed to
pay Houlihan a fee of $425,000. No portion of Houlihan's fees are contingent
upon the successful completion of the Contribution Proposal or any related
transaction. However, Starwood Capital and its affiliates have entered into an
additional agreement with Houlihan that allows Starwood Capital and its
affiliates access to
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certain information prepared by Houlihan in rendering its fairness opinion.
Starwood Capital has agreed to pay Houlihan a fee of $50,000 for such access
to such information. Moreover, Starwood Mezzanine and SOFI IV will reimburse
the Trust for fees and expenses paid to Houlihan if the Contribution Proposal
is not consummated on or prior to June 30, 1998 other than as a result of the
Independent Committee withdrawing its approval for the Proposals. The Trust
has also agreed to indemnify Houlihan and related persons against certain
liabilities, including liabilities under Federal securities laws, arising out
of the engagement of Houlihan, and reimburse Houlihan for certain expenses.
Houlihan did not, and was not requested by the Trust, to make any
recommendations as to the form or amount of consideration to be paid to the
Trust pursuant to the Contribution Proposal. In arriving at its opinion,
Houlihan made its determination as to the fairness, from a financial point of
view, of the Contribution Proposal on the basis of the analyses described
below. No restrictions or limitations were imposed by the Trust or Starwood
Capital or its affiliates upon Houlihan with respect to its investigation made
or the procedures followed by Houlihan in rendering its opinion. Houlihan's
opinion is not intended to be and does not constitute a recommendation to any
Shareholders as to whether to vote in favor of the Contribution Proposal.
The following is a summary of the material financial analyses used by
Houlihan in connection with providing its fairness opinion. This summary is
qualified in its entirety by reference to the full text of such opinion, which
is attached as Exhibit A to this Proxy Statement. Shareholders are urged to
read the full text of Houlihan's opinion carefully and in its entirety.
In arriving at its opinion, Houlihan:
1. reviewed the final draft of this Proxy Statement and exhibits hereto,
including the Financial Statements included herein;
2. met with certain members of the senior management of the Trust,
Starwood Mezzanine and SOFI IV to discuss the operations, financial
condition, future prospects and projected operations and performance of the
Trust, Starwood Mezzanine and SOFI IV, and held discussions with
representatives of counsel to the Trust, Starwood Mezzanine and SOFI IV to
discuss certain matters;
3. reviewed unaudited profit and loss information with respect to the
Interests and the First Mortgage Portfolio, to the extent available, for
the period from the date of the acquisition of such asset to the period
ended approximately August 31, 1997, which the management of Starwood
Mezzanine and SOFI IV identified as being the most current financial
information available, and reviewed certain documents and agreements
relating to each asset including, to the extent available, a description of
such asset, a description of the collateral underlying such asset, a loan
agreement summary, an intercreditor agreement summary, a summary of any
first mortgage agreement on the same collateral, underlying collateral
appraisals, and financial forecasts for the underlying collateral;
4. visited certain facilities and business offices of the Trust, Starwood
Mezzanine and SOFI IV;
5. reviewed forecasts and projections prepared by management of Starwood
Mezzanine and SOFI IV with respect to the Interests and the First Mortgage
Portfolio for the months ended January 31, 1998 through the maturity of the
subject asset;
6. reviewed the historical market prices and trading volume for the Class
A Shares and reviewed the historical market prices, to the extent
available, for certain of the Interests;
7. reviewed certain other publicly available financial data for certain
companies that were deemed comparable to the Trust, both immediately prior
to and immediately after giving effect to the Contribution Transaction;
8. reviewed certain other publicly available financial data for certain
assets, including collateralized mortgage backed securities, that were
deemed comparable to the Interests and the First Mortgage Portfolio; and
9. conducted such other studies, analyses and inquiries as were deemed
appropriate.
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Houlihan used several methodologies to assess the fairness of the
Contribution Transaction from a financial point of view. These methodologies
provided (i) an estimate as to the value of the assets to be contributed, and
(ii) an estimate as to the value of the Class A Shares prior to the
consummation of the Contribution Transaction; and thus provided a basis of
comparison to the consideration given and received by the Trust in connection
with the Contribution Transaction.
With respect to the Contributed Assets:
One methodology, a "Comparable Market Multiple"analysis, considered the
capitalization multiples for certain income and cash flows of a peer group of
companies comparable to the Contributed Assets and then applied a selected
capitalization multiple based on a comparative financial analysis of such
assets and the peer group of companies. This analysis resulted in an
indication of value for the Trust following the consummation of the
Contribution. This resulting aggregate value for the Trust was adjusted to
reflect the pro forma capital structure of the Trust. A price per share was
derived by dividing the pro forma value of the Trust attributable to the Class
A Shares by the pro forma Class A Shares outstanding after the consummation of
the Contribution Transaction.
An alternative analysis was a "Yield" analysis, whereby the Trust's pro-
forma value was estimated by calculating yields for similar, alternative
investments and then applying a selected yield to the Trust's pro forma
distributable cash. A price per share was derived by dividing the pro forma
value of the Trust attributable to the Class A Shares by the pro forma Class A
Shares outstanding after consummation of the Contribution Transaction.
Finally, a "Comparable Transaction" analysis, which considered the terms and
conditions of transactions which Houlihan deemed similar to the Contribution
Transaction, was considered.
Based upon these analyses, Houlihan estimated the value of the Class A
Shares, on a pro forma basis, after giving effect to the Contribution
Transaction.
With respect to the Trust:
Due to the nature of the Trust's assets, which consist primarily of cash, an
"Adjusted Net Book Value" analysis, which considered the orderly liquidation
value of the Trust's assets and the likely net proceeds to Shareholders, was
considered. A price per share was derived by dividing the value of the Trust
attributable to the Class A Shares by the existing outstanding Class A Shares.
Additionally, the Trust's "Market Trading Price" was considered, including
the Trust's limited float, volume, lack of analyst coverage, price reaction
upon certain events and other factors.
Based upon these analyses, Houlihan estimated the value of the Class A
Shares prior to the consummation of the Contribution Transaction.
In the aforementioned analyses, the estimate of the Class A Share value
prior to the consummation of the Contribution Transaction was lower than the
value of the Class A Shares after giving effect to the Contribution
Transaction, leading Houlihan to conclude that the Contribution Transaction is
fair to the existing Class A Shareholders of the Trust from a financial point
of view.
The aforementioned analyses required studies of the overall market, economic
and industry conditions in which the Trust, Starwood Mezzanine and SOFI IV
operate, and their respective operating results. Research into, and
consideration of, these conditions were incorporated into the analyses.
Houlihan's opinion is based on the business, economic, market and other
conditions as they existed as of February 11, 1998. In rendering its opinion,
Houlihan has relied upon and assumed, without independent verification, that
the financial results provided to Houlihan have been reasonably prepared and
reflect the best current available estimates of the financial results and
condition of the Trust, Starwood Mezzanine and SOFI
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IV. Houlihan did not independently verify the accuracy or completeness of the
information supplied to it with respect to the Trust, Starwood Mezzanine or
SOFI IV and does not assume responsibility for the accuracy or completeness of
such information. Except as set forth above Houlihan did not make any physical
inspection or independent appraisal of the specific properties or assets of
the Trust, Starwood Mezzanine or SOFI IV.
The summary set forth above describes the material points of more detailed
analyses performed by Houlihan in arriving at its fairness opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Houlihan did not attribute any particular weight
to any analysis or factor considered by it, but rather made the qualitative
judgements as to the significance and relevance of each analysis and factor.
Accordingly, Houlihan believes that is analyses and the summary set forth
herein must be considered as a whole and that selecting portions of its
analyses, without considering all analyses, or portions of this summary,
without considering all factors and analyses, could create an incomplete view
of the processes underlying the analyses set forth in the Houlihan opinion. In
its analysis, Houlihan made numerous assumptions with respect to the Trust,
Starwood Mezzanine, and SOFI IV, industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of the Trust, Starwood Mezzanine and SOFI IV. The estimates
contained in such analyses are not necessarily indicative of actual values of
predictive of future results or values, which may be more or less favorable
than suggested by such analyses. Additionally, analyses relating to the true
value of businesses or securities are not appraisals. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty.
REGISTRATION RIGHTS AGREEMENT
The following summary of the material terms of the Registration Rights
Agreement is qualified in its entirety by reference to the form of
Registration Rights Agreement attached hereto as Exhibit C. The Registration
Rights Agreement is being amended and restated in substantially the form of
Exhibit C and as described below as of the Contribution Date. Pursuant to the
Registration Rights Agreement, the Trust has granted registration rights with
respect to Class A Shares acquired upon exercise of the Class A Warrant or
upon the exchange of the Units issued to Starwood Mezzanine upon the formation
of the Partnership. The Registration Rights Agreement is being amended to
grant registration rights to Starwood Mezzanine and SOFI IV with respect to
the Class A Shares issued upon contribution of the Contributed Assets and to
grant SAHI Partners registration rights with respect to the Class A Shares it
owns on the Contribution Date.
As amended and restated, the Registration Rights Agreement will require the
Trust to use its best efforts to cause a shelf registration of resales of the
Class A Shares under the Securities Act to be declared effective prior to the
90th day after the Contribution Date. The Trust will be required to maintain
the shelf registration statement effective until all eligible Class A Shares
have been transferred in a resale registered under the Securities Act or are
otherwise freely transferable without registration under the Securities Act
(except for Class A Shares held by certain affiliates of the Trust), including
pursuant to Rule 144(k) under the Securities Act. Starwood Mezzanine, SOFI IV
and SAHI Partners will also have rights, subject to certain exemptions and
limitations, to request that the Trust include such Class A Shares in other
registrations of securities by the Trust under the Securities Act ("Incidental
Registrations").
All expenses incident to such registrations (other than underwriting
discounts and selling commissions and fees and expenses of the selling
holders) will be borne by the Trust.
Subject to certain restrictions, the Trust has the right to suspend any
public offering of Class A Shares pursuant to the Registration Rights
Agreement if the Trust determines that a suspension is required to avoid
premature disclosure of, or interference with, certain Trust transactions.
Furthermore, if the underwriters used in connection with a public offering in
an Incidental Registration advise the Trust that marketing factors require a
limitation on the number of securities to be sold at a given time, the size of
such offering may be reduced by decreasing the number of securities to be sold
by persons other than the Trust; provided, that Starwood
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<PAGE>
Mezzanine, SOFI IV and their limited partners cannot be required to reduce the
number of Class A Shares included in the registration statement to less than
20% of the total gross proceeds of the securities to be sold.
The Trust has agreed to indemnify Starwood Mezzanine, SOFI IV and SAHI
Partners and certain other persons against certain liabilities, including
liabilities under the Securities Act, and to contribute to payments that
Starwood Mezzanine, SOFI IV and SAHI Partners may be required to make in
respect thereof. Starwood Mezzanine, SOFI IV and SAHI Partners have agreed to
indemnify the Trust and certain other persons against certain limited
liabilities, including limited liabilities under the Securities Act, and to
contribute to payments that the Trust may be required to make in respect
thereof; provided that such liability shall not exceed the proceeds (net of
underwriting discounts and commissions) from the applicable offering received
by Starwood Mezzanine, SOFI IV and SAHI Partners.
In addition, the Company is considering implementing a dividend reinvestment
program and registering Class A Shares to be issued in connection therewith.
SHAREHOLDERS AGREEMENT
The following is a summary of the form of Second Amended and Restated
Shareholders Agreement, by and among BLLC, SAHI Partners, Starwood Mezzanine,
SOFI IV and the Trust and is qualified in its entirety by reference to the
form of Second and Amended Restated Shareholders Agreement, attached hereto as
Exhibit D (the "Shareholders Agreement"). The Shareholders Agreement is being
amended and restated as of the Contribution Date in substantially the form of
Exhibit D to include BLLC and SOFI IV as a party and to make certain other
revisions. The Shareholders Agreement is being restated to incorporate all
prior amendments and to eliminate certain provisions that have expired. The
Shareholders Agreement prohibits BLLC, SAHI Partners, Starwood Mezzanine and
SOFI IV from taking certain actions with respect to the Trust without the
approval of a majority of the Non-Starwood Trustees (defined below). These
actions include transactions between the Trust and any of BLLC, SAHI Partners,
Starwood Mezzanine and SOFI IV or their affiliates (except if such
transactions have been determined by the Board of Trustees to be pursuant to
the reasonable requirements of the Trust's business and are upon fair and
reasonable terms which are no less favorable and comparable to an arms-length
independent third party transaction and involve less than $500,000), actions
by the Trust which would result in one or more publicly-traded classes of the
Company's equity securities no longer having the attributes of public
ownership, or any actions beneficial to Starwood which would be detrimental to
a material number of the public Shareholders of the Trust (e.g., any action
that would have the effect of disproportionately diluting the voting or
ownership interest of the public Shareholders as compared to BLLC, SAHI
Partners, Starwood Mezzanine and SOFI IV).
In addition and pursuant to the Shareholders Agreement, the Trust has agreed
that prior to the date on which Class A Shares with a fair market value of
$250 million are outstanding that were issued as part of one or more primary
or secondary public offerings (with not less than $200 million constituting
issuances of Class A Share that are not resales of Class A Shares outstanding
at 11:59 p.m. on the Contribution Date) (i) it will grant only Options and not
other Awards to any person (a "Starwood Insider") that has an interest,
directly or indirectly, in Starwood Mezzanine or SOFI IV or with respect to
the initial grant, to the Advisor; (ii) no Options will be granted to Barry
Sternlicht; (iii) the Class A Shares underlying total granted Awards shall not
exceed in the aggregate 4.5% of the fully-diluted Class A Shares outstanding
from time to time and not more than 2.5% of the fully-diluted Class A Shares
outstanding from time to time will underlie Awards to Starwood Insiders; (iv)
vesting of Options granted to Starwood Insiders shall, in addition to any
service criteria, occur on a pari passu percentage basis with the percentage
of the total number of Class A Shares held on the Contribution Date by
Starwood Mezzanine and SOFI IV that have been sold or distributed by Starwood
Mezzanine or SOFI IV; provided that in no event shall such Options vest at a
rate that is faster than 33.33% per annum and provided further that subject to
the continued satisfaction of any service criteria imposed by the Board of
Trustees, all unvested Options held by Starwood Insiders shall vest in full on
the earlier to occur of a Change in Control or on the fifth anniversary of the
date of grant; and (v) to certain exceptions and for a limited period, not to
grant Awards with an exercise or trigger price below fair market value.
Further, the Trust will not grant Awards to officers, key employees, members
or principals of the Advisor in such capacity without the consent of the
Advisor.
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Pursuant to the Shareholders Agreement and during any period in which (x)
the Class B Shares remain controlled by Starwood Capital Group LLC or by an
entity under common control with Starwood Capital Group, LLC and (y) the
Advisory Agreement has not been terminated by the Advisor or terminated for
cause by the Trust, the Trust shall use its best efforts to cause five
nominees designated by Starwood Capital Group, LLC or by the parties who
control Starwood Capital Group, LLC to be elected to the Board of Trustees and
to cause such persons to be included as the management slate of nominees to
the Board of Trustees. Further, the Trust has agreed to use its best efforts
during such period to cause such nominees or Trustees to be replaced from time
to time, with or without cause, with new persons designated by Starwood
Capital Group, LLC or the parties who control Starwood Capital Group, LLC at
the request of Starwood Capital Group, LLC or persons who control Starwood
Capital Group, LLC. Starwood agrees to renominate and to vote the Class A
Shares and Class B Shares held by it for the election of Robin Josephs as a
Trustee at the 1998 annual meeting of the Trust's Shareholders.
Also pursuant to the Shareholders Agreement, BLLC has agreed that from and
after the tenth anniversary of the Contribution Date, it will not to vote any
Class B Shares in respect of any matters related to the Advisory Agreement
(including, but without limitation, to vote in respect of any proposed
termination of the Advisory Agreement) during any period (a "Suspension
Period") in which all of the following conditions shall be satisfied: (a) the
daily average closing price of Class A Shares of the Trust on the AMEX or the
national securities exchange or electronic trading system that provides the
primary market on which the Class A Shares are then traded for the 180-
consecutive-calendar-day period preceding each day occurring during the
Suspension Period shall be less than the product of (i) the Trust's book
equity value attributable to the Class A Shares and (ii) the percentage
equivalent of a fraction, the numerator of which is one, and the denominator
of which is the total outstanding Class A Shares; and (b) the partners of SOFI
IV shall have received aggregate distributions from SOFI IV that are less than
the sum of (i) the total accrued "Preferred Return" (as defined in the SOFI IV
partnership agreement) on the contributed and unreturned capital contributions
of SOFI IV's partners to SOFI IV plus (ii) the total capital contributed by
the partners of SOFI IV to SOFI IV; provided, however, that solely for
purposes of this subparagraph (b) (and not for purposes of determining
distributions from SOFI IV), in the event SOFI IV's partners are distributed
Class A Shares and such Class A Shares are sold to unaffiliated third parties
of such partners within 180 days subsequent to such distribution, then the
prices received by such partners with respect to such shares so sold shall be
deemed to have been the amounts distributed to such partners by SOFI IV for
purposes of this subparagraph (b).
Each of BLLC, the Trust, SAHI Partners, Starwood Mezzanine and SOFI IV have
agreed to take all actions within their powers, to cause the nomination and
election of at least three Non-Starwood Trustees to serve on the Board of
Trustees during the term of the Shareholders Agreement; provided that in no
event shall BLLC, SAHI Partners, Starwood Mezzanine or SOFI IV be obligated to
take any action which would prevent them from electing a majority of the
entire Trustees on the Board of Trustees. A "Non-Starwood Trustee" is a
Trustee who is a "Non-Employee Trustee within the meaning of Rule 16(b)-
3(b)(3) of the Exchange Act and who is not (i) a person directly or indirectly
owning, controlling, or holding, with power to vote, 3% or more of the
outstanding voting securities of the Advisor or Starwood Capital Group, LLC,
(ii) a person directly or indirectly owning, controlling or holding 10% or
more of the economic interest of any borrower under any loan made by the
Company with an outstanding principal balance in excess of $3 million (a
"Borrower") or any Person that provides mortgage servicing, or real estate or
financial advisory or consulting services to the Trust and that received fees
from the Trust for such services in excess of $100,000 for the prior fiscal
year or is expected to receive in excess of $100,000 per annum during the
current fiscal year (a "Service Provider") or an Affiliate of such Borrower or
Service Provider, (iii) an officer, director, employee, member or partner of
the Advisor or Starwood Capital Group, LLC, (iv) a spouse, sibling, lineal
descendent, parent, grandparent, sibling of parents or first cousin, including
adoptive relationships and with respect to siblings and parents, in-laws (a
"Relative") of any person described in clause (i), or (v) a Relative of a
Borrower or any Person described in clause (iii) residing in the same
household as such Person.
Finally, the general partners of Starwood Mezzanine and SOFI IV, who are
affiliated with the Advisor, have agreed with their limited partners not to
vote any Class A Shares owned by Starwood Mezzanine or SOFI IV, as applicable,
in favor of any amendment to the Advisory Agreement or the basic terms of the
Incentive Plan that is not approved by the advisory committee of SOFI IV or
limited partners holding two-thirds in economic interest of Starwood
Mezzanine, as applicable and the Trust has agreed not to amend the basic terms
of the Incentive Plan without the consent of Starwood Mezzanine and SOFI IV,
respectively, as long as such entity owns Class A Shares.
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As amended on the Contribution Date, the Shareholders Agreement will
terminate automatically on the date that neither Starwood Mezzanine nor SOFI
IV own any Class A Shares.
EXCHANGE RIGHTS AGREEMENT
Pursuant to the Exchange Rights Agreement, subject to the limitations
described therein, Starwood Mezzanine has the right to tender to the Trust all
or a portion of the Units held by Starwood Mezzanine from time to time. The
Trust has the option to pay for such tendered Units either (i) by delivering
Class A Shares to such tendering holders as described below, (ii) with cash or
(iii) by delivering a combination of Class A Shares and cash as determined by
the Independent Trustees. The Exchange Rights Agreement is being terminated on
the Contribution Date in connection with the termination of the Partnership,
and the outstanding Units held by persons other than the Trust are being
converted into Class A Shares.
FEDERAL INCOME TAX ASPECTS OF THE CONTRIBUTION PROPOSAL
The Contribution Proposal has been structured to be taxable for federal
income tax purposes to taxable partners of Starwood Mezzanine and SOFI IV.
Shareholders that are also partners of Starwood Mezzanine or SOFI IV should
consult with their own tax advisors with respect to the tax consequences of
the Contribution Proposal.
The Code provides that a REIT may qualify as a REIT for a taxable year only
if, as of the close of such year, it has no earnings and profits accumulated
in any non-REIT year (including amounts attributable to entities merged into
the REIT). If the Trust had any such non-REIT earnings and profits, it would
be required to make a distribution equal to the non-REIT earnings and profits
to preserve its REIT status. Because assets (and not stock) will be
contributed to the Trust pursuant to the Contribution Proposal by Starwood
Mezzanine and SOFI IV, the Trust will not succeed to the non-REIT earnings and
profits of any entity by reason of the Contribution, and this special
distribution requirement does not apply with respect to the Contribution
Proposal. However, because the Trust may not have qualified as a REIT in prior
taxable years, the Trust may be required to make distributions sufficient to
eliminate any earnings and profits accumulated during the period for which it
did not qualify as a REIT. The Board of Trustees currently believes that the
Trust did not generate earnings and profits in prior taxable years during
which the Trust may not have qualified as a REIT; however, the amount of such
a distribution (if any) is uncertain as it may be a condition of a possible
agreement with the IRS, which has not been finalized at this time. See "TRUST
AMENDMENTS PROPOSAL--Federal Income Tax Aspects of the Contribution Proposal
and the Change of the Trust's Purpose and Investment Policy--Closing
Agreement."
Based upon a review of the assets contributed pursuant to the Contribution
Proposal by the Board of Trustees, the Board of Trustees expect the Trust will
be able to satisfy the requirements for qualification as a REIT. The Trust's
qualification and taxation as a REIT in the future will depend upon the
Trust's ability to meet on a continuing basis, through actual operating
results, asset composition, distribution levels and diversity of stock
ownership, the various qualification tests imposed under the Code. The Trust
will review compliance with these tests on a continuing basis. However, no
assurance can be given that the Trust will satisfy such tests in the future.
For further discussion, see "TRUST AMENDMENTS PROPOSAL--Federal Income Tax
Aspects of the Contribution Proposal and the Change of the Trust's Purpose and
Investment Policy."
ACCOUNTING TREATMENT OF THE CONTRIBUTION
Since Starwood Mezzanine currently owns a controlling interest in the Trust,
the transfer of the Starwood Mezzanine Interests by Starwood Mezzanine will be
accounted for as a step acquisition. Accordingly, the Starwood Mezzanine
Interests will be adjusted to reflect the pro rata amount of the Class A
Shareholder's (other than Starwood Mezzanine's) ownership of these assets
subsequent to Starwood Mezzanine's acquisition.
The Contributed Assets received from SOFI IV will be accounted for as a
purchase and, accordingly, will be reflected at their fair market value at the
consummation of the Contribution.
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REASONS FOR AND ALTERNATIVES TO THE CONTRIBUTION PROPOSAL AND BOARD OF
TRUSTEES' RECOMMENDATION REGARDING THE CONTRIBUTION PROPOSAL
The Independent Committee and the Board of Trustees believe that the
Proposals, taken as a whole, are in the best interests of both the Trust and
the Shareholders. In presenting the Proposals to the Board of Trustees,
representatives of Starwood Mezzanine and SOFI IV informed the Trustees that
the Contribution Proposal, the Advisory Agreement Proposal and the Trust
Amendments Proposals were prepared and negotiated over a long period of time
with a number of different parties, including the Independent Committee and
the limited partners of Starwood Mezzanine and SOFI IV, with an objective of
carefully, reasonably and fairly balancing and responding to the concerns and
interests of all parties, including the Trust and its Shareholders.
Consequently, the overall transaction was presented to the Trust and the Board
of Trustees as a single proposal and package and not as a series of
independent and separate components. While the Board of Trustees determined to
provide the Shareholders an opportunity to vote on these proposals separately,
Starwood Mezzanine and SOFI IV's obligation to consummate the Contribution is
conditioned upon approval by the Shareholders of each of the Proposals.
The Board of Trustees took into account, among other things, the factors
discussed below in deciding to approve the Proposals and submit them to a vote
of the Shareholders. In view of the variety of factors considered in its
evaluation of the Proposals, the Board did not find it practical to, and did
not, quantify or otherwise assign precise relative weights to the individual
items described below.
Infusion of Capital. As of December 31, 1997, the Trust's assets primarily
consisted of approximately $11.0 million in short-term, liquid real estate
investments, cash and cash equivalents which were held directly or indirectly
through its ownership in the Partnership. The Trust has no other remaining
assets. The consummation of the Contribution Proposal will increase the real
estate-related assets held by the Trust from approximately $10.0 million to $1
billion. In addition, the consummation of the Contribution Proposal is
accretive to the net tangible book value per Class A Share. On a fully diluted
basis, the net book value per Class A Share as of December 31, 1997 was $0.89
per Class A Share and, on a pro forma basis for the Transactions would have
been $2.36 per Class A Share as of such date, an increase of $1.47 per Class A
Share or 165.1%.
Potential for Growth. The Board of Trustees believes that the implementation
of the Contribution Proposal will provide Shareholders with a potential for
growth of their investment and overall return. The Board of Trustee's belief
is based upon (a) the ability of the Trust to implement its purpose and
investment policy through the consummation of the Contribution, (b) the
increase in the assets, and particularly real estate-related assets, owned by
the Trust upon consummation of the Contribution, and (c) the experience and
track record of Starwood in making real-estate related investments. In
recommending the approval of the implementation of the Contribution Proposal
and the other Proposals, the Board is subject to conflicts of interests. See
"RISK FACTORS--Conflicts of Interests."
Experience and Track Record of Starwood. The Board of Trustees believes that
the Trust will benefit from Starwood's additional ownership interest in the
Trust and its substantial experience in acquiring and owning real estate
assets. Since 1991, affiliates of Starwood have acquired in excess of $6.3
billion in real estate related assets in over 180 transactions from a variety
of sellers, including banks, insurance companies, the Resolution Trust
Corporation, and the Federal Deposit Insurance Corporation. Starwood Mezzanine
was formed in 1994 with a goal to create a portfolio of high-yielding
mezzanine investments with significant current cash flow and has achieved a
leading position in the developing market for mezzanine financing. SOFI IV was
formed in 1996 with $830 million in committed investor capital and a goal to
create a portfolio composed of approximately two-thirds high yielding
mezzanine debt and one-third equity investments intended to generate
significant risk-adjusted returns for investors. Since its inception, SOFI IV
has created a portfolio of $1.17 billion in investments. The Trust believes
that, given the success and experience of Starwood, the implementation of the
Contribution Proposal will provide Shareholders with a potential for growth of
their investment and overall return.
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Implementation of Purpose and Investment Policy Plan. The Contribution
Proposal will allow the Trust to implement the Trust's purpose and investment
policy. The Board of Trustees has considered the additional risks to the Trust
relating to debt investments in real estate related assets set forth in "RISK
FACTORS" but believes that the potential growth of the Trust's assets through
such investments in real estate-related assets outweighs such additional
risks. The Board of Trustees also considered that Shareholders who desire to
liquidate their investment could do so by selling their Class A Shares on
AMEX.
No Better Alternative Identified. The primary alternative to the
Contribution Proposal identified by the Board of Trustees as available to the
Trust at the current time was to liquidate the Trust and distribute its
assets. The Board of Trustees estimates that approximately $6,736,000 would
have to be available to the Trust to be distributed to the Shareholders in a
liquidating dividend on December 31, 1997 after deduction for estimated
operating expenses that will be incurred by the Trust prior to December 31,
1997 other than in connection with the Proxy Statement and the transactions
described herein. Such dividend would equal $.89 per Class A Share. The Board
of Trustees rejected this alternative as they determined implementing the
Contribution Proposal presents the Shareholders a greater potential for growth
of their investment and an ultimate return on the remainder of their
investment in the Trust of greater than the liquidating dividend of $.89 per
Class A Share. The Board of Trustees concluded that implementing the
Contribution Proposal is the best alternative currently available to the Trust
and its Shareholders.
Protection of the Unaffiliated Shareholders by the Shareholders
Agreement. The Shareholders Agreement requires the consent of a majority of
the Independent Trustees for the Trust to undertake certain of the
transactions described in this Proxy Statement. The Board of Trustees required
BLLC, SAHI Partners, Starwood Mezzanine and SOFI IV to enter into the
Shareholders Agreement to protect the Shareholders not affiliated with
Starwood. The Trust has fully complied with the Shareholders Agreement in
connection with the transactions contemplated by this Proxy Statement. The
Proposals, taken as a whole, were approved by the Independent Trustees.
Fairness Opinion. The Independent Committee and the Board of Trustees placed
significant weight on written material and oral presentations received from
Houlihan and Houlihan's opinion that the Contribution Proposal is fair from a
financial point of view to the Trust and its Shareholders.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of the Contribution Proposal.
CONSIDERATIONS IF THE CONTRIBUTION PROPOSAL IS NOT APPROVED
If the Contribution Proposal is not approved, none of the other Proposals
will be submitted to the Shareholders for their consideration and vote, and a
new Annual Meeting will be held at which Trustees will be elected.
Additionally, if such Proposals are not approved and the Contribution is not
consummated, the Trust will be forced to look for other capital sources and
alternative transaction opportunities. The Trust currently has not identified
any other capital sources or potential opportunities.
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ADVISORY AGREEMENT PROPOSAL
If the Contribution Proposal is approved, the Shareholders will be asked to
consider and vote upon the following proposals to amend the Trust's
Declaration of Trust as described below that will conform certain provisions
of the Declaration of Trust to the Advisory Agreement.
THE ADVISOR
The Advisor is a Connecticut limited liability company. The Starwood
Trustees and Messrs. Silvey, Dishner and Kleeman directly or indirectly own a
substantial economic and voting interest in the Advisor. The Advisor is a
recently formed entity with no significant assets and no prior history of
operations. While the management of the Advisor have the real estate
experience described below, the Advisor has not previously managed the
investment affairs of any other company. Mr. Sternlicht is also Chairman of
the Trust and Mr. Sugarman is Chief Executive Officer, President and a Trustee
of the Trust.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Barry S. Sternlicht......... 37 Chairman and Director
Jay Sugarman................ 35 Chief Executive Officer, President and Director
</TABLE>
Barry S. Sternlicht became Chairman, a director of the Advisor in November
1997, a Trustee of the Trust in March 1994 and was elected Chairman in
September 1996. Mr. Sternlicht was Chief Executive Officer of the Trust from
September 1996 to November 1997. Mr. Sternlicht was Chairman of the Audit and
Compensation Committee of the Trust from March 1994 until December 1995. He is
founder and General Manager of Starwood Capital Group, L.L.C. (together with
its predecessor entities "Starwood Capital LLC") and co-founder of its
predecessor entities in 1991 and has been the President and Chief Executive
Officer of Starwood Capital L.P. since its formation in 1991. In addition, Mr.
Sternlicht is currently the Chief Executive Officer and Chairman of the Board
of Trustees of Starwood Hotels & Resorts Trust, Chairman of the Board of
Directors of Starwood Hotels & Resorts Worldwide, Inc., a trustee of Equity
Residential Properties Trust, a multi-family REIT and a director of 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, is a member of the Young
Presidents Organization and is on the Board of Directors of Junior Achievement
for Fairfield County, Connecticut.
Jay Sugarman became Chief Executive Officer, President and a director of the
Advisor in November 1997, Chief Executive Officer of the Trust in November
1997 and President and Trustee of the Trust in September 1996. Mr. Sugarman is
Senior Managing Director of Starwood Capital LLC and has been President of
Starwood Mezzanine since November 1994. From 1990 through 1993, Mr. Sugarman
managed a diversified, privately owned investment fund. Earlier in his career,
Mr. Sugarman worked at First Boston Corporation and Goldman, Sachs & Co. Mr.
Sugarman is a director of Commercial Guaranty Assurance, a financial insurance
company and WCI Communities, Inc., a residential developer in South Florida.
Mr. Sugarman received a B.A. degree from Princeton University where he was
nominated for valedictorian and is a graduate of Harvard Business School,
where he was a Baker Scholar.
ADVISORY AGREEMENT
On the Contribution Date, the Trust and the Advisor will enter into the
Advisory Agreement pursuant to which the Advisor will manage the investment
affairs of the Trust. The following summary of the material terms of the
Advisory Agreement is qualified in its entirety by reference to the Advisory
Agreement attached as Exhibit E. Pursuant to the Advisory Agreement, the
Advisor will provide the following investment advisory services to the Trust,
subject to the Trust's purpose and investment policy, the Investment
Restrictions and the limitations set forth below:
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. Identify investment opportunities for and advise the Trust as to the
acquisition and disposition of investments.
. Effect acquisitions and dispositions for the Trust's account; provided
that approval of the Board of Trustees is required prior to the
acquisition or disposition of an investment with an acquisition cost or
disposition value in excess of $10 million.
. To the extent such services are not provided by third parties, monitor,
manage and service the Trust's loan portfolio on a continuing basis,
including upon approval of the Board of Trustees, the enforcement of
remedies upon default.
. Arrange debt financing for the Trust, provided that all financings in
excess of $100 million and financings that are recourse to the Trust in
excess of $25 million must be approved by the Board of Trustees.
. At the request of the Board of Trustees and in accordance with its
direction, invest or reinvest any money of the Trust.
. Engage in hedging activities on behalf of the Trust.
. At the direction of the Board of Trustees, open and maintain bank
accounts in the name of the Trust.
In addition to the specific limitations with respect to the management of
the investment affairs of the Trust, the Advisor will not act in a manner that
is inconsistent with the express direction of the Board of Trustees and the
Advisor will be at all times subject to any directives of the Board of
Trustees or authorized officers of the Trust. In addition, the Advisor will be
required to report to the Board of Trustees and/or the officers of the Trust
with respect to its activities. The Advisor will not be responsible for the
administration of the Trust.
The Advisor has agreed not to take any action (including without limitation,
furnishing or rendering services to tenants of property or managing real
property), which would (a) adversely affect the status of the Trust as a REIT
under the Code or which would make the Trust subject to the Investment Company
Act, if not in the best interests of the Shareholders as determined by the
Board of Trustees, or (b) violate any law, rule, regulation or statement of
policy of any government body or agency having jurisdiction over the Trust or
over its securities, or (c) otherwise not be permitted by the Declaration of
the Trust, except if such action shall be ordered by the Board of Trustees, in
which event the Advisor shall promptly notify the Board of Trustees of the
Advisor's judgement that such action or omission to act would adversely affect
such status or violate any such law, rule or regulation or the Declaration of
Trust, and shall refrain from taking such action pending further clarification
of such instructions from the Board of Trustees. In addition, the Advisor has
agreed to take any and all affirmative steps required to prevent or cure any
action described in (a), (b) or (c) above.
Compensation and Expenses. Commencing on the 90th day after the Contribution
Date, the Trust will pay to the Advisor a quarterly base management fee ("Base
Fee") of .3125% (1.25% per annum) of the "Book Equity Value" of the Trust
determined as of the last day of each quarter, but estimated and paid in
advance subject to recomputation. "Book Equity Value" is the excess of the
book value of the assets of the Trust over all liabilities of the Trust
determined in accordance with generally accepted accounting principles
("GAAP") consistently applied, except that real estate-related depreciation
and amortization (other than amortization of financing costs and other prepaid
expenses to the extent such costs and prepaid expenses have previously been
booked as an asset of the Trust) shall not operate to reduce the book value of
the Trust's assets for purposes of determining Book Equity Value. For purposes
of determining Book Equity Value, debt obligations, such as convertible debt,
which are exchangeable or convertible into equity securities shall not be
considered liabilities of the Trust for any applicable period in which the
value of the equity securities into which such debt obligation is convertible
or for which it may be exchanged equals or exceeds the outstanding balance of
such debt obligation as of the last day of the period (with the value of any
such equity securities for such applicable period as are traded on an exchange
to be deemed to be the average daily closing price of such equity securities
on such exchange over such applicable period for purposes of making the value
determination contemplated by this sentence). Debt obligations that are
excluded as liabilities of the Trust under the preceding sentence in
determining Book Equity Value are referred to as "Deemed Equity Obligations."
In addition to the foregoing,
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in the event and to the extent non-cash assets are contributed to the Trust or
any of its subsidiaries or affiliates in exchange for equity securities of the
Trust, then for purposes of determining the Trust's "Book Equity Value"
following such contributions, the book value of the assets so contributed
shall be deemed to be increased by the excess, if any, of the fair market
value of the equity securities issued in consideration of such contributions
determined at the time of such contributions over the book equity value
allocable to such assets by the Trust immediately following such contributions
determined in accordance with generally accepted accounting principles.
In addition, commencing on the 90th day after the Contribution Date, the
Trust will pay the Advisor a quarterly incentive fee ("Incentive Fee") of five
percent (5%) of the Trust's "Adjusted Net Income" during each quarter that the
Adjusted Net Income for such quarter restated and annualized as an annualized
rate of return on the Trust's Book Equity Value for such quarter equals or
exceeds the "Benchmark BB Rate." "Adjusted Net Income" is the Trust's gross
income for the applicable quarter (determined in accordance with GAAP) less
the Trust's expenses for the applicable quarter (determined in accordance with
GAAP and including the Base Fee for such quarter but not the Incentive Fee for
such quarter). In addition, real estate-related depreciation and amortization
(other than amortization of financing costs and other prepaid expenses to the
extent such costs and prepaid expenses have previously been booked as an asset
of the Trust) shall not be deducted in determining Adjusted Net Income. For
purposes of determining Adjusted Net Income, any interest expenses for an
applicable period on Deemed Equity Obligations shall not be included as an
expense and, thus, shall not operate to reduce the Trust's gross income for
such applicable period. "Benchmark BB Rate" for a given quarter means the
arithmetic average of the various weekly average annualized rates of return to
maturity on current pay "BB" rated commercial mortgage-backed securities
during such quarter by domestic U.S. issuers. The weekly average annualized
rates of return on current pay "BB" rated commercial mortgage backed
securities shall mean the sum of the rate of return on the 10 year Treasury on
the applicable date and the BB spread as reported in the Morgan Stanley Dean
Witter Weekly Mortgage Research Report. During any quarter where such rate is
not published, the Trust and the Advisor shall meet in good faith to agree
upon another published report or similar sources. The Advisor will also be
reimbursed for certain expenses it incurs on behalf of the Trust.
As a result of the delayed commencement of the advisory fee accrual, the
operating results of the Trust for the 90 days after the Contribution Date
will be higher than they would have been if the advisory fee had not been
deferred and therefore may not be reflective of future operating results of
the Trust.
Term and Termination. The Advisory Agreement has an initial term of three
years subject to automatic renewal for one year periods unless a "Termination
Event" has occurred and is continuing or the Trust has been liquidated
(provided, however, that if Trust assets are transferred to a subsidiary of
the Trust other than in connection with a liquidation of the Trust, the terms
of the Advisory Agreement shall continue to apply with respect to such
assets). In addition, the Advisor may terminate the Advisory Agreement on 60
days' notice to the Trust and the Trust may terminate the Advisory Agreement
upon 60 days' written notice of termination from the Board of Trustees to the
Advisor, if a Termination Event has occurred or if the decision to terminate
is based on an affirmative vote of the holders of two-thirds or more of the
voting shares of the Trust at the time outstanding. A "Termination Event"
shall have occurred if the Advisor (i) violates any provisions of the Advisory
Agreement and fails to cure such violation within 90 days of notice of such
violation, or (ii) certain bankruptcy events have occurred, including if the
Advisor admits in writing its inability to pay its debts or makes a general
assignment for the benefit of, or enters into any composition or arrangement
with, creditors; authorizes or files a voluntary petition in bankruptcy; or
permits or suffers all or any substantial part of its properties or assets to
be sequestered or attached by court order and the order remains undismissed
for 90 days or has an order for relief entered against it in some bankruptcy
proceeding, or (iii) unless cured within 90 days of notice of such violation,
commits some act or omission that constitutes bad faith, willful misconduct,
gross negligence or reckless disregard of its duties and results in a material
expense, loss, damage or liability incurred by the Trust.
Standard of Care; Indemnification. The Trust (and its respective
subsidiaries, affiliates and successors) has agreed to reimburse, indemnify
and hold harmless the Advisor, its members, managers, officers, stockholders
and employees of and from any and all expenses, losses, damages, liabilities,
demands, charges and claims of any nature whatsoever, (including attorneys'
fees) in respect of or arising from any acts or omissions of the
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Advisor, its members, managers, officers, stockholders and employees, made in
good faith in the performance of the Advisor's duties under the Advisory
Agreement and not constituting bad faith, willful misconduct, gross negligence
or reckless disregard of its duties.
Conflicts of Interests. All determinations on behalf of the Trust in respect
of the computation of the Advisor's fees under the Advisory Agreement are
required to be made by the members of the Board of Trustees who are not
affiliated with the Advisor.
In addition, BLLC, the holder of the Class B Shares on the Contribution
Date, will agree pursuant to the Shareholders Agreement to abstain from voting
the Class B Shares in any matter relating to the Advisory Agreement during any
period ("Suspension Period") after the tenth anniversary of the Contribution
Date during which (i) the daily average closing price of the Class A Shares
for the 180 consecutive calendar day period preceding each day occurring
during the Suspension Period is less than the product of (a) the Trust's book
equity value attributable to the Class A Shares and (b) the percentage
equivalent of a fraction, the numerator of which is one and the denominator of
which is the aggregate number of then outstanding Class A Shares and (ii) the
partners of SOFI IV have received aggregate distributions from SOFI IV that
are less than the sum of (a) the total accrued Preferred Return (as defined in
the SOFI IV partnership agreement) on the contributed and unreturned capital
contributions of SOFI IV's partners to SOFI IV plus (b) the total capital
contributed by the partners of SOFI IV to SOFI IV; provided that in the event
SOFI IV's partners are distributed Class A Shares and such Shares are sold to
parties unaffiliated with the partner of SOFI IV within 180 days of such
distribution, then the consideration received by the partner in such sale
shall be deemed to be the amount distributed to such partner by SOFI IV for
purposes of determining the Suspension Period. Finally, (i) the general
partners of Starwood Mezzanine and SOFI IV and (ii) Starwood Capital LLC for
so long as it controls BLLC, who are all affiliated with the Advisor, have
agreed with the limited partners of Starwood Mezzanine and SOFI IV not to vote
any Class A Shares owned by Starwood Mezzanine or SOFI IV, as applicable, in
favor of any amendment to the Advisory Agreement that is not approved by the
advisory committee of SOFI IV or limited partners holding two-thirds in
economic interest of Starwood Mezzanine, as applicable.
Until the first to occur of (i) February 27, 2000, and (ii) the date which
is six (6) months after the date on which aggregate proceeds of not less than
$400 million have been raised through one or more public offerings of shares
after the Contribution Date (with at least $320 million of such proceeds
raised for the benefit of the Trust), neither the Advisor nor any person who
is controlled by, who controls or who is under common control with the Advisor
shall form a new blind pool investment fund, the primary purpose of which is
to invest in debt (a) that is secured by real estate in the United States, (b)
that has current coupon rates in excess of comparable maturity treasury
spreads plus 400 basis points, and (c) that has maturities longer than four
years, and which debt otherwise has predominantly debt investment
characteristics.
REASONS FOR THE AMENDMENTS TO THE DECLARATION OF TRUST AND EFFECT THEREOF AND
BOARD OF TRUSTEES' RECOMMENDATION REGARDING THE ADVISORY AGREEMENT PROPOSAL
The following description sets forth the reasons for the proposed amendments
to the Declaration of Trust and the effect of their adoption, including any
modifications to the Class A Shares or Class B Shares caused by any such
amendments. The following description is qualified in its entirety by
reference to the form of Declaration of Trust, attached hereto as Exhibit F,
which has been marked to reflect the proposed amendments. Approval of each of
the following proposals to amend the Declaration of Trust is contingent upon
the approval of both of the proposals.
Revision of Provisions Detailing Termination of the Advisory Agreement
Reasons for Amendments: The Declaration of Trust currently states that the
Advisory Agreement can be terminated by the Advisor after the initial term on
60 days notice or by a vote of a majority of the Board of Trustees or
Shareholders holding a majority of the voting shares. The provisions in the
Declaration of Trust relating to the terms of the Advisory Agreement reflect
the terms of an agreement with the Trust's former advisor
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and do not reflect the terms of the new Advisory Agreement. The new Advisory
Agreement provides that the Advisory Agreement can be terminated (i) by the
Board of Trustees in the event of a Termination Event, (ii) by the Trust upon
approval of Shareholders holding two-thirds of the voting shares of the Trust
and (iii) by the Advisor at any time on 60 days' notice. The Trustee's
investment policy and plan is to continue or develop long term relationships
with its borrowers. The Board of Trustees believes that the continuation of
the Advisory Agreement is important to its ability to develop relationships
with its borrowers and continue to implement its investment policy. The Board
of Trustees has determined it to be in the best interest of the Trust and the
Shareholders to secure the services of the Advisor with respect to the
investment affairs of the Trust and to correct the inconsistencies between the
Declaration of Trust and the Advisory Agreement. If the Contribution is
consummated, the Trust will need to retain an advisor to manage the Interests
and the First Mortgage Portfolio or to hire additional personnel to perform
such tasks. The Board of Trustees considered the expense, effort and time
required to hire the required personnel and the experience of the individuals
employed by the Advisor that will perform the investment advisory services
under the Advisory Agreement in evaluating the terms of the Advisory Agreement
and the necessity of amending the Declaration of Trust. The Board of Trustees
determined that the terms and provisions of the Advisory Agreement are fair to
the Shareholders. The Board of Trustees considered that it may be difficult
for the Trust to terminate the Advisory Agreement in the absence of a
Termination Event and that this may delay, discourage or prevent a change in
control of the Trust, but determined that this effect was outweighed by the
other terms of the Advisory Agreement (including the Board's supervisory
rights under the Advisory Agreement) and the potential benefits to the Trust
and the Shareholders of retaining the services of the Advisor.
Proposed Amendments: The sections of the Declaration of Trust proposed to be
amended are Sections 4.2 and 6.2(c). The actual text of this proposed
amendment is set forth in Exhibit F.
Effect of Amendments: It will be more difficult for the Trust to terminate
the Advisory Agreement as a result of these proposed amendments. The inability
of the Trust to terminate the Advisory Agreement in the absence of a
Termination Event without approval of Shareholders holding two-thirds of the
voting shares of the Trust may have the effect of delaying, discouraging or
preventing a change in control of the Trust even if Shareholders holding a
majority of the voting shares believed such a change of control was in their
best interest. A new controlling Shareholder may be dissatisfied with the
services provided by the Advisor or may otherwise want to terminate the
Advisory Agreement, either to replace the Advisor or have investment advisory
services performed by the Trust's personnel. The Advisor is affiliated with
the Starwood Trustees, Messrs. Silvey, Dishner and Kleeman and Shareholders of
the Trust that, as a group, held 79.64% of the voting shares of the Trust as
of January 21, 1998. As a result of the dual class structure of the Trust's
Shares, the holders of the Class B Shares, who will at all times control one
third of the voting shares, will effectively have the ability to block a
termination of the Advisory Agreement by the Trust in the absence of a
Termination Event. The Class B Shares are all currently owned by Starwood,
members of which are affiliated with the Advisor. See "TRUST AMENDMENT
PROPOSALS--Anti-Takeover Effects" for additional amendments to the Declaration
of Trust that may also effect a change of control of the Trust.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of foregoing proposed
amendments.
Change in Requirements with Respect to Independent Trustees
Reason for Amendment: The provisions in the Declaration of Trust with
respect to the Advisor and the Advisory Agreement were originally implemented
when the primary purpose of the Trust was to make mortgage loans to entities
affiliated with the former advisor to the Trust. The purpose and investment
policy has been changed to acquiring or originating the Diversified Portfolio.
In light of the change of the purpose and investment policy of the Trust, the
Board of Trustees has determined that the requirement that a majority of the
members of the Board of Trustees be unaffiliated with the Advisor is no longer
necessary and that the Shareholders should be able to control the Board of
Trustees by electing the Trustees without regard to such restriction. However,
the Board of Trustees, recognizing that the Advisor and Starwood Capital
Group, LLC is affiliated with Shareholders
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holding 79.64% of the voting shares as of January 21, 1998, determined that
the Shareholders not affiliated with the Advisor or Starwood Capital Group,
LLC should have representation on the Board of Trustees and that certain
decisions should require the approval of the Trustees not affiliated with the
Advisor or Starwood Capital Group, LLC. Therefore, the Board of Trustees is
recommending that a minimum of the greater of (i) 33 1/3% of the total number
of Trustees and (ii) three (3) members of the Board of Trustees be
unaffiliated with the Advisor or Starwood Capital Group, LLC.
Proposed Amendment: The section of the Declaration of Trust proposed to be
amended is Section 4.3. The actual text of this proposed amendment is set
forth in Exhibit F.
Effect of Amendments: A minimum of the greater of (i) 33 1/3% of the total
number of Trustees and (ii) three (3) members of the Board of Trustees will be
required to be unaffiliated with the Advisor or Starwood Capital Group, LLC.
The remaining members of the Board of Trustees, who may and likely will
constitute a majority of the Trustees, may be affiliated with the Advisor and
will be able to control many actions of the Trust which could create
additional conflicts of interests.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of the foregoing proposed
amendment.
TRUST AMENDMENTS PROPOSAL
If the Contribution Proposal and the Advisory Agreement Proposal are
approved, the Shareholders will be asked to consider and vote upon the
following proposals to amend the Trust's Declaration of Trust as described
below and adopt the Amended and Restated Declaration of Trust substantially in
the form attached hereto as Exhibit F (collectively, the "Trust Amendments
Proposal").
PURPOSE AND INVESTMENT POLICY
The proposal to amend the Trust's Declaration of Trust will change the
purpose and investment policy of the Trust as presently stated in the
Declaration of Trust (i) to allow the Trust to originate or acquire certain
mortgage loans made to borrower that are affiliated with the Trust and to
acquire certain securities and investments that are collateralized by or made
to borrowers that are affiliated with the Trust, (ii) to clarify that (1) the
primary purpose of the Trust is to acquire a diversified portfolio of debt or
debt like interests in real estate related assets, (2) the Trust generally
will not obtain management rights over or equity interests in assets
underlying non-performing or sub-performing debt unless the Trust's efforts to
restructure such debt into performing debt are unsuccessful, (3) the Trust's
authority with respect to the Diversified Portfolio includes the power to
acquire, hold, own, develop, redevelop, construct, improve, maintain, operate,
manage, sell, lease, rent, transfer, encumber, mortgage, convey, exchange and
otherwise dispose of or deal with the Diversified Portfolio and that the
Diversified Portfolio may be held by the Trust directly or indirectly and (4)
the Board of Trustees has exclusive authority over the management of the
Trust, the conduct of its affairs and the management and disposition of its
property and (iii) to include the Investment Restrictions. The proposed
amendment to the Declaration of Trust will change the purpose and investment
policy of the Trust to primarily originating or acquiring the Diversified
Portfolio subject to the Investment Restrictions which will be included in the
Declaration of Trust. The acquisition of the Interests and the First Mortgage
Portfolio by the Trust as part of the Contribution Proposal will implement the
purpose and investment policy of the Trust.
ANTI-TAKEOVER EFFECTS
Elimination of cumulative voting, establishment of a classified board,
requiring approval of Shareholders holding two-thirds of the voting shares
prior to certain asset transfers, certain amendments relating to the issuance
of additional securities and increasing the Shareholder vote required to
terminate the Advisory Agreement may be characterized in the view of the SEC
as "anti-takeover measures" and could have the effect of delaying,
discouraging or preventing a change in control of the Trust even if
Shareholders holding a majority of the voting shares believed such change of
control was in their best interests.
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In considering the Proposals, Shareholders should be aware that the overall
effect of certain proposals is to make it more difficult for holders of a
majority of the outstanding Class A Shares and Class B Shares to change the
composition of the Board of Trustees and to remove existing management and/or
the Advisor in circumstances where the Shareholders holding a majority of the
voting shares may be dissatisfied with the performance of the incumbent
Trustees or the Advisor or otherwise desire to make changes. These provisions,
if adopted, could make a proxy contest a less effective means of removing or
replacing existing Trustees or could make it more difficult to make a change
in control of the Trust which is opposed by the Board of Trustees. This
strengthened tenure and authority of the Board of Trustees could enable the
Board of Trustees to resist change and otherwise thwart the desires of the
Shareholders. Because these provisions may have the effect of continuing the
tenure of the current Board of Trustees, the Board has recognized that the
individual Trustees have a personal interest in these proposals that may
differ from those of the Shareholders. Shareholders should recognize that one
of the effects of the amendments may be to discourage a future attempt to
acquire control of the Trust which is not presented to and approved by the
Board of Trustees, but which a substantial number of Shareholders, and perhaps
even Shareholders holding a majority of the outstanding voting shares, might
believe to be in their best interests or in which Shareholders might receive a
substantial premium for their shares over the current market price. As a
result, Shareholders who might desire to participate in such transaction may
not have an opportunity to do so. The changes to the Declaration of Trust with
respect to the Advisory Agreement will make it more difficult for the Trust to
terminate the Advisory Agreement which may discourage an attempt to acquire
control of the Trust. Shareholders holding a majority of the voting shares
would be unable to terminate the Advisory Agreement in the event such
Shareholders wanted to replace the Advisor or have the Trust's own personnel
manage the investment affairs of the Trust.
The Trust's investment policy and plan is to continue or develop long term
relationships with its borrowers. The Board of Trustees believes that the
continuation of the Advisory Agreement is important to its ability to develop
relationships with its borrowers and continue to implement its investment
policy.
A hostile takeover attempt may have a positive or a negative effect on the
Trust and its Shareholders, depending on the circumstances surrounding a
particular takeover attempt. Takeover attempts that have not been negotiated
or approved by the board of directors or trustees of a corporation can
seriously disrupt the business and management of a corporation and generally
present to the shareholders the risk of terms which may be less than favorable
to all of the shareholders than would be available in a Board-approved
transaction. Board-approved transactions may be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the
corporation and all of its shareholders with due consideration to matters such
as the recognition or postponement of gain or loss for tax purposes, the
management and business of the acquiring corporation and maximum strategic
deployment of corporate assets. In addition, in the case of a proposal which
is presented to the Board of Trustees, there is a greater opportunity for the
Board to analyze the proposal thoroughly, to develop and evaluate
alternatives, to negotiate for improved terms and to present its
recommendations to the Shareholders in the most effective manner.
The Board of Trustees recognizes that hostile takeover attempts do not
always have the unfavorable consequences or effects described above and may
frequently be beneficial to shareholders, providing all shareholders with
considerable value for their shares. However, the Board of Trustees believes
that the potential disadvantages of unapproved takeover attempts are
sufficiently great such that prudent steps to reduce the likelihood of such
takeover attempts are in the best interests of the Trust and its Shareholders.
Accordingly, the Board of Trustees has separately proposed certain measures
for inclusion in the Declaration of Trust that may have the effect of
discouraging or deterring hostile takeover attempts.
Notwithstanding the belief of the Board of Trustees as to the benefits to
Shareholders of the changes, Shareholders should recognize that one of the
effects of such changes may be to discourage a future attempt to acquire
control of the Trust which is not presented to and approved by the Board of
Trustees, but which a substantial number of Shareholders, and perhaps even a
majority, of the Shareholders holding might believe to be in their best
interests or in which Shareholders might receive a substantial premium for
their shares over the
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current market price. As a result, Shareholders who might desire to
participate in such transaction may not have an opportunity to do so.
In addition, by increasing the probability that any person or group seeking
control of the Trust would be forced to negotiate directly with the Board of
Trustees, the proposed takeover defenses could discourage takeover bids by
means of a hostile tender offer, proxy contest or otherwise without the
approval of the Board. Thus, the principal disadvantages to the Shareholders
which result from discouraging such hostile takeover bids would be to (i)
reduce the likelihood that any acquiror would make a hostile tender offer for
the outstanding shares of the Trust at a premium over the market rate and (ii)
increase the difficulty of removing the existing Board of Trustees and
management and the Advisor even if, in a particular case, removal would be
beneficial to Shareholders generally.
It should be noted, however, that the Board of Trustees has a fiduciary duty
to the Shareholders to negotiate for the best interests of the Shareholders
and not for its own interests. Further, while the proposed takeover defenses
may discourage hostile takeover attempts, these provisions would not prevent a
hostile acquisition of the Trust.
The Board of Trustees has considered the potential disadvantages and
believes that the potential benefits of the provisions described below
outweigh the possible disadvantages. In particular, the Board believes that
the benefits associated with enabling the Board to fully consider and
negotiate proposed takeover attempts make these proposals beneficial to the
Trust and its Shareholders.
The proposal to include these anti-takeover provisions does not reflect
knowledge on the part of the Board of Trustees or management of any proposed
takeover or other attempt to acquire control of the Trust. Management may in
the future propose or adopt other measures designed to discourage takeovers
apart from those proposed in this Proxy Statement, if warranted from time to
time in the judgment of the Board of Trustees, although the Board has no such
intention at the present time.
LICENSE AGREEMENT
If approved by the Shareholders, the Trust will change its name to Starwood
Financial Trust on the Contribution Date. The Trust will license the Starwood
trademark from Starwood Capital Group LLC pursuant to a Trademark License
Agreement. The Trust will pay Starwood Capital Group LLC a royalty of $1.00
per year for use of the Starwood trademark. Starwood Capital Group LLC may
terminate the Trademark License Agreement on 30 days' written notice;
provided, that, Starwood Capital Group LLC may not terminate the Trademark
License Agreement if (i) the Advisory Agreement is in effect; (ii) the Trust
is not in default under the Advisory Agreement and; (iii) Starwood Mezzanine
and SOFI IV own in the aggregate more than 50% of the Class A Shares unless
the Trust has changed its business so that its primary business is no longer
acquiring, originating, owning or servicing debt or investments with debt-like
characteristics. In the event the Trademark License Agreement is terminated,
the Trust would have to cease using the Starwood name and would have to change
its name so that it no longer included "Starwood."
FEDERAL INCOME TAX ASPECTS OF THE CONTRIBUTION PROPOSAL AND THE CHANGE OF THE
TRUST'S PURPOSE AND INVESTMENT POLICY
The following is a summary of certain Federal income tax consequences to the
Trust of the Contribution Proposal and the change of the Trust's purpose and
investment policy. The discussion is general in nature and not exhaustive of
all possible tax considerations, nor does the discussion give a detailed
description of any state, local, or foreign tax considerations.
Based upon a review by the Board of Trustees of the assets contributed
pursuant to the Contribution Proposal, the Board of Trustees expects the Trust
to satisfy the requirements for qualification as a REIT for its 1998 taxable
year subject to the receipt by the Trust of a written agreement from the IRS
that provides that the Trust is eligible to make an election under Section
856(c)(1) of the Code to be taxed as a REIT for its taxable
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year ending December 31, 1998. The Trust's qualification and taxation as a
REIT in the future will depend upon the Trust's ability to meet on a
continuing basis, through actual operating results, asset composition,
distribution levels and diversity of stock ownership, the various
qualification tests imposed under the Code. The Trust will review compliance
with these tests on a continuing basis. However, no assurance can be given
that the Trust will satisfy such tests.
If certain detailed conditions imposed by the REIT provisions of the Code
are met, entities, such as the Trust, that invest primarily in real estate
interests (including interests in mortgages on real property) and that
otherwise would be treated for Federal income tax purposes as corporations,
are generally not taxed at the corporate level on their REIT taxable income
that is currently distributed to shareholders. This treatment substantially
eliminates the double taxation (i.e., at both the corporate and shareholder
levels) that generally results from the use of corporations.
If the Trust fails to qualify as a REIT in any year, however, it will be
subject to Federal income taxation as if it were a domestic corporation, and
its shareholders will be taxed in the same manner as shareholders of ordinary
corporations. In this event, the Trust could be subject to potentially
significant tax liabilities, and therefore the amount of cash available for
distribution to its shareholders would be reduced or eliminated.
As discussed above, subject to the receipt by the Trust of a written
agreement from the IRS that provides that the Trust is eligible to make an
election to be taxed as a REIT for its taxable year ending December 31, 1998,
and the Board of Trustees believes that the Trust will operate in a manner
that will permit the Trust to elect REIT status in 1998 and in each taxable
year thereafter. There can be no assurance, however, that this belief or
expectation will be fulfilled, since qualification as a REIT depends on the
Trust continuing to satisfy numerous asset and income tests (as described
below) as well as other tests, which in turn will be dependent in part on the
Trust's operating results.
CLOSING AGREEMENT
The Board of Trustees expects that the Trust will receive an IRS Closing
Agreement (i.e., a written agreement from the IRS confirming its agreement on
a material issue) in the near future that provides that the Trust is eligible
to make an election under Section 856(c)(1) of the Code to be taxed as a REIT
for its taxable year ending December 31, 1998. After determining that it may
have violated certain REIT asset requirements, the Trust sought an IRS Closing
Agreement by voluntarily disclosing to the Commissioner of Internal Revenue
that the Trust may have violated certain REIT asset requirements set forth in
Section 856(c) of the Code for its taxable years ending December 31, 1993
through December 31, 1996. Although the Board of Trustees expects that the
Trust will receive an IRS Closing Agreement in the near future, there can be
no assurance that this will occur.
While it is a condition of REIT status that prior corporate earnings and
profits be eliminated, the Board of Trustees currently believes that the Trust
did not generate significant earnings and profits in prior taxable years
during which the Trust may not have qualified as a REIT; however, the amount
of any such distribution is uncertain as it may be a condition of a possible
IRS Closing Agreement, which has not been finalized at this time. In addition,
if the Trust had any net unrealized built-in gain, with respect to any asset
(a "Built-In Gain Asset") held by the Trust on January 1, 1998, and the Trust
recognizes gain or the disposition of such asset during the ensuing 10-year
period, then, the built-in gain on such date will be subject to tax at the
corporate tax rate.
TAXATION OF THE TRUST
General. In any year in which the Trust qualifies as a REIT, it will not, in
general, be subject to Federal income tax on that portion of its REIT taxable
income or capital gain which is distributed to shareholders. The Trust may,
however, be subject to tax at normal corporate rates upon any taxable income
not distributed (as well as with respect to capital gains not distributed,
subject to a shareholder's ability to claim a credit or refund for its share
of such capital gain tax).
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Notwithstanding its qualification as a REIT, the Trust may also be subject
to taxation in certain other circumstances. If the Trust should fail to
satisfy either the 75% or the 95% gross income test (as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the greater of the
amount by which the Trust fails either the 75% or the 95% test, multiplied by
a fraction intended to reflect the Trust's profitability. The Trust will also
be subject to a tax of 100% of net income from any "prohibited transaction" as
described below, and if the Trust has (i) income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying
income from foreclosure property, it will be subject to tax on such income
from foreclosure property at the highest corporate tax rate. In addition, if
the Trust should fail to distribute during each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior years, the Trust would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
The Trust may also be subject to the corporate alternative minimum tax, as
well as tax in certain situations not presently contemplated.
In order to qualify as a REIT, the Trust must meet, among others, the
following requirements:
Asset Tests. At the close of each quarter of the Trust's taxable year, the
Trust must satisfy two tests relating to the nature of its assets (with
"assets" being determined in accordance with generally accepted accounting
principles). First, at least 75% of the value of the Trust's total assets must
be represented by interests in real property, interests in mortgages on real
property, shares in other REITs, cash, cash items, government securities,
qualified temporary investments and regular or residual interests in a REMIC,
except that, if less than 95% of the assets of a REMIC are "real estate
assets," (as determined under the Code), the Trust shall be treated as holding
directly its proportionate shares of the assets of the REMIC. Second, although
the remaining 25% of the Trust's assets generally may be invested without
restriction, securities in this class may not exceed (i) in the case of
securities of any one non-government issuer, 5% of the value of the Trust's
total assets or (ii) 10% of the outstanding voting securities of any one such
issuer.
Based on existing facts, the Board of Trustees intends that the Trust will
meet these tests at the applicable times in the future. If, however, the Trust
were unable to satisfy the foregoing asset tests at the applicable time, the
Trust would be required to take preventive steps by disposing of certain
assets or otherwise risk a loss of REIT status.
Gross Income Tests. There are three separate percentage tests relating to
the sources of the Trust's gross income which must be satisfied for the
Trust's 1997 taxable year and two separate percentage tests thereafter. Under
recently enacted legislation, the 30% gross income test (described below) has
been repealed and the Trust will not be required to comply with this test
beginning January 1, 1998. For purposes of these tests, where the Trust
invests in a partnership, the Trust will be treated as receiving its share of
the income and loss of the partnership, and the gross income of the
partnership will retain the same character in the hands of the Trust as it has
in the hands of the partnership. The three tests are as follows:
The 75% Test. At least 75% of the Trust's gross income for the taxable year
must be "qualifying income." Qualifying income generally includes (i) rents
from real property (except as modified below); (ii) interest on obligations
secured by mortgages on, or interests in, real property including amounts
included in gross income with respect to a regular or residual interest in a
REMIC, except that, if less than 95% of the assets of a REMIC are "real estate
assets" (as determined under the Code), the Trust will be treated as holding
directly its proportionate share of the assets of such REMIC; (iii) gains from
the sale or other disposition of interests in real property and real estate
mortgages, other than gain from property held primarily for sale to customers
in the ordinary course of the Trust's trade or business ("dealer property");
(iv) dividends or other distributions on shares in other REITs, as well as
gain from the sale of such shares; (v) abatements and refunds of real property
taxes; (vi) income from the operation, and gain from the sale, of property
acquired at or in lieu of a foreclosure of the mortgage secured by such
property ("foreclosure property"); (vii) commitment fees received for agreeing
to make loans secured by mortgages on real property or to purchase or lease
real property; and (viii) certain
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qualified temporary investment income attributable to the investment of new
capital received by the Trust in exchange for its shares or specified debt
securities during the one-year period following the receipt of such capital.
The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Trust's gross income for the taxable
year must be derived from the above-described qualifying income, or from
dividends, interests, or gains from the sale or other disposition of stock or
other securities that are not dealer property. Dividends and interest on any
obligations not collateralized by an interest in real property (including a
mortgage) are included for purposes of the 95% gross income test, but not for
purposes of the 75% gross income test. In addition, payments to a REIT under
an interest rate swap, cap agreement, option, futures contract, forward rate
agreement or any similar financial instrument entered into by the REIT to
hedge its indebtedness incurred or to be incurred (and any gain from the sale
or other disposition of these instruments) are treated as qualifying income
for purposes of the 95% gross income test, but not for purposes of the 75%
gross income test.
For purposes of determining whether the Trust complies with the 75% and the
95% gross income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property
(excluding foreclosure property); however, it does not include a sale of its
investments if such investments are held by the Trust for at least four years
and certain other requirements (relating to the number of investments sold in
a year, their tax bases, and the cost of improvements made thereto) are
satisfied. See "--Taxation of the Trust--General."
In order to comply with the 75% and 95% gross income tests described above,
the Board of Trustees will monitor the investments made by the Trust with the
intent of maintaining the Trust's status as a REIT. As a result, the Board of
Trustees may limit and/or closely scrutinize certain types of investments made
by the Trust, including, among others, loans that provide for interest amounts
that are dependent in whole or in part on the income or profits of a borrower,
loans that contain interest payment provisions relating to appreciation of the
underlying property, loans that are secured by assets other than mortgages on
real property or interests in real property, and certain hedging transactions.
Under the REIT rules, any amount received or accrued, directly or
indirectly, with respect to any obligation is generally not includible as
qualifying "interest" for purposes of the 75% and 95% gross income tests if
the determination of the amount depends in whole or in part on the income or
profits of any person (whether or not derived from property secured by the
obligation). However, an amount received or accrued generally will not be
excluded from the term "interest" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. In addition, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on the income or profits of a debtor if the
debtor derives substantially all of its gross income from the related property
through the leasing of substantially all of its interests in the property, to
the extent the amounts received from the debtor are attributable to amounts
that would be characterized as qualified rents from real property under the
REIT rules. Furthermore, to the extent interest under a loan is based on the
cash proceeds realized upon the sale of the property securing the loan and
constitutes a "shared appreciation provision" (as described below), income
attributable to such participation feature will be treated as gain from the
sale of the secured property, which generally is treated as qualifying income
for purposes of the 75% and 95% gross income tests, except as noted below.
In addition, while the Board does not believe this to be the case as to any
significant portion of the current loan portfolio being contributed, at the
time of loan acquisition or origination it might be determined in certain
cases that the Trust's investment in a loan may exceed at the time of loan
acquisition or origination the value of the real property securing the loan or
may not be secured by a mortgage on real property (e.g., a loan secured by a
partnership interest), which would result in part or all of the interest
income from such loan constituting qualifying income for purposes of the 95%
gross income test, but not for purposes of the 75% gross income test. It is
also possible that, in some instances, the interest income from a loan may be
based in part on the borrower's profits or net income, which generally will
disqualify the income from the loan for purposes of both the 75% and the 95%
gross income tests, except as noted above.
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Certain of the loans contributed pursuant to the Contribution Proposal
contain the right to receive interest based on appreciation of the underlying
real property. In addition, the Trust may acquire or originate loans in the
future that have similar rights. Under the Code, a shared appreciation
provision in a mortgage is any provision which is in connection with an
obligation held by the Trust and secured by an interest in real property (the
"secured property"), and which entitles the Trust to receive a specified
portion of any gain realized on the sale or exchange of such property (or of
any gain which would be realized if the property were sold on a specified
date).
For purposes of determining whether the Trust meets the 75% income test and
95% income test and whether it derives any income from prohibited
transactions, any income derived from a shared appreciation mortgage shall be
treated as gain recognized on the sale of the secured property. For purposes
of this rule, (i) the Trust is treated as holding the secured property for the
period during which it held the shared appreciation provision (or, if shorter,
for the period during which the secured property was held by the person
holding such property), and (ii) the secured property is treated as "dealer
property" (as defined in Section 1221(1) of the Code) if it would be treated
as "dealer property" in the hands of the person holding the secured property
(or it would be treated as "dealer property" if held by the Trust).
For the Trust's taxable years after 1997, if the secured property is treated
as dealer property, gain from the sale of such property could give rise to the
100% tax on gain from prohibited transactions. Since substantially all the
loans being contributed pursuant to the Contribution Proposal by Starwood
Mezzanine and SOFI IV were acquired by purchase or contribution rather than
originated by the Trust, there is no built-in safeguard in the loan documents
to protect the Trust from the risk that the secured property will be treated
as "dealer property." Similarly, in the case of loans that are acquired in the
future rather than originated by the Trust, the same issue arises. However,
the Trust intends to include built-in safeguards in the loans it originates in
the future to minimize any risk that any secured property will be treated as
"dealer property."
The Trust acknowledges that certain of the mortgage investments contributed
pursuant to the Contribution Proposal do not generate qualifying income for
purposes of the 75% and 95% gross income tests because such assets, for
example, generate income dependent in whole or in part on the income or
profits of the applicable borrower. However, based on the Board of Trustee's
review of all the mortgage investments being contributed pursuant to the
Contribution Proposal (after consultation with its counsel and accountants),
the Board of Trustees believes that, for purposes of both the 75% and 95%
gross income tests, the mortgage investments contributed pursuant to the
Contribution Proposal will permit the Trust to satisfy the requirements for
qualification as a REIT.
The Trust intends to enter into various hedging transactions with respect to
one or more of its assets or liabilities. While such hedging transactions
could take a variety of forms, only those payments to a REIT under an interest
rate swap, cap agreement, option, futures contract, forward rate agreement or
any similar financial instrument entered into by the REIT to hedge its
indebtedness incurred or to be incurred (and any gain from the sale or other
disposition of these instruments) are treated as qualifying income for
purposes of the 95% gross income test (but not for purposes of the 75% gross
income test). The provisions of the Code regarding the qualification of the
Trust as a REIT may thus restrict the Trust's ability to enter into certain
types of hedging transactions. The Board of Trustees will monitor the Trust's
compliance with the various REIT qualification tests imposed under the Code
with respect to its various hedging strategies on a continuing basis. However,
no assurance can be given that hedging transactions (together with other Trust
operations) would permit the Trust to satisfy these tests on an ongoing basis.
Even if the Trust fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will generally be available if: (i) the Trust's failure to
comply were due to reasonable cause and not to willful neglect; (ii) the Trust
reports the nature and amount of each item of its income included in the tests
on a schedule attached to its tax returns; and (iii) any incorrect information
on the schedule is not due to fraud with intent to evade tax. If these relief
provisions apply, however, the Trust will nonetheless be subject to a 100% tax
on the greater of the amount by which it fails either the 75% or 95% gross
income test, multiplied by a fraction intended to reflect the Trust's
profitability.
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The 30% Test. The 30% gross income test has been repealed and the Trust will
not be required to comply with this test beginning January 1, 1998.
Foreclosure Property Rules. REITs generally are subject to tax at the
maximum corporate rate on any income from foreclosure property (other than
income that would generally be qualifying income for purposes of the 75% gross
income test), less expenses directly connected with the production of such
income. "Foreclosure property" is defined as any real property (including
interests in real property) and any personal property incident to such real
property (i) that is acquired by a REIT as the result of such REIT having bid
in such property at foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law, after there was a
default (or default was imminent) on a lease of such property or on an
indebtedness owed to the REIT that such property secured, (ii) as to which the
related loan was made or acquired by the REIT at a time when default was not
imminent or anticipated, and (iii) for which such REIT makes a proper election
to treat such property as foreclosure property. Except as provided in the
following paragraph, property shall cease to be foreclosure property with
respect to the Trust as of the close of the third taxable year following the
taxable year in which the Trust acquired such property in foreclosure. If
property is not eligible for the election to be treated as foreclosure
property ("ineligible property") because, for example, the related loan was
acquired by the REIT at a time when default was imminent or anticipated,
income received with respect to such ineligible property may not be qualifying
income for purposes of the 75% or 95% gross income tests.
Any foreclosure property shall cease to be foreclosure property on the first
day (occurring on or after the day on which the Trust acquired the property in
foreclosure) on which: (x) a lease is entered into with respect to such
property which, by its terms, will not give rise to qualifying income for
purposes of the 75% gross income test or any amount is received or accrued,
directly or indirectly, pursuant to a lease entered into on or after such day
which does not generate qualifying income for purposes of the 75% gross income
test; (y) any construction takes place on such property (other than completion
of a building, or completion of any other improvement, where more than 10
percent of the construction of such building or other improvement was
completed before default became imminent); or (z) if such day is more than 90
days after the day on which such property was acquired by the Trust and the
property is used in a trade or business which is conducted by the Trust (other
than through an independent contractor (within the meaning of Section
856(d)(3) of the Code) from whom the Trust itself does not derive or receive
any income). For example, if the Trust were to acquire a hotel as foreclosure
property and operate the hotel for more than 90 days, the Trust would be
required to operate the hotel through an independent contractor (within the
meaning of the Code) from whom the Trust itself did not derive or receive any
income (which might include income from the hotel). Otherwise, after such 90th
day, the property would cease to be foreclosure property.
In the event that a foreclosure with respect to any of the Trust's mortgage
investments were to occur (or were anticipated to occur), the Trust intends to
manage the actual or anticipated foreclosure with the intent of assuring
qualification under the REIT asset and gross income tests including, if
appropriate, the election to treat a foreclosed upon property as foreclosure
property and to pursue the continued treatment of such property under the
foreclosure property rules.
Failure to Qualify. If the Trust fails to qualify for taxation as a REIT in
any taxable year and the relief provisions do not apply, the Trust will be
subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to shareholders in
any year in which the Trust fails to qualify as a REIT will not be deductible
by the Trust, nor generally will they be required to be made under the Code.
In such event, to the extent of current and accumulated earnings and profits,
all distributions to shareholders will be taxable as ordinary income, and,
subject to certain limitations in the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Trust also will be disqualified from re-
electing taxation as a REIT for the four taxable years following the year
during which qualification was lost.
Possible Legislative or Other Actions Affecting Tax
Consequences. Prospective shareholders should recognize that the present
Federal income tax treatment of investment in the Trust may be modified by
legislative, judicial or administrative action at any time and that any such
action may affect investments and
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commitments previously made. The rules dealing with federal income taxation
are constantly under review by persons involved in the legislative process and
by the IRS and the Treasury Department, resulting in revisions of regulations
and revised interpretations of established concepts as well as statutory
changes. No assurance can be given as to the form or content (including with
respect to effective dates) of any tax legislation which may be enacted.
Revisions in Federal tax laws and interpretations thereof could adversely
affect the tax consequences of investment in the Trust.
The Taxpayer Relief Act of 1997 (the "1997 Act"), which was signed into law
by President Clinton on August 5, 1997, modified many of the provisions
relating to the requirements for qualification as, and the taxation of, a
REIT. Among other things, the 1997 Act (i) permits a REIT to render a de
minimis amount of impermissible services to tenants, or in connection with the
management of property, and still treat amounts received with respect to that
property as rents from real property; (ii) permits a REIT to elect to retain
and pay income tax on net long-term capital gains (subject to a shareholder's
ability to claim a credit or refund in its share of such capital gains tax);
(iii) as discussed above, repealed a rule that required that less than 30% of
a REIT's gross income be derived from gain from the sale or other disposition
of stock or securities held for less than one year, certain real property and
mortgage investments held for less than four years, and property that is sold
or disposed of in a prohibited transaction; and (iv) treats income from all
hedges that reduce the interest rate risk of REIT liabilities, not just
interest rate swaps and caps, as qualifying income under the 95% gross income
test. The changes are effective for taxable years beginning after the date of
enactment. Thus, these changes will apply to the Trust for its taxable year
beginning January 1, 1998.
SUMMARY OF THE AMENDMENT OF THE DECLARATION OF TRUST AND EFFECT THEREOF AND
BOARD OF TRUSTEES' RECOMMENDATION REGARDING THE TRUST AMENDMENTS PROPOSAL
The following description sets forth a summary of the proposed amendments to
the Declaration of Trust and the effect of their adoption, including any
modifications to the Class A Shares or Class B Shares caused by any such
amendments. The following description is qualified in its entirety by
reference to the form of Restated Declaration of Trust attached hereto as
Exhibit F, which has been marked to reflect the proposed amendments. Approval
of each of the following proposals to amend the Declaration of Trust is
contingent upon the approval of all of the proposals.
CHANGE OF TRUST'S NAME
Reasons for Amendment: The change of the Trust's name from Angeles
Participating Mortgage Trust to Starwood Financial Trust will eliminate the
name of the Trust's former advisor from the name of the Trust, which might be
confusing to investors and to include the name of the Advisor in the name of
the Trust.
Proposed Amendment: The sections of the Declaration of Trust proposed to be
amended are the recitals and Section 1.1. The actual text of the proposed
amendment is set forth in Exhibit F.
Effect of Amendment: The name of the Trust will be changed from Angeles
Participating Mortgage Trust to Starwood Financial Trust.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of the foregoing proposed
amendment.
CHANGE OF TRUST'S PURPOSE AND INVESTMENT POLICY
Reasons for Amendments: The primary change to the purpose and investment
policy of the Trust is to allow the Trust to originate or acquire certain
mortgage loans made to affiliated entities and to acquire certain securities
and investments that are collateralized by or made to borrowers that are
affiliated with the Trust. The Trust has no present plans to originate or
acquire loans made to borrowers affiliated with the Trust. This change will
increase the investment options available to the Trust and allow the Board of
Trustees to use its discretion with respect to the investment affairs of the
Trust. While the elimination of the restrictions on affiliated investments may
increase potential conflicts of interests between the Trust and its
affiliates, the Board of Trustees
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has determined that the Shareholders will be adequately protected by the
Shareholders Agreement. The purpose and investment policy is also being
amended to clarify that (1) the primary purpose of the Trust is to acquire a
diversified portfolio of debt or debt like interests in real estate related
assets, (2) the Trust generally will not obtain management rights over or
equity interests in assets underlying non-performing or sub-performing debt
unless the Trust's efforts to restructure such debt into performing debt are
unsuccessful, (3) the Trust's authority with respect to the Diversified
Portfolio includes the power to acquire, hold, own, develop, redevelop,
construct, improve, maintain, operate, manage, sell, lease, rent, transfer,
encumber, mortgage, convey, exchange and otherwise dispose of or deal with the
Diversified Portfolio and that the Diversified Portfolio may be held by the
Trust directly or indirectly and (4) the Board of Trustees has exclusive
authority over the management of the Trust, the conduct of its affairs and the
management and disposition of its property. Finally, the Investment
Restrictions, which are currently applicable to the Trust and are contained in
the partnership agreement of the Partnership, are being included in the
Declaration of Trust.
Proposed Amendments: The sections of the Declaration of Trust proposed to be
amended are Sections 1.4 and 3.1. The actual text of this proposed amendment
is set forth in Exhibit F.
Effect of Amendments: The change in the Trust's purpose and investment
policy may increase potential conflicts of interests by permitting the Trust
to originate or acquire mortgage loans made to borrowers affiliated with the
Trust and to acquire securities and investments that are collateralized by or
made to borrowers affiliated with the Trust. See "RISK FACTORS--Conflicts of
Interest."
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of the foregoing proposed
amendment.
CHANGE IN REQUIREMENTS TO APPROVE CERTAIN ASSET SALES
Proposal: To amend the Declaration of Trust to require the approval of
Shareholders holding two-thirds of the voting shares of the Trust to approve
any sale, transfer or other disposition of all or substantially all of the
assets of the Trust.
Reasons for Amendments: The purpose of increasing the voting requirements
with respect to approving certain asset sales is to provide greater assurance
that the Shareholders are in agreement with respect to transactions that will
substantially alter the nature of the Shareholders' investment. In light of
increasing industry consolidation and the frequency of transactions involving
hostile and/or coercive offers to Shareholders, the Board believes that
increasing the voting requirements with respect to approving certain asset
sales will help to ensure that Shareholders are treated fairly and ultimately
will assist in maximizing the return on their investment.
Under California law, the sale, lease, exchange or disposition of all or
substantially all of the assets of the Trust requires the approval of the
holders of at least a majority of the securities entitled to vote thereon. The
Board of Trustees is proposing that the vote required to take this action
would be increased to two-thirds of the securities entitled to vote thereon.
Proposed Amendments: The sections of the Declaration of Trust proposed to be
amended are Sections 6.2(f) and 6.8. The actual text of this proposed
amendment is set forth in Exhibit F.
Effect of Amendments: In the event this proposal is approved by the
requisite vote of the Shareholders, the sale, lease, exchange or disposition
of all or substantially all of the assets of the Trust will require the
affirmative vote of two-thirds of outstanding voting shares.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of the foregoing proposed
amendment.
ELIMINATION OF CUMULATIVE VOTING
Proposal: To eliminate the provisions in the Declaration of Trust that allow
Shareholders to cumulate votes when electing Trustees. Cumulative voting
permits the holder of each share entitled to vote in the election of Trustees
to cast that number of votes which equals the number of Trustees to be
elected. The holder may allocate all votes represented by a share to a single
candidate or may allocate those votes among as many candidates as he or she
chooses. Thus, a Shareholder with a significant minority percentage of the
outstanding shares may be able to elect one or more Trustees if voting is
cumulative. In contrast, the holder or holders of a
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majority of the shares entitled to vote in an election of Trustees are able to
elect all the Trustees in the absence of cumulative voting.
Reason for Amendment: The Board of Trustees believes that eliminating the
cumulative voting provision contained in the Declaration of Trust reduces the
risk that one or more persons would seek to acquire a minority ownership in
the Trust with a view toward obtaining a seat on the Board of Trustees to
represent specific interests. The Board believes that such an effort, if
successful, could negatively affect the Board's ability to effectively conduct
the affairs of the Trust's business. Additionally, the Board believes that the
elimination of cumulative voting is advantageous to the Trust and its
Shareholders because each Trustee of a publicly held corporation has the duty
to represent the interest of all shareholders, rather than any specific
shareholder or group of shareholders.
Proposed Amendment: The section of the Declaration of Trust proposed to be
amended is Section 6.2(a). The actual text of this proposed amendment is set
forth in Exhibit F.
Effect of Amendment: The elimination of cumulative voting could deter
investors from acquiring a minority block in the Trust with a view toward
obtaining a seat on the Board of Trustees and influencing Trust policy. It is
also possible that the absence of cumulative voting might deter efforts to
seek control of the Trust on a basis which some Shareholders might deem
favorable.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of the foregoing proposed
amendment.
ESTABLISHMENT OF CLASSIFIED BOARD OF TRUSTEES
Proposal: Under the existing provisions of the Declaration of Trust, each
Trustee of the Trust is elected annually for a term of one year. The
Shareholders are being asked to consider and vote upon a proposal to
reorganize the Trust's Board of Trustees into two classes of approximate equal
size and to increase the minimum required number of Trustees from three to
seven. Assuming Shareholder approval, each class of Trustees will, after an
interim arrangement, serve for two years with only one of the two classes
being elected each year. Upon approval of the Trust Amendment Proposal the
Trustees will be aligned into two approximately equal classes: Class I,
composed of Messrs. Dishner, Eilian and Kleeman and Ms. Josephs; and Class II,
composed of Messrs. Sternlicht, Sugarman, Matthes and Youngblood. Following
the interim arrangement described below, the Trustees of each class will serve
two year terms, and the term of one class will expire each year.
The Class I and Class II Trustees will initially be elected at the 1997
Annual Meeting for terms of one year and two years, respectively. If the Trust
Amendment Proposals are adopted, Class I Trustees elected at the 1997 Annual
Meeting will hold office until the 1998 Annual Meeting of Shareholders; and
Class II Trustees elected at the Annual Meeting will hold office until the
1999 Annual Meeting of Shareholders. At each Annual Meeting of Shareholders
commencing with the 1998 Annual Meeting of Shareholders, Trustees elected to
succeed those in the class whose terms then expire will be elected for two-
year terms, so that the term of one class of Trustees expires each year. Thus,
after the 1997 Annual Meeting, Shareholders will elect approximately one-half
of the Trustees at each Annual Meeting of Shareholders and each Trustee will
serve until a successor is duly elected and qualified or until his earlier
death, resignation or removal.
Reason for Amendments: The Board of Trustees believes that dividing the
Trustees into two classes and providing that Trustees will serve two-year
terms rather than one-year terms is advantageous to the Trust and Shareholders
because it enhances the likelihood of continuity and stability in the Trust's
management and in policies formulated by the Board of Trustees. The
establishment of a classified Board of Trustees is not the result of any
specific current efforts, of which the Trust is aware, by anyone to accumulate
the Trust's securities or to obtain control of the Trust.
The Board of Trustees also believes the establishment of a classified Board
of Trustees would, if adopted, reduce the possibility that a third party could
effect a sudden or surprise change in control of the Board of Trustees. It may
require two meetings of Shareholders, rather than one, to effect a change in a
majority of members of the Board of Trustees. The delay afforded by a
classified Board of Trustees would serve to ensure that the Board of Trustees,
if confronted by a hostile tender offer, proxy context or other surprise
proposal from a third party who has acquired a block of Shares, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal, and to act in a manner which it believes to be in the best interest
of the Shareholders.
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The Board of Trustees believes that if a potential acquiror were to purchase
a significant or controlling interest in the Trust, such acquiror could remove
the Trustees and obtain control of the Board of Trustees which could severely
curtail the Trust's ability to negotiate effectively with such potential
acquiror on behalf of all other Shareholders. The threat of obtaining control
of the Board of Trustees would deprive the Board of Trustees of the time and
information necessary to evaluate the proposal, to study alternative proposals
and to help ensure that the best price is obtained in any transaction
involving the Trust. The establishment of a classified Board of Trustees is
designed to reduce the vulnerability of the Trust to an unsolicited takeover
proposal, particularly a proposal that does not contemplate the acquisition of
all of the Trust's outstanding Shares, or an unsolicited proposal for the
restructuring or sale of all or part of the Trust.
The proposed classification of the Board of Trustees is intended to
encourage persons seeking to acquire control of the Trust to initiate such an
acquisition through arm's-length negotiations with the Board of Trustees. The
establishment of a classified Board of Trustees would not prevent a negotiated
acquisition of the Trust with the cooperation of the Board of Trustees, and a
negotiated acquisition could be structured in such a manner as to shift
control of the Board of Trustees to representatives of the acquiror as part of
the transaction. The minimum required number of Trustees is being increased
from three to seven to facilitate the implementation of a two class Board of
Trustees.
Proposed Amendments: The sections of the Declaration of Trust proposed to be
amended are Sections 2.1, 2.4, and 6.2(a). The actual text of this proposed
amendment is set forth in Exhibit F.
Effect of Amendments: Since the establishment of a classified Board of
Trustees will increase the amount of time required for a takeover bidder to
obtain control of the Trust without the cooperation of the Board of Trustees,
even if the takeover bidder were to acquire a majority of the outstanding
Shares, the establishment of a classified Board of Trustees could tend to
discourage certain tender offers and other attempts to change control of the
Trust, even though Shareholders might believe such attempt would be beneficial
to them or the Trust. In addition, the establishment of a classified Board of
Trustees may discourage tender offers, open market purchases in anticipation
of tender offers, and other investment and speculative market activity that
may have the effect of increasing the market price of, or price volatility in,
Shares. As a result, Shareholders could be deprived of certain opportunities
to sell their Shares at a temporarily higher price. The Board of Trustees
believes, however, that the advantages obtained from more assured stability
and continuity in corporate leadership, which thereby reduces the chance of
disruption to the Trustee's strategic plans and long-term policies, outweigh
the disadvantages the establishment of a classified Board of Trustees might
present.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR the foregoing proposed amendment.
AMENDMENTS TO THE EXCESS SHARE PROVISION
Proposal: The Declaration of Trust will be amended to modify certain
restrictions on the ownership and transfer of Class A and Class B Shares which
are intended to assist the Trust in complying with the REIT provisions of the
Code. The Declaration of Trust will provide that, subject to certain specified
exceptions, (i) no person or entity (except for certain qualified pension
plans) may own, or be deemed to own by virtue of the applicable constructive
ownership provisions of the Code, more than 9.8% in number of Class A Shares
or 9.8% by value of the outstanding Class A and Class B Shares (the "Ownership
Limit"). The current Ownership Limit is 9.8% for all holders of Class A
Shares. The Class B Shares are not currently subject to the Ownership
Limitation. The constructive ownership rules of the Code are complex, and may
cause Class A and Class B Shares owned actually or constructively by a group
of related individuals and/or entities to be owned constructively by one
individual or entity. As a result, the acquisition of less than 9.8% of the
Class A and Class B Shares (or the acquisition of an interest in an entity
that owns, actually or constructively, Class A and Class B Shares) by an
individual or entity could, nevertheless cause that individual, or another
individual or entity, to own constructively in excess of 9.8% of the
outstanding value of Class A and Class B Shares and thus subject such Class A
and Class B Shares to the Ownership Limit. The Board of Trustees may, but in
no event will be required to, waive the Ownership Limit with respect to a
particular Shareholder if it determines that such
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ownership will not jeopardize the Trust's status as a REIT. As a condition to
such waiver, the Board of Trustees may require opinions of counsel
satisfactory to it and/or undertakings or representations from the applicant
with respect to preserving the REIT status of the Trust.
The Declaration of Trust will also continue to further prohibit (a) a person
from actually or constructively owning Class A and Class B Shares that would
result in the Trust being "closely held" under Section 856(h) of the Code or
otherwise cause the Trust to fail to qualify as a REIT and (b) any person from
transferring Class A and Class B Shares if such transfer would result in Class
A and Class B Shares being owned by fewer than 100 persons. Any person who
acquires or attempts or intends to acquire Class A and Class B Shares that
will or may violate any of the foregoing restrictions on transferability and
ownership is required to give notice immediately to the Trust and provide the
Trust with such other information as the Trust may request in order to
determine the effect of such transfer on the Trust's status as a REIT. The
foregoing restrictions on transferability and ownership will not apply if the
Board determines that it is no longer in the best interest of the Trust to
attempt to qualify, or to continue to qualify, as a REIT.
As amended and restated, the Declaration of Trust will provide that, if any
purported transfer of Class A and Class B Shares or any other event would
otherwise result in any person violating the Ownership Limit or the
Declaration of Trust, then any such purported transfer will be void ab initio
and of no force or effect with respect to the purported transferee (the
"Prohibited Transferee") as to that number of Class A and Class B Shares in
excess of the Ownership Limit and the Prohibited Transferee shall acquire no
right or interest (or, in the case of any event other than a purported
transfer, the person or entity holding record title to any such Class A and
Class B Shares in excess of the Ownership Limit as the case may be (the
"Prohibited Owner") shall cease to own any right or interest) in such Class A
and Class B Shares. Any such Class A and Class B Shares described above will
be transferred automatically, by operation of law, to a trust (the "Charitable
Trust"), the beneficiary of which will be a qualified charitable organization
selected by the Trust (the "Beneficiary"). Such automatic transfer shall be
deemed to be effective as of the close of business on the business day prior
to the date of such violative transfer. Within sixty days after the later of
(a) the date of the transfer which resulted in the violation and (b) the date
the Board of Trustees determines in good faith that the transfer which
resulted in the violation occurred, the trustee of the Charitable Trust (who
shall be designated by the Trust and be unaffiliated with the Trust and any
Prohibited Transferee or Prohibited Owner, the "Charitable Trustee") will be
required to sell such shares to a person or entity who could own such shares
without violating the Ownership Limit and distribute to the Prohibited
Transferee an amount equal to the lesser of the price paid by the Prohibited
Transferee for such Class A and Class B Shares or the sales proceeds received
by the Charitable Trust for such Class A and Class B Shares. In the case of
any Class A and Class B Shares in excess of the Ownership Limit resulting from
an event other than a transfer, or from a transfer for no consideration (such
as a gift), the Charitable Trustee will be required to sell such Class A and
Class B Shares to a qualified person or entity and distribute to the
Prohibited Owner an amount equal to the lesser of the fair market value of
such Class A and Class B Shares as of the date of such event or the sales
proceeds received by the Charitable Trustee for such Class A and Class B
Shares. In either case, any proceeds in excess of the amount distributable to
the Prohibited Transferee or Prohibited Owner, as applicable, will be
distributed to the Beneficiary. Prior to a sale of any Class A and Class B
Shares in excess of the Ownership Limit by the Charitable Trust, the
Charitable Trustee will be entitled to receive, in trust for the Beneficiary,
all dividends and other distributions paid by the Trust with respect to such
Class A and Class B Shares, and also will be entitled to exercise all voting
rights with respect to such Class A and Class B Shares and also will be
entitled to exercise all voting rights with respect to such Class A and Class
B Shares. Subject to California law, effective as of the date that such Class
A and Class B Shares have been transferred to the Charitable Trust, the
Charitable Trustee shall have the authority (at the Charitable Trustee's sole
discretion) to vote such Shares. Any vote taken by a Prohibited Owner prior to
the discovery by the Trust that such Shares were held in trust shall be
rescinded ab initio. Any dividend or other distribution paid to the Prohibited
Transferee or Prohibited Owner (prior to the discovery by the Trust that such
Shares had been automatically transferred to the Charitable Trust as described
above) will be required to be repaid to the Charitable Trustee upon demand for
distribution to the Beneficiary. In the event that the transfer to the Trust
as described above is not automatically effective (for any reason) to prevent
violation of the Ownership Limit, then the Declaration of Trust provides that
the transfer of the Class A and Class B Shares will be void.
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In addition, Class A and Class B Shares held in the Charitable Trust shall
be deemed to have been offered for sale to the Trust, or its designee, at a
price per Share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the Charitable Trust (or, in the
case of a devise or gift), the market price at the time of such devise or
gift, and (ii) the market price on the date the Trust, or its designee,
accepts such offer. The Trust shall have the right to accept such offer until
90 days after the later of (a) the date of the transfer which resulted in the
violation and (b) the date the Board of Trustees determines in good faith that
the transfer which resulted in the violation occurred, if the Trust did not
receive the required notice, but in no event later than the date that the
Charitable Trustee has sold the Class A and Class B Shares held in the
Charitable Trust. Upon such sale to the Trust, the interest of the Beneficiary
in the shares sold shall terminate and the Charitable Trustee shall distribute
the net proceeds of the sale to the Prohibited Transferee or Prohibited Owner,
as the case may be.
All certificates representing Class A and Class B Shares will bear a legend
referring to the restrictions described above.
Reason for Amendments: The Board of Trustees has determined that it is
necessary and/or advisable to amend the Excess Shares provisions and certain
other provisions relating to restrictions on transfer of Class A and Class B
Shares contained in Section 6.13 of the Declaration of Trust in response to
rulings issued by the IRS, and to clarify that the Ownership Limit is
applicable to the Class B Shares. Such amendments will reduce the risk that
the Trust could fail the "closely held" test set forth in section 856 of the
Code, and thereby fail to qualify as a REIT for federal income tax purposes
and will clarify the maximum percentage of Class A and Class B Shares that
certain persons may own.
Proposed Amendments: The section of the Declaration of Trust proposed to be
amended is Section 6.13. In addition, a new Article X will be added to the
Declaration of Trust. The actual text of this proposed amendment is set forth
in Exhibit F.
Effect of Amendments: Currently under the Declaration of Trust, any
attempted transfer of Class A Shares by a person or other change in the
capital structure of the Trust that would violate one of the limitations
described in the Declaration of Trust will cause the transfer resulting in
such violation to be deemed void ab initio.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR the forgoing proposed amendment.
ELIMINATING CERTAIN LIMITATIONS ON INDEMNIFICATION BY THE TRUSTEES OF CERTAIN
PERSONS
Reasons for Amendment: The proposal amendment would eliminate certain
limitations on indemnification by the Trust of the Trustees and their
affiliates and any person acting as a broker dealer for liabilities arising
under the federal and state securities laws. This limitation on
indemnification was required as a result of activities previously engaged in
by the Trust. The Trust is no longer required to limit indemnification in this
manner. The Board of Trustees believes that eliminating the limitation on
indemnification is necessary in order to attract and retain qualified
individuals as Trustees of the Trust. Without protection for actions taken in
good faith in the absences of gross negligence, misconduct or breach of
fiduciary duties, many individuals that are qualified to serve as Trustees of
the Trust will be unwilling to do so. In addition the Declaration of Trust is
being amended to clarify certain provisions and add additional sections with
respect to the limited liability of the Shareholders and indemnification of
the Shareholders.
Proposed Amendment: The sections of the Declaration of Trust proposed to be
amended are Sections 7.1, 7.2 and 7.9. The actual text of this proposed
amendment is set forth in Exhibit F.
Effect of Amendment: The Trust may be required to indemnify the Trustees and
certain others for liabilities arising under the federal and state securities
laws in the absence of successful adjudication of or dismissal with prejudice
on the merits of the allegations or a court approved settlement that provides
for indemnification. The Declaration of Trust will clearly state that the
Shareholders have no liability with respect to the Trust's assets and
obligations as a result of their status as shareholders and provide
indemnification with respect to any loss incurred by Shareholders with respect
thereto.
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Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of the foregoing proposed
amendment.
CERTAIN AMENDMENTS TO THE DECLARATION OF TRUST
Reasons for Amendment. The management of the Trust has explored the
possibility of changing the domicile of the Trust from California to a state
with a more developed body of law governing REITs and possibly changing the
form of the Trust from a business trust to a corporation. The proposed
amendment will facilitate any such change by permitting amendments to the
Declaration of Trust in connection therewith without approval of the
Shareholders if the Board of Trustees determines that such amendment does not
materially and adversely affect the rights of the Shareholders.
Proposed Amendment. The section of the Declaration of Trust proposed to be
amended is Section 8.3. The actual text of the proposed amendment is set forth
in Exhibit F.
Effect of Amendment. The Shareholders will not have the right to vote on
amendments to the Declaration of Trust if the amendments facilitate a change
in the Trust's domicile or a change in the form of the Trust to a corporation
and the Board of Trustees determines that such amendment does not materially
and adversely affect the rights of the Shareholders.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of the foregoing proposed
amendment.
TECHNICAL AMENDMENTS
Reasons for Amendments: Certain factual information contained in the
Declaration of Trust has become outdated. The Board of Trust is taking the
opportunity to update outdated information and clarify certain provisions
since the Declaration of Trust is being restated. These amendments include:
(i) reflecting the change in the Trust's principal place of business; (ii)
clarifying that additional Class B Shares required to be issued by the Trust
shall be issued only upon issuance of Class A Shares and on a pro rata basis
to holders of then outstanding Class B Shares and that such additional Class B
Shares may be issued up to 60 days after the issuance of the Class A Shares;
(iii) clarifying that a merger of the Trust with and into another entity is a
termination event unless the Trust is the surviving entity or if the purpose
of the merger is primarily to change the domicile of the Trust and that a
change of the Trust's form from a business trust to a corporation is not a
termination event; (iv) clarifying certain provisions with respect to the
Trustees' authority to issue securities, including preferred stock, in the
future and to amend the Declaration of Trust without Shareholder approval to
reflect the terms of any newly issued securities; (v) that any provision of
the Declaration of Trust that sets forth a supermajority voting requirement
can only be amended by the supermajority vote set forth in such provision; and
(vi) clarifying that the existence of the Trust is perpetual.
Proposed Amendments: The text of these proposed amendments, which affect
Sections 1.2, 1.5, 3.2(d), 5.1, 5.4, 6.1, 6.2(d), 6.2(e) and 8.1 of the
Declaration of Trust, is set forth in Exhibit F.
Effect of Amendments: The amendments will correct certain factual
inaccuracies and clarify certain provisions of the Declaration of Trust. As a
result of the clarifications with respect to events that constitute a
termination event, Shareholders holding a majority of the voting shares, as
opposed to two-thirds of the voting shares, will be required to approve (i) a
merger in which the Trust is the surviving entity or that is effected
primarily to change the domicile of the Trust or (ii) a change in the Trust's
form from a business trust to a corporation. In addition, the amendments with
respect to the issuance of additional securities will clarify the Trustees'
authority with respect to determining the terms and rights of a new class or
series of securities and will explicitly state that the Trustees have the
right to amend the Declaration of Trust to reflect the terms and rights of any
such securities.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of the foregoing proposed
amendments.
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REVERSE SPLIT
If the Contribution Proposal, the Advisory Agreement Proposal and the Trust
Amendments Proposal are approved, the Shareholders will be asked to consider
and vote upon the following proposals to approve the Reverse Split.
REVERSE SPLIT
The Shareholders are being asked to consider and vote on the Reverse Split
and a proposal to grant the Board of Trustees the authority determine the
magnitude and timing of the Reverse Split subject to the following
limitations: (a) the magnitude of the Reverse Split shall not be any greater
than 1 for 8 and (b) the Reserve Split shall be effective no later than 60
days after the Contribution Date. If the Reverse Split is not effected within
60 days of the Contribution Date the authority of the Board of Trustees with
respect thereto shall terminate and the Reverse Split will not be effected.
The Shareholders will also consider and vote on approval of an amendment to
the Declaration of Trust to effect the Reverse Split to be adopted by the
Board of Trustees immediately prior to the Reverse Split. The Reverse Split
will be effective upon the adoption of the amendment to the Declaration of
Trust (the "Effective Date"). "Shares" refers to Class A Shares and Class B
Shares.
Fractional Class A Shares will not be issued as a result of the Reserve
Split. Shareholders entitled to receive fractional Class A Shares as a
consequence of the Reverse Split will, instead, receive from the Trust a cash
payment in United States dollars equal to such fraction multiplied by the
average closing price of the Class A Shares on the AMEX for the five trading
days immediately preceding the Effective Date (adjusted for the Reverse
Split). Holders of Class B Shares will receive fractional shares.
EFFECT OF REVERSE SPLIT
On the Effective Date, without further action on the part of the Trust or
its Shareholders, each Share will be converted into a fraction of a Share. The
fraction will be determined by the Board of Trustees and will be no smaller
than one-eighth. For purpose of illustrating the effects of the Reverse Split,
the following description assumes that the Board of Trustees approved a 1 for
2 Reverse Split. This assumption is solely for illustration purposes. The
Board of Trustees will be authorized, in its sole discretion, to determine the
magnitude of the Reverse Split up to a 1 for 8 reverse split.
Illustration
On the Effective Date, each Share will be converted into one-half
of a Share. Each Shareholder who owns fewer than two Class A Shares
will have its fractional Class A Shares converted into the right to
receive cash as set forth below in "--Exchange of Stock
Certificates and Payment for Fractional Shares." The interest of
such Shareholder in the Trust will thereby be terminated, and such
Shareholder will have no right to share in the assets and future
growth of the Trust. Each Shareholder who owns two or more Class A
Shares will continue to own Class A Shares and will have a right to
share in the assets and future growth of the Trust. Such interest
will be represented by one-half as many Class A Shares as such
Shareholder owned before the Reverse Split, except that no
fractional Class A Shares will be issued.
The Reverse Split will not affect any Shareholder's proportionate equity
interest in the Trust or the rights, preferences or privileges of any
Shareholder. The Reverse Split will also not affect the number of authorized
Shares, which is infinite. Neither the par value of the Class A Shares or the
Class B Shares nor any rights presently accruing to any of the holders of the
foregoing capital stock will be affected by the Reverse Split. On the
Effective Date, the exercise price, conversion ratio, shares available for
issuance and other relevant terms and provisions of the Incentive Plan will be
appropriately adjusted to reflect the Reverse Split.
A vote for the Reverse Split proposal will include authorization for the
Board of Trustees not to effect the Reverse Split in the event the Board of
Trustees determines in its sole judgment that the Reverse Split would not be
in the best interest of the Shareholders.
REASONS FOR THE REVERSE SPLIT
The Board of Trustees believes that the Reverse Split is beneficial to the
Trust and the Shareholders because it may create a greater interest in the
Class A Shares by the brokerage and investment community. The Board of
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Trustees believes that the low market price of the Class A Shares may impair
the acceptability of the Class A
Shares to certain institutional investors and other members of the investing
public. Theoretically, the number of shares outstanding should not, by itself,
affect the marketability of a stock, the type of investor who acquires it, or
the issuers's reputation in the financial community. In practice, however, the
Board of Trustees believes that this is not necessarily the case, as certain
investors view low-priced stocks as unattractive. In addition, the Board of
Trustees believes that many brokerage houses are reluctant to recommend lower-
priced stocks to their clients, to hold them in their own portfolios or extend
margin credit on stocks trading at low prices. Furthermore, a variety of
brokerage house policies and practices discourage individual brokers within
those firms from dealing in low-priced stocks because of the time-consuming
procedures that make handling low-priced stocks economically unattractive.
It is anticipated that following the consummation of the Reverse Split, the
Class A Shares will trade at a price per share that is significantly higher
than the current market price. There can be no assurances, however, that after
the consummation of the Reverse Split the post-split Class A Shares will trade
at a higher market price or that the Class A Shares will receive greater
acceptance by institutional investors and other members of the investing
public.
EXCHANGE OF STOCK CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
The exchange of Shares will occur on the Effective Date without regard to
the date certificates representing pre-split Shares are physically surrendered
for certificates representing post-split shares of Shares. The Trust's
transfer agent will exchange certificates. No scrip or fractional certificates
of Class A Shares will be issued in connection with the Reverse Split.
Fractional Class B Shares will be issued. In the event that the number of
post-split Class A Shares includes a fraction, the Trust will pay to the
Shareholder, in lieu of the issuance of fractional Class A Shares, a cash
amount in United States dollars which will be equal to the same fraction
multiplied by the magnitude of the Reverse Split times the average closing
price of the Class A Shares on AMEX for the five trading days immediately
preceding the Effective Date. For example, if a Shareholder owns 10 Class A
Shares, the Board of Trustees approved a 1 for 3 reverse split and the average
closing price was $5.00, the Shareholder would receive three post split Class
A Share and $5.00 in cash ( 1/3 Class A Share multiplied by 3 multiplied by
$5.00).
As soon as practicable after the Effective Date, each holder of Shares will
be mailed transmittal forms for use in forwarding their certificates for
surrender and exchange for certificates representing the number of shares of
post-split Shares such Shareholders are entitled to receive as a consequence
of the Reverse Split. Each holder who surrenders certificates will receive new
certificates representing the number of shares of post-split Shares to which
it is entitled and any cash payable in lieu of any fractional Class A Shares.
The transmittal forms will be accompanied by instructions specifying other
details of the exchange. SHAREHOLDERS SHOULD NOT SEND THEIR CERTIFICATES UNTIL
THEY RECEIVE A TRANSMITTAL FORM. NO CERTIFICATES SHOULD BE SENT DIRECTLY TO
THE TRUST.
After the Effective Date, each certificate representing pre-split Shares
will, until surrendered and exchanged as described above, be deemed, for all
trust purposes, to evidence ownership of the whole number and in the case of
Class B Shares only, a fraction of post-split Shares, and the right to receive
from the Trust the amount of cash for any fractional Class A Shares, into
which the shares evidenced by such certificate have been converted, except
that the holder of such unexchanged certificates will not be entitled to
receive any dividends or other distributions payable by the Trust after the
Effective Date, until the certificates representing pre-split Shares have been
surrendered. Such dividends and distributions, if any, will be accumulated,
and at the time of the surrender of the certificates for pre-split Shares, all
such unpaid dividends or distributions will be paid without interest.
The Trust will pay all service charges incurred in connection with the
exchange of certificates. The Trust will obtain a new CUSIP number with
respect to the post-split Shares.
ANTI-TAKEOVER EFFECTS
The Reverse Split is not intended to be an anti-takeover device and is not
expected to have a significant effect on the ownership percentages of the
Trust's current Shareholders. See "--Reasons for the Reverse Split."
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes certain Federal income tax consequences
of the Reverse Split. This discussion is based upon the Code, applicable
Treasury regulations thereunder, judicial decisions and authority and current
administrative rulings and practice, all as amended and in effect on the date
hereof. There can be no assurance that future legislative, judicial or
administrative changes or interpretations will not adversely affect the
accuracy of statements and conclusions set forth herein. Any such changes or
interpretations could be applied retroactively and, accordingly, could cause
the tax consequence to vary substantially from the consequences described
below. No ruling from the IRS with respect to the matters discussed herein has
been requested, and there is no assurance that the IRS would agree with the
conclusions set forth in this discussion.
This discussion is for general informational purposes only and does not
address the Federal income tax consequences that may be relevant to particular
Shareholders in light of their personal circumstances or to certain types of
Shareholders (such as dealers in securities, insurance companies, foreign
individuals and entities, financial institutions and tax-exempt entities) who
may be subject to special treatment under the Federal income tax laws. The
discussion also does not address any tax consequences under state, local or
foreign laws.
SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR
TAX CONSEQUENCES TO THEM OF PARTICIPATION IN THE REVERSE SPLIT, INCLUDING THE
APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, CHANGES IN APPLICABLE
TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION.
The exchange of pre-split Shares for post-split Shares will constitute a
"recapitalization" of the Trust within the meaning of Section 368(a)(1)(E) of
the Code. No gain or loss will be recognized by a Shareholder who exchanges
pre-split Shares for post-split Shares of the Trust except to the extent that
cash is received by Shareholders with respect to fractional shares of post-
split Class A Shares.
The aggregate basis for Federal income tax purposes of post-split Shares
received by a Shareholder will be equal to the aggregate basis of the pre-
split Shares exchanged by such Shareholder. If a Shareholder acquired its pre-
split Shares in different lots at different prices, the basis of the post-
split Shares received will be calculated separately with respect to each lot
of pre-split Shares exchanged for post-split Shares, provided the Shareholder
takes adequate steps to identify the post-split Shares received with respect
to the different lots of pre-split Shares which are exchanged.
If the pre-split Shares were a capital asset in the hands of the
Shareholder, the holding period of the post-split Shares will include the
period during which the pre-split Shares was held.
Assuming that the payment in cash in lieu of fractional post-split Class A
Shares is solely for the purpose of avoiding the expense and inconvenience to
the Trust of issuing fractional shares and does not represent separately
bargained-for consideration, a Shareholder who receives a payment of cash with
respect to a fractional pre-split Class A Share will be treated as if a
fractional post-split Class A Share were issued to such Shareholder and
redeemed for cash in a distribution in redemption of such fractional share.
The Federal income tax consequences of such deemed redemption will be governed
by Section 302 of the Code.
Upon the hypothetical redemption of such fractional Class A Share, a
Shareholder will realize capital gain or loss (assuming the pre-split Shares
is held as a capital asset) in an amount equal to the difference between the
cash received and such Shareholder's basis in its fractional Share only if the
hypothetical redemption would qualify as a sale or exchange under one of the
tests of Section 302(b) of the Code. A redemption of such Shareholder's post-
split Shares would qualify as a sale or exchange under Section 302(b) of the
Code if: (i) under Section 302(b)(1) of the Code, such redemption is "not
essentially equivalent to a dividend" with respect to such Shareholder; (ii)
under Section 302(b)(2) of the Code, (a) such Shareholder's percentage
ownership of the pre-split Shares outstanding after the redemption is less
than 80% of its percentage ownership of the pre-split Shares outstanding
before the redemption, and (b) its percentage ownership of the voting stock of
the Trust outstanding after the redemption is less than 80% of its percentage
ownership of the voting stock outstanding immediately prior to the redemption;
or (iii) under Section 302(b)(3) of the Code, such Shareholder does not own
any Shares of the Trust after the redemption. The IRS has publicly ruled that
a redemption of stock held by a holder of a minimal interest in a publicly-
held corporation would be considered "not essentially equivalent to a
dividend" for purposes of Section 302(b)(1) of the Code if such Shareholder
exercised no control over the
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<PAGE>
affairs and such Shareholder's percentage interest in the corporation were
reduced by any amount as a result of such redemption. Under judicial decisions
and IRS published rulings, the application of these tests takes into account
all transactions which are part of a single overall plan. Thus, a
Shareholder's dispositions or acquisitions of pre-split Shares or post-split
Shares that occur contemporaneously with an exchange pursuant to the Reverse
Split and as part of a single plan with such exchange should be taken into
account in applying the Section 302(b) of the Code tests to that Shareholder.
For purposes of the tests of Section 302(b) of the Code, it is necessary to
take into account not only the pre-split Shares and post-split Shares that a
Shareholder actually owns, but also the pre-split Shares and post-split Shares
that such Shareholder is deemed constructively to own under Section 318 of the
Code. Generally, under Section 318 of the Code, a Shareholder is deemed
constructively to own stock actually owned, and in some cases constructively
owned, by certain related individuals and entities (including corporations in
which the Shareholder has a major interest, partnerships, trusts and estates)
or which such Shareholder or such related individuals or entities may acquire
by exercise of an option, whether or not presently exercisable.
If the exchange of pre-split Shares for post-split Shares pursuant to the
Reverse Split does not qualify as a sale or an exchange under Section 302 of
the Code as to a particular Shareholder, the cash payment will constitute a
distribution to such Shareholder under Section 301 of the Code and will be
taxable as ordinary income to such Shareholder to the extent of the Trust's
current and accumulated earnings and profits.
BACKUP WITHHOLDING
Participating Shareholders may be required to provide certain information to
the transfer agent to avoid 31% "backup withholding" under the Federal income
tax laws upon any cash payable to them. Such information will be incorporated
in the letter of transmittal to be forwarded by the transfer agent.
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR the Reverse Split and the foregoing
proposed amendment.
ELECTION OF TRUSTEES
If all of the preceding proposals are approved, Trustees are to be elected
at the Annual Meeting and reorganized into two Classes: Class I Trustees will
hold office until the next Annual Meeting and until their successors are
elected and qualified and Class II Trustees will hold office until the 1999
Annual Meeting and until their successors are elected and qualified.
Class I will be composed of Messrs. Dishner, Eilian and Kleeman and Ms.
Josephs and Class II will be composed of Messrs. Sternlicht, Sugarman, Matthes
and Youngblood. Following the interim arrangement described above, the
Trustees of each class will serve two year terms, and the term of one class
will expire each year.
TRUSTEES AND NOMINEES
The persons named as proxy holders in the accompanying proxy card have
advised the Trust that they will vote the Shares represented by the proxies
which they hold in favor of the election of the eight nominees named below as
Trustees of the Board, unless and except to the extent that authority to vote
for one or more nominees is withheld in the proxies. In no case will proxies
be voted for a greater number of persons than the number of nominees for
election to the Board. Messrs. Sternlicht, Eilian and Sugarman are presently
Trustees who have been nominated for re-election. Their current terms of
office will expire on the date of the Annual Meeting and when their successors
are elected and qualified. Madison F. Grose, J. D'Arcy Chisholm, Ronald J.
Consiglio and Jack E. McDonald all currently serve as Trustees. Their terms of
office will expire on the date of the Annual Meeting and when their successors
are elected and qualified. If a nominee becomes unavailable to serve as a
Trustee for any reason, the Shares represented by any proxy will be voted for
the person, if any, who may be designated by the Board of Trustees to replace
such nominee. However, the Board of Trustees has no reason to believe that any
nominee will be unavailable to serve as a Trustee if elected.
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<PAGE>
It is a condition precedent to the Contribution that the nominees for
Trustee are elected at the Annual Meeting. In particular, each of Messrs.
Matthes and Youngblood and Ms. Josephs have been approved as nominees to the
Board of Trustees by Starwood Mezzanine and SOFI IV. No other arrangement or
understanding exists between any nominee and any other person or persons
pursuant to which any nominee was or is to be selected as a Trustee or
nominee. On the Contribution Date, the Shareholders Agreement will be amended
and restated and pursuant thereto during any period in which (x) the Class B
Shares remain controlled by Starwood Capital Group LLC or by an entity under
common control with Starwood Capital Group, LLC and (y) the Advisory Agreement
has not been terminated by the Advisor or terminated for cause by the Trust,
the Trust shall use its best efforts to cause five nominees designated by
Starwood Capital Group, LLC or by the parties who control Starwood Capital
Group, LLC to be elected to the Board of Trustees and to cause such persons to
be included as the management slate of nominees to the Board of Trustees.
Further, during such period the Trust has agreed to use its best efforts to
cause such nominees or Trustees to be replaced from time to time, with or
without cause, with new persons designated by Starwood Capital Group, LLC or
the parties who control Starwood Capital Group, LLC at the request of Starwood
Capital Group, LLC or persons who control Starwood Capital Group, LLC.
Finally, each of BLLC, SAHI Partners, Starwood Mezzanine and SOFI IV have
agreed to renominate and to vote all Shares held by each for the election of
Ms. Josephs as a Trustee at the 1998 Annual Meeting of Shareholders. None of
the nominees has any family relationship between them nor with any Trustee or
executive officer of the Trust. However, Messrs. Dishner, Eilian, Grose,
Kleeman and Sugarman are employed by an entity controlled by Mr. Sternlicht.
The following table sets forth the name, age and the position(s) with the
Trust (if any) currently held by each person nominated as a Trustee:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Barry S. Sternlicht....... 37 Chairman and Trustee
Jay Sugarman.............. 35 Chief Executive Officer, President and Trustee
Jeffrey G. Dishner........ 33 Trustee
Jonathan D. Eilian........ 30 Trustee
Merrick R. Kleeman........ 34 Trustee
Robin Josephs............. 37 Trustee
William Matthes........... 37 Trustee
Kneeland Youngblood....... 42 Trustee
</TABLE>
Jeffrey G. Dishner has been nominated as a Trustee. Mr. Dishner has been a
Senior Vice President of Starwood Capital LLC since September 1994. From 1993
through September 1994, Mr. Dishner was employed by the commercial mortgage
finance group of J.P. Morgan & Co. Mr. Dishner obtained his M.B.A. during 1991
and 1992 and was employed by JMB Realty Corporation from 1987 through 1991.
Mr. Dishner received a B.A. degree from the Wharton School of Finance at the
University of Pennsylvania and an M.B.A. from the Amos Tuck School at
Dartmouth College.
Jonathan D. Eilian was elected a Trustee of the Trust in March 1997. Mr.
Eilian has been a Managing Director of Starwood Capital LLC since its
formation in September, 1991. Prior to being a founding member of Starwood
Capital LLC, Mr. Eilian served as an Associate for JMB Realty Corporation, a
real estate investment firm, and for The Palmer Group, L.P., a private
investment firm specializing in corporate acquisitions.
Merrick R. Kleeman has been nominated as a Trustee. Mr. Kleeman is a
Managing Director of Starwood Capital Group, LLC. Prior to joining Starwood in
August 1992, Mr. Kleeman was employed by the investment banking division of
Merrill Lynch and by Coastal Management and Consultant, Inc., a real estate
investment company. Mr. Kleeman received a B.A. degree in biology from
Dartmouth College and an M.B.A. from the Harvard Business School where he was
a Baker Scholar.
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<PAGE>
Robin Josephs has been nominated as a Trustee. Ms. Josephs currently advises
real estate ventures. Ms. Josephs served as a Vice President at Goldman Sachs
from 1986 to 1996 in various capacities. Prior to working at Goldman, Ms.
Josephs served as an analyst for Booz Allen & Hamilton in New York from 1982
to 1984. Ms. Josephs received a bachelor's degree from the Wharton School at
the University of Pennsylvania in 1982 and an M.B.A. from Columbia University
in 1986.
William M. Matthes has been nominated as a Trustee. Since April 1996, Mr.
Matthes has been a partner of Behrman Capital, a New York and San Francisco
based private equity investment fund with in excess of $600 million of equity
capital under management. From July 1994 to April 1996, Mr. Matthes was
employed as Senior Vice President and Chief Operating Officer of Holsted
Marketing, Inc., a credit card based direct marketing company. Mr. Matthes was
a general partner of Brentwood Associates, a private equity investment firm
from 1986 to July 1994 and previously was employed as an analyst at Morgan
Stanley & Co., Inc. Mr. Matthes is a director of Condor Systems, Inc., Behrman
TMNG, Inc., Holsted Marketing, Inc. and Holsted, Inc.
Kneeland C. Youngblood has been nominated as a Trustee. Mr. Youngblood is a
Director of the United States Enrichment Corporation, an independently run
government-owned nuclear fuel corporation scheduled for privatization in 1998.
He is also a fiduciary trustee for the $65 billion Teacher Retirement System
of Texas ("TRS"), in which capacity he has responsibility for hiring
investment advisors, determining asset allocations and formulating
investment/benefit policies. As Chairman of the fund's Real Estate Committee,
he has directed a major restructuring of the TRS portfolio, which has assets
of $1.4 billion, and is responsible for considering and approving significant
transactions within the portfolio. Mr. Youngblood is a Director of AMR
investments, a $15 billion investment fund and a division of American
Airlines. He is currently involved in private investment and consulting and is
a member of the Council on Foreign Relations.
The following individuals are Trustees whose term expires at the Annual
Meeting.
Madison F. Grose was elected as a Trustee of the Trust in September 1996 and
as Secretary of the Trust in March 1997. Mr. Grose has been Managing Director
of Starwood Capital LLC and General Counsel of Starwood Capital LLC since July
1992. Mr. Grose is a member of the Board of Trustees of Starwood Hotels &
Resorts Trust. From November 1983 through June 1992, Mr. Grose was a partner
in the law firm of Pircher, Nichols & Meeks.
J. D'Arcy Chisholm has been a Trustee of the Trust since September 1989 and
is currently a member of the Audit and Compensation Committee. He has been a
consultant to real estate, business and educational entities. Mr. Chisholm has
been a trustee of Angeles Mortgage Investment Trust ("AMIT") since 1989. 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
an associate director from 1986 until 1989. Mr. Chisholm was President of
Capital Real Estate Management Co. (the predecessor to the Angeles family of
companies from 1973 to 1980.) He was also President of Capital Real Estate
Programs during the same period. Previously he was associated with the
following real estate companies: Del E. Webb Corp.; Real Estate Research
Corporation and Milton Meyer & Co. Mr. Chisholm holds a B.A. degree from the
University of Notre Dame and is a graduate of the Executive Program at UCLA's
Graduate School of Business.
Ronald J. Consiglio has been a Trustee since April 1988 and served as the
Chairman, Chief Executive Officer and President of the Trust from May 1993 to
September 1996 and as Secretary from September 1996 until March 1997. Mr.
Consiglio has been the Chief Executive Officer and President of AMIT since
1993. 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
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<PAGE>
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. Mr.
Consiglio is a certified public accountant and was a partner in Deloitte
Haskins & Sells from 1977 to June 1984.
Jack E. McDonald has been a Trustee of the Trust 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 Committee.
He has been Chief Executive Officer and a director of JEM Diversified
Management Company, Inc., a Los Angeles-based business consulting firm since
1992. Mr. McDonald was a trustee of AMIT from April 1988 to May 1995. Mr.
McDonald is a certified public accountant, certified financial planner and tax
and business consultant and received his B.S. degree in accounting from Cal
Poly University--Pomona in 1969. Mr. McDonald served in the tax department of
Ernst & Ernst for five years before forming a certified public accounting firm
that specialized in real estate in 1974. Mr. McDonald is a founder and former
director of a California savings and loan association and past Chapter
President of the National Association of Accountants. He is an active member
of the American Institute of Certified Public Accountants and California
Society of Certified Public Accountants.
INFORMATION REGARDING THE BOARD OF TRUSTEES AND ITS COMMITTEES
Audit Committee and Compensation Committee. The Board of Trustees has
delegated a portion of its authority to an Audit and Compensation Committee.
This Committee makes recommendations to the Board of Trustees concerning the
selection of the Trust's independent auditors, oversees the financial
reporting process, develops and approves plans for the annual duties of the
Trustees, 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 Audit and
Compensation Committee is kept apprised by management of the Trust's internal
control procedures. Additionally, the Audit and Compensation Committee reviews
and monitors non-audit services provided by the independent auditors and
oversees, reviews and approves the compensation of the Trustees and officers
of the Trust. Messrs. Chisholm and McDonald currently serve on the Audit and
Compensation Committee with Mr. McDonald serving as Chairman.
Board of Trustees and Committee Meetings. During the fiscal year ending
December 31, 1996, the Board of Trustees held one regular meeting, at which
all of the Trustees participated. There were no meetings of the Audit and
Compensation Committee during 1996.
EXECUTIVE OFFICERS
The following information relates to the executive officers of the Trust who
are not Trustees and are not nominated as Trustees. Each of the officers
serves at the pleasure of the Board of Trustees and is customarily appointed
as an officer at the annual meeting of the Board of Trustees held following
each Annual Meeting of Shareholders.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Jerome C. Silvey................................. 39 Chief Financial Officer
</TABLE>
Jerome C. Silvey was elected as Chief Financial Officer of the Trust in
September 1996. Mr. Silvey has been a Senior Vice President and the Chief
Financial Officer of Starwood Capital LLC since August 1993 after 13 years at
Price Waterhouse LLP. Mr. Silvey has overall responsibilities for Starwood
Capital LLC's administration, MIS and finance. Mr. Silvey is a graduate of
Colgate University and received his M.B.A. from Rutgers Graduate School of
Management in 1980. He is a certified public accountant and a director of the
Stamford Museum.
EXECUTIVE OFFICERS' COMPENSATION
For the year ended December 31, 1996, Mr. Consiglio received a total of
$30,000 for services as President and Chief Executive Officer of the Trust and
an additional $12,000 for serving on the Board of Trustees. Mr. Sternlicht
received no compensation for his services as a Chief Executive Officer of the
Trust during 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. No other executive officer of the
Trust received compensation from the Trust during the year ended December 31,
1996.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1)
- --------------------------- -------- ----------- ---------------
<S> <C> <C> <C>
Barry S. Sternlicht, Chief Executive Of-
ficer(2)................................ 1996 $ 0 $ 9,000
1995 $ 0 $12,000
1994 $ 0 $ 9,750
Ronald J. Consiglio, Chief Executive Of-
ficer................................... 1996 $ 30,000 $12,000
1995 $ 31,500 $12,000
1994 $ 41,850 $12,000
</TABLE>
- --------
(1) Represents Trustees Fees.
(2) Mr. Sternlicht resigned as Chief Executive Officer in November 1997. Mr.
Sugarman was elected Chief Executive Officer of the Trust in November 1997
and received no compensation from the Trust in 1994, 1995 or 1996.
AUDIT AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Audit and Compensation Committee's compensation policy is to set
salaries at levels the Audit and Compensation Committee believes will attract,
retain and motivate highly competent individuals. Additionally, the Audit and
Compensation Committee generally seeks to create a commonality of interest
between the executives and the Shareholders by linking the executive's total
compensation to the performance of the Trust. The Audit and Compensation
Committee did not meet during 1996 and Mr. Consiglio was compensated at the
same rate as set by the Audit and Compensation Committee in 1995. In
determining the salary of Mr. Consiglio, the Audit and Compensation Committee
primarily considered the responsibilities of Mr. Consiglio as the Chief
Executive Officer and President of the Board of Trustees of the Trust, which
were limited as a result of the lack of business conducted by the Trust prior
to September 1996. Mr. Sternlicht was not compensated as Chief Executive
Officer in 1996 and neither Mr. Sternlicht nor Mr. Sugarman will receive any
compensation from the Trust in 1997.
The Audit and Compensation Committee currently intends for all compensation
paid to the Trust's executive officers to be tax deductible to the Trust
pursuant to Section 162(m) of the Code ("Section 162(m)"). Section 162(m)
provides that compensation paid to executive officers in excess of $1,000,000
cannot be deducted by the Trust for federal income tax purposes unless, in
general, such compensation is performance based, is established by an
independent committee of directors, is objective and the plan or agreement
providing for such performance based compensation has been approved in advance
by the Shareholders. In the future, however, if, in the judgment of the Audit
and Compensation Committee, the benefits to the Trust of a compensation
program that does not satisfy the arbitrary and inflexible conditions of
Section 162(m) outweigh the costs to the Trust of failure to satisfy these
conditions, the Audit and Compensation Committee may adopt such a program.
Jack E. McDonald (Chairman)
J. D'Arcy Chisholm
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Audit and Compensation Committee oversees, reviews and approves the
compensation of the Trustees and officers of the Trust. Currently, Messrs.
Chisholm and McDonald serve on the Audit and Compensation Committee, with Mr.
McDonald serving as Chairman. Mr. McDonald was Chief Financial Officer of the
Trust from May 1993 to December 1995. See "ELECTION OF TRUSTEES--Information
Regarding Board of Trustees and Its Committees."
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<PAGE>
TRUSTEES' COMPENSATION
Each Trustee who is not also an officer of the Trust, currently receives a
fee of $12,000 per year, which is paid quarterly. This fee will be increased
to $20,000 per year on the Contribution Date. 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 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 the Trust. The unaffiliated
Trustees will also receive an additional $20,000 in 1997. The Trustees who are
affiliated with the Trust, including the Starwood Trustees, do not receive any
compensation from the Trust.
Currently, as of the date of each Annual Meeting of Shareholders at which
the Trustee is reelected, each Trustee of the Trust who is not also an officer
or employee of the Trust or an affiliate (a "Non-Employee Trustee") and who
was elected on September 26, 1996, receives an option to purchase 1,000 Class
A Shares. A Non-Employee Trustee who is appointed or elected after September
26, 1996 receives an Option to purchase 1,000 Class A Shares as of the date of
his or her initial appointment or election, and receives an Option to purchase
an additional 1,000 Class A Shares on each anniversary of the initial grant
date provided that the individual is a Non-Employee Trustee on such date. The
purchase price of each Class A Share under the Option is the fair market value
of a Class A Share on the date of grant, and such Options are fully vested and
immediately exercisable. The Trustee Plan provides that Options expire on the
earliest of (i) ten years after the grant date, (ii) the first anniversary of
the Non-Employee Trustee's termination of service because of death or
disability, (iii) three months after the Non-Employee Trustee's involuntary
termination of service for reasons other than death, disability or cause, and
(iv) the date that the Non-Employee Trustee's service on the Board voluntary
terminates or is terminated for cause.
If approved by the Shareholders, the Incentive Plan will also provide an
automatic grant of Options to Non-Employee Trustees. Generally, under the
Incentive Plan each individual who is first elected or continuing as a Non-
Employee Trustee as of the close of the Annual Meeting of Shareholders will
receive an Option to purchase 10,000 Class A Shares. Each individual who is
first elected or appointed as a Non-Employee Trustee on a date other than the
date of an Annual Meeting of Shareholders, shall be granted an Option to
purchase 10,000 Class A Shares, reduced to reflect the portion of the period
elapsed since the last grant to Trustees. The exercise price of the shares
subject to the Option shall be the fair market value of a Class A Share on the
grant date. Such Options shall be fully vested and expire ten years after the
grant date, without regard to whether the Trustee ceases to be a member of the
Board of Trustees prior to such date. The Non-Employee Trustees received an
Option to purchase 2,000 Class A Shares at an exercise price of $2.50 per
share on October 24, 1997.
The Trust and each of its Trustees and executive officers have entered into
indemnification agreements. The indemnification agreements provide that the
Trust will indemnify the Trustees and the executive officers to the fullest
extent permitted by the law against certain liabilities (including
settlements) and expenses actually and reasonably incurred by them in
connection with any threatened or pending legal action, proceeding or
investigation to which any of them is, or is threatened to be, made a party by
reason of their status as a Trustee, officer or agent of the Trust, or serving
at the request of the Trust in any other capacity for or on behalf of the
Trust; provided that such Trustee or executive officer acted in a manner
determined in good faith to be within the scope of his authority and to be in
the best interest of the Trust and so long as the Trustee or executive officer
was not guilty of gross negligence, misconduct or a breach of his fiduciary
obligations in the act or failure to act. The Trust will not indemnify the
Trustees and executive officers to the extent prohibited by the Declaration of
Trust. If the amendment to the Declaration of Trust with respect to removal of
limitations on indemnification are approved, the indemnification agreements
will be amended accordingly. The Trust is not required to indemnify any
Trustee or executive officer for liabilities (i) for which he receives payment
under an insurance policy, except for the excess beyond payment under such
insurance, or which could have been claimed under an expired insurance policy,
(ii) based upon or attributable to his gaining in fact any personal profit or
advantage to which he was not legally entitled, (iii) resulting from an
accounting of profits under Section 16(b)
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<PAGE>
of the Exchange Act or (iv) brought about or contributed to by his dishonesty,
willful misconduct on bad faith except to the extent permitted by law unless a
judgment or other final adjudication adverse to the Trustee or executive
officer establishes that he was guilty of the claimed conduct and that the
conduct was material to the course of action so adjudicated. In addition, the
Trust has obtained trustee and officer insurance for the Trustees and
executive officers of the Trust.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 15, 1994, the Trust entered into an agreement with SAHI Partners
and SAHI, Inc. for the sale of the Warrants. SAHI Partners 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 Partners in March 1996. Each of Messrs. Sternlicht, Dishner,
Eilian, Kleeman, Grose, Silvey and Sugarman are affiliated with SAHI Partners,
SAHI, Inc. and Starwood Mezzanine. As of December 31, 1997, SAHI Partners,
SAHI, Inc. and Starwood Mezzanine jointly owned 69.46% of the outstanding
Class A Shares and 100% of the outstanding Class B Shares, on an aggregate
basis, such shareholders control 79.64% of the voting interest of the Trust
and, upon exchange of the Units for Class A Shares and consummation of the
Contribution, would own 99.5% of the voting interest of the Trust.
On September 26, 1996, the Trust 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 Units. Starwood Mezzanine became the
sole limited partner and received a 91.95% interest in the Partnership by
contributing to the Partnership its entire interest in the Warwick
Certificates, valued by the Trust at approximately $4.6 million as of
September 30, 1996. Starwood Mezzanine's interest in the Partnership evidenced
by 4,568,944 Units, which are exchangeable into cash, Class A Shares, or a
combination of the two as determined by the Trust pursuant to an exchange
rights agreement with the Trust. In addition, Starwood Mezzanine has the right
to require the Trust to register for public sale any or all of the Class A
Shares issued to it upon the exercise of the Class A Warrant or upon exchange
of the Units issued to Starwood Mezzanine. The Units are exchangeable into
cash or Class A Shares of the Trust 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 and SAHI, Inc. exercised its
rights under the Class B Warrant to acquire 2,500,000 Class B Shares.
On October 24, the Board of Trustees granted an option to purchase 2,000
Class A Shares at an exercise price of $2.50 per share to each of the
Independent Trustees.
If the Proposals are approved by the Shareholders, the Trust will enter into
the transactions described in this Proxy Statement, including the Contribution
Agreement, the Advisory Agreement and the Incentive Plan. In addition, the
Trust will grant Options to purchase 14,963,057 Class A Shares to the Advisor
with an exercise price of $2.50 per share on the Contribution Date. See
"CONTRIBUTION PROPOSAL," "ADVISORY AGREEMENT PROPOSAL," "TRUST AMENDMENTS
PROPOSAL" and "INCENTIVE PLAN PROPOSAL."
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PERFORMANCE GRAPH
The following graph compares the total cumulative shareholder return on the
Class A Shares from December 31, 1991 to December 31, 1996 to that of the (a)
Standard & Poor's 500 Index, and (b) NAREIT Mortgage REIT Total Return Index,
an index that included 20 companies with a market capitalization of $4.8
billion.
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
The Trust............... $100.00 $118.18 $117.59 $ 66.14 $ 58.79 $205.78
S&P's 500............... $100.00 $107.67 $118.43 $119.97 164.88 $202.74
Mortgage REITs.......... $100.00 $101.92 $116.75 $ 88.37 $144.42 $217.88
</TABLE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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: 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: 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 the Trust.
RECOMMENDATION REGARDING THE BOARD ELECTION PROPOSAL
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR the eight named nominees to be elected
as the Trustees of the Trust.
83
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information as of January 21, 1998 with
respect to any Class A Shares owned by the Trustees and individual
Shareholders known to be the beneficial owner of more than five percent (5%)
of the issued and outstanding Class A Shares. There are no other Trustees,
nominees for Trustee or officers of the Trust who beneficially own either
Class A Shares or Class B Shares.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
OWNERSHIP OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER (1) CLASS
-------------- ------------------------ ---------- -------
<C> <S> <C> <C>
Class A Shares Starwood Mezzanine Investors,
L.P.(2).............................. 9,568,944(3) 79.0 %
Class A Shares Starwood Mezzanine Holdings, L.P.(2).. 9,568,944(4) 79.0 %
Class A Shares Starwood Capital Group I, L.P.(2)..... 9,568,944(4) 79.0 %
Class A Shares BSS Capital Partners, L.P.(2)......... 9,568,944(4) 79.0 %
Class A Shares Sternlicht Holdings II, Inc.(2)....... 9,568,944(4) 79.0 %
Class A Shares SAHI Partners(2)...................... 270,120(5) 3.6 %
Class A Shares SAHI, Inc.(2)......................... 321,140(6) 4.2 %
Class A Shares J. D'Arcy Chisholm, 340 N. Westlake
Blvd.,
Suite 230, Westlake Village, CA
91362................................ 3,773(7) (13)
Class A Shares Barry Sternlicht(2)................... 9,936,706(8) 81.2 %
Class A Shares Ronald J. Consiglio, 340 N. Westlake
Boulevard,
Suite 230, Westlake Village, CA
91362................................ 8,500(7) (13)
Class A Shares Jack McDonald, 2315 Pier Avenue,
Santa Monica, CA 90405............... 3,000(7) (13)
Class A Shares SWL Acquisition Partners, L.P.(2)..... 270,120(9) 3.6 %
Class A Shares SWL Mortgage Investors, Inc.(2)....... 270,120(9) 3.6 %
Class B Shares SAHI, Partners(2)..................... 1,275,000(10) 33.8 %
Class B Shares Barry Sternlicht(2)................... 6,059,471(11) 100 %
Class B Shares SAHI , Inc.(2)........................ 3,775,000(12) 100 %
Class B Shares SWL Acquisition Partners, L.P.(2)..... 1,275,000(9) 33.8 %
Class B Shares SWL Mortgage Investors, Inc.(2)....... 1,275,000(9) 33.8 %
Class A Shares All Executive Officers, Trustees and
nominees for Trustee as a group (9
persons)............................. 9,951,979 81.2 %
Class B Shares All Executive Officers, Trustees and
nominees for Trustee as a group (9
persons)............................. 6,059,471 100 %
</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) Three Pickwick Plaza, Suite 250, Greenwich, CT 06830
(3) Represents 5,000,000 Class A Shares owned directly and 4,568,944 Class A
Shares issuable upon exchange of Units.
(4) Sternlicht Holdings II, Inc. is the general partner of BSS Capital
Partners, L.P., 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 Mezzanine Holdings, L.P., which is the other general
partner of Starwood Mezzanine.
84
<PAGE>
(5) Represents 244,100 Class A Shares held directly and 26,020 Class A Shares
issuable upon conversion of 1,275,000 Class B Shares. If all of the Units
held by Starwood Mezzanine were exchanged for Class A Shares, SAHI, Inc.
would be issued 1,512,892 Class B Shares that would be convertible into
30,875 Class A Shares and SAHI Partners would be issued 771,580 Class B
Shares that would be convertible into 15,747 Class A Shares.
(6) Represents 51,020 Class A Shares issuable upon conversion of 2,500,000
Class B Shares and the 270,120 Class A Shares beneficially owned by SAHI
Partners, of which SAHI, Inc. is a general partner. If all of the Units
held by Starwood Mezzanine were exchanged for Class A Shares, SAHI, Inc.
would be issued 1,512,892 Class B Shares that would be convertible into
30,875 Class A Shares and SAHI Partners would be issued 771,580 Class B
Shares that would be convertible into 15,747 Class A Shares.
(7) Includes 3,000 Class A Shares issuable upon exercise of outstanding
options.
(8) Represents 9,568,944 Class A Shares beneficially owned by Sternlicht
Holdings II, Inc., of which Mr. Sternlicht is a 100% owner, 321,140 Class
A Shares beneficially owned by SAHI, Inc., of which Mr. Sternlicht is a
controlling shareholder, 30,985 Class A Shares beneficially owned upon
the conversion of 1,518,892 Class B Shares issued to SAHI, Inc., and
15,747 Class A Shares beneficially owned upon the conversion of 771,580
Class B Shares issued to SAHI Partners, in each case upon the exchange by
Starwood Mezzanine of Units for Class A Shares.
(9) SWL Mortgage Investors, Inc. is the general partner of SWL Acquisition
Partners, L.P., which is a general partner of SAHI Partners.
(10) If all of the Units held by Starwood Mezzanine were exchanged for Class A
Shares, SAHI, Inc. would be issued 1,512,892 Class B Shares that would be
convertible into 30,875 Class A Shares and SAHI Partners would be issued
771,580 Class B Shares that would be convertible into 15,747 Class A
Shares.
(11) Represents 3,725,000 Class B Shares beneficially owned by SAHI, Inc., of
which Mr. Sternlicht is a controlling shareholder, 1,512,892 Class B
Shares issuable to SAHI, Inc. upon conversion of the Units held by
Starwood Mezzanine, and 771,580 Class B Shares issuable to SAHI Partners
upon conversion of the Units held by Starwood Mezzanine. If all of the
Units held by Starwood Mezzanine were exchanged for Class A Shares, SAHI,
Inc. would be issued 1,512,892 Class B Shares that would be convertible
into 30,875 Class A Shares and SAHI Partners would be issued 771,580
Class B Shares that would be convertible into 15,747 Class A Shares.
(12) Represents 2,500,000 Class B Shares held by SAHI, Inc., and 1,275,000
Class B Shares held by SAHI Partners of which SAHI, Inc. is a general
partner.
(13) Less than 1% of the class outstanding.
85
<PAGE>
MARKET FOR THE TRUST'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
The Trust had approximately 1,832 Class A Shareholders as of January 21,
1998. The Class A Shares are traded on AMEX 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 the Trust's
Class A Shares for the quarters ended 1997, 1996 and 1995.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Quarter ended:
December 31, 1997........................................... 6 3/8 3 5/8
September 30, 1997.......................................... 4 1/2 2 1/4
June 30, 1997............................................... 3 1/4 2 1/2
March 31, 1997.............................................. 4 1 9/16
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
</TABLE>
On February 6, 1998, the last sale price of the Class A Shares as reported
by AMEX was $5.25.
The Trust has not declared any cash dividends on the Class A or Class B
Shares during the past two fiscal years or since January 1, 1997. No
assurances can be made as to the declaration of, or if declared, the amount
of, future distributions since such distributions are subject to the Trust'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 Code that a REIT must distribute at least 95% of its taxable income.
86
<PAGE>
INCENTIVE PLAN PROPOSAL
If the Contribution Proposal, the Advisory Agreement Proposal, the Trust
Amendments Proposals and the named nominees are elected to the Board of
Trustees, the Board will ask the Shareholders to consider and vote upon a
proposal to approve the Incentive Plan.
GENERAL
The Board of Trustees is proposing for approval by Shareholders the
amendment and restatement of the existing Angeles Participating Mortgage Trust
1996 Share Incentive Plan and the Angeles Participating Mortgage Trust 1996
Trustees Share Incentive Plan (the "Trustee Plan") as one plan to be known as
the Starwood Financial Trust 1996 Long Term Incentive Plan. Reference is made
to Exhibit G to this Proxy Statement for the complete text of the form of the
Incentive Plan which is summarized below and which is to be adopted in
substantially such form on the Contribution Date.
The purpose of the Incentive Plan is (i) to align the interests of the
Shareholders and recipients of Options, restricted share awards and
performance awards (collectively, "Awards") under such Incentive Plan by
increasing the proprietary interest of such recipients in the growth and
success of the Trust and (ii) to advance the interests of the Trust by
attracting and retaining officers, key employees, Trustees, consultants and
advisers. Share options, restricted share awards and performance awards may be
granted under the Incentive Plan.
DESCRIPTION OF THE PLAN
Administration. The Incentive Plan may be administered by the Board of
Trustees or by a committee of the Board of Trustees (the "Administrator")
consisting of two or more Trustees who, at the election of the Board of
Trustees, are both "outside trustees" within the meaning of Section 162(m) of
the Code and "non-employee trustees" within the meaning of Rule 16b-3 issued
under the Exchange Act. At any time that the Board of Trustees has not
appointed a committee, the full Board of Trustees shall act as the committee
under the Incentive Plan.
Subject to the express provisions of the Incentive Plan and the Shareholders
Agreement, the Administrator will have the authority to select eligible
officers, key employees, consultants and advisers who will receive Awards and
determine all of the terms and conditions of each Award. Each Award will be
evidenced by a written agreement containing such provisions not inconsistent
with the Incentive Plan as the Administrator shall approve. The Administrator
will also have authority to establish rules and regulations for administering
the Incentive Plan and to decide questions of interpretation or application of
any provision of such Incentive Plan. Subject to certain restrictions, the
Administrator may delegate certain power and authority to administer the
Incentive Plan to the Chief Executive Officer, Chief Operating Officer or
other executive officer of the Trust; provided, however that there are some
powers that may not be delegated by the Administrator such as the grant of an
Award to any person who is a "covered employee" within the meaning of Section
162(m) of the Code where the compensation payable pursuant to such an Award is
intended to be qualified performance-based compensation or the selection for
participation in the plan of any person subject to Section 16 of the Exchange
Act or certain decisions regarding the grant of an Award to such person.
Plan Benefits. The following table reflects the awards of Options to Non-
Employee Trustees under the Trustee Plan. No Options have been granted to Non-
Employee Trustees under the Incentive Plan. The Administrator will grant
immediately exercisable Options to purchase 14,963,057 Class A Shares to the
Advisor with an exercise price of $2.50 per Share on the Contribution Date.
The Advisor intends to enter into comparable agreements with its employees
from time to time. Such agreements may contain vesting requirements and other
contingencies or terms. Approximately 25 officers, key employees, Trustees,
consultants and other advisors are eligible for participation in the Incentive
Plan although it is not anticipated that all eligible individuals will
actually receive Awards under the Incentive Plan. The Administrator has not
made a determination with respect to which of the eligible individuals, if
any, will be granted discretionary Awards under the Incentive Plan. The Trust
is currently prohibited from granting Awards to certain individuals pursuant
to the Shareholders Agreement. See "CONTRIBUTION PROPOSAL--Shareholders
Agreement."
87
<PAGE>
<TABLE>
<CAPTION>
OPTION AWARDS
-------------------
SHARES UNDERLYING
NAME OPTIONS GRANTED (#)
---- -------------------
<S> <C>
Non-Employee Trustees as a group......................... 9,000
</TABLE>
Available Shares. A maximum of 29,926,114 Class A Shares have been reserved
for the issuance of Awards under the Incentive Plan, of which 14,954,057 Class
A Shares remain available for Awards. In the event the number of outstanding
Class A Shares on a fully diluted basis increases after the date the Incentive
Plan is approved by the Shareholders, the maximum number of Class A Shares
reserved for Awards other than Incentive Options under the Incentive Plan will
be adjusted automatically so that the maximum number equals 9.0% of the
outstanding Class A Shares on a fully-diluted basis. The maximum number of
Class A Shares available for grants of Awards to any one individual other than
the Advisor in any calendar year is 8,000,000 Class A Shares. The number of
Class A Shares available for Awards, and the terms of any outstanding Awards,
may be adjusted in the discretion of the Administrator to reflect any stock
split, stock dividend, recapitalization, reorganization, merger,
consolidation, combination, exchange of shares, liquidation, spin off or other
similar change in capitalization of the Trust.
Amendment and Termination. The Board of Trustees may amend or terminate the
Incentive Plan at any time, subject to Shareholder approval if required by
applicable law, rule or regulation, and provided that no amendment may be made
without Shareholder approval if such amendment would, among other things, (i)
change the persons eligible to participate in such Incentive Plan or (ii)
change the maximum number of Class A Shares available under such Incentive
Plan. No amendment to the Incentive Plan may impair the rights of a holder of
an outstanding award without the consent of such holder.
Share Options--General. An Option awarded under the Incentive Plan grants
the recipient thereof the right to purchase a specified number of Class A
Shares at a specified price. The Administrator will determine conditions
relating to the exercisability of the Option and may include such other terms
and conditions as it deems desirable. Upon exercise of an Option, the purchase
price may be paid in cash, by delivery of previously owned Class A Shares or
by a combination thereof. Options granted under the Incentive Plan may be
either "Incentive Options" which are intended to satisfy section 422 of the
Code or "Non-qualified Options" which are not intended to satisfy such Code
section.
Non-Qualified Options. The number of Class A Shares subject to a Non-
qualified Option, the vesting period for a Non-qualified Option, the exercise
price per Class A Share and the period for the exercise of a Non-qualified
Option will be determined by the Administrator.
In the event of a termination of employment or service by reason of death or
disability, each Non-qualified Option will become fully vested and will be
exercisable for a period of not more than one year after the date of such
termination, but in no event after the expiration of such Option. In the event
of a termination of employment or service for "Cause" (which is defined as
embezzlement or misappropriation of funds or other assets, other acts of
dishonesty, significant activities harmful to the reputation of the Trust,
willful refusal to perform or substantial disregard of the duties properly
assigned to the holder (other than as a result of disability), significant
violation of any statutory or common law duty of loyalty to the Trust or a
material breach by the holder of the holder's employment agreement, if any),
each Non-qualified Option will terminate on the effective date of such
optionee's termination of employment or service. In the event of a termination
of employment or service for any other reason, unless otherwise set forth in
the agreement relating to an option, each Non-qualified Option to the extent
vested on that date may thereafter be exercised for a period of not more than
three months after the date of such optionee's termination of employment or
service but in no event after the expiration of such Option. If a holder dies
during the one-year period following termination of employment or service by
reason of disability, or if the holder dies during the three-month period
following termination of employment or service for any other reason (other
than Cause), each Non-qualified Option may thereafter be exercised for a
period of three months after the date of death (except in the case of
termination of employment or service by reason of disability, for one year
after the date of death) but in no event after the expiration of such Option.
88
<PAGE>
Incentive Options. The number of Class A Shares subject to an Incentive
Option, the vesting period for an Incentive Option, the exercise price per
Share and the period for the exercise of an Incentive Option will be
determined by the Administrator; provided that no Incentive Option will be
exercisable more than ten years after its date of grant, unless the recipient
of the Incentive Option owns greater than ten percent of the voting power of
all shares of capital stock of the Trust (a "ten percent holder"), in which
case the Incentive Option will be exercisable for no more than five years
after its date of grant; and provided further that the exercise price of an
Incentive Option will not be less than 100% of the fair market value of the
Class A Shares on the date of grant of such Option, unless the recipient of
the Incentive Option is a ten percent holder, in which case the exercise price
will be the price required by the Code, currently 110% of fair market value.
In the event of a termination of employment by reason of death or permanent
and total disability (as defined in Section 22(e)(3) of the Code), Incentive
Options will become fully exercisable may thereafter be exercised for a period
of no more than one year after such termination, but in no event after the
expiration of the Incentive Option. In the event of a termination of
employment for Cause, each Incentive Option will terminate on the date of such
termination. In the event of a termination of employment for any other reason,
unless otherwise set forth in the agreement relating to an option, each
Incentive Option will be exercisable to the extent vested on the date of
termination for a period of three months after such termination, but in no
event after the expiration of such Incentive Option. If the holder of an
Incentive Option dies during the one-year period following termination of
employment by reason of permanent and total disability or during the three-
month period following termination of employment for any other reason (other
than for Cause), each Incentive Option will be vested to the extent that such
Incentive Option was exercisable on the date of the holder's death, and may
thereafter be exercised for a period of three months from the date of death,
but in no event after the expiration of such Incentive Option.
Share Awards. The Administrator will determine the conditions, if any, to
which an Award of Class A Shares shall be subject. The terms of each such
Award, including whether the Award is subject to a restriction period and/or
performance measures (a "Restricted Share Award") will be set forth in the
agreement relating to such Award. Unless otherwise set forth in the agreement
relating to a Restricted Share Award, the holder of such award shall have all
rights of a Shareholder, including but not limited to, voting rights, the
right to receive dividends and the right to participate in any capital
adjustment applicable to all holders of Class A Shares.
Unless otherwise set forth in the agreement relating to a Restricted Share
Award, in the event of termination of employment or service by reason of death
or disability, the restriction period terminates and the performance measures,
if any, are to be computed through the date of such termination. Unless
otherwise set forth in the agreement relating to a Restricted Share Award, in
the event of termination of employment or service for any reason other than
death or disability, the portion of such Award that is subject to a
restriction period or performance measure on the date of such termination
shall be forfeited.
Performance Awards. The Administrator will determine the terms and
conditions, if any, to which an award of a right, contingent upon the
attainment of specified performance measures within a specified performance
period, to receive a payment in cash (a "Performance Award") shall be subject.
Performance Awards may be granted in tandem with Options concurrently or
previously granted under the Incentive Plan and will apply to all or such
portion of the Class A Shares subject to such Options as designated by the
Administrator. The performance period and performance measure applicable to
any Performance Award will be designated by the Administrator.
Unless otherwise set forth in the agreement relating to a Performance Award,
in the event of termination of employment or service by reason of death or
disability, then the performance period will be deemed to expire on the date
of such termination and the performance measures will be computed for the
performance period through such date and the Performance Award settled as and,
if applicable, when the tandem Options are exercised if the performance
measures for such shortened performance period have been satisfied. Unless
otherwise set forth in the agreement relating to a Performance Award, in the
event of termination of employment or service for any reason other than death
or disability, then the Performance Award shall be immediately forfeited and
canceled.
89
<PAGE>
Change of Control. In the event of a change of control of the Trust (which
includes the acquisition by a person of 51% or more of the then outstanding
Class A Shares; a change in the composition of a majority of the members of
the Board of Trustees of the Trust from that in effect on the Contribution
Date, unless such change is with the approval of the majority of the then
existing Board of Trustees and is not in connection with a material
transaction affecting the Trust; consummation of a reorganization, merger or
consolidation, sale or other similar corporate transaction; or approval by the
shareholders of the Trust of a plan of complete liquidation or dissolution (a
"Change of Control")), all Options will immediately become fully exercisable
for their remaining term and Restricted Share Awards under the Incentive Plans
will immediately vest in full. In addition, in the event of a Change of
Control, the performance period for Performance Awards will expire and the
performance measures will be computed through the date of such Change of
Control and the applicable Performance Award will be settled on the date of
such Change in Control or, if later, upon exercise of any tandem Options.
Trustee Options. Under the Trustee Plan, as of the effective date of the
Trustee Plan, and as of the date of each Annual Meeting of Shareholders at
which the Trustee is reelected thereafter, each Non-Employee Trustee receives
an option to purchase 1,000 Class A Shares. A Non-Employee Trustee who is
appointed or elected after the effective date of the Trustee Plan, receives an
Option to purchase 1,000 Class A Shares as of the date of his or her initial
appointment or election, and receives an Option to purchase an additional
1,000 Class A Shares on each anniversary of the initial grant date, provided
that the individual is a Non-Employee Trustee on such date. The purchase price
of each Class A Share under the Option is the fair market value of a Class A
Share on the date of grant, and such Options are fully vested and immediately
exercisable. The Trustee Plan provides that Options expire on the earliest of
(i) ten years after the grant date, (ii) the first anniversary of the Non-
Employee Trustee's termination of service because of death or disability,
(iii) three months after the Non-Employee Trustees' involuntary termination of
service for reasons other than death, disability or cause, and (iv) the date
that the Non-Employee Trustee's service on the Board voluntary terminates or
is terminated for cause.
If approved by the Shareholders, the Incentive Plan will also provide an
automatic grant of Options to Non-Employee Trustees. Generally, under the
Incentive Plan each individual who is first elected or continuing as a Non-
Employee Trustee as of the close of the Annual Meeting of Shareholders will
receive an Option to purchase 10,000 Class A Shares. Each individual who is
first elected or appointed as a Non-Employee Trustee on a date other than the
date of an Annual Meeting of Shareholders shall be granted an Option to
purchase 10,000 Class A Shares, reduced to reflect the portion of the period
elapsed since the last grant to Trustees. The exercise price of the shares
subject to the Option shall be the fair market value of a Class A Share on the
grant date. Such Options shall be fully vested and expire ten years after the
grant date, without regard to whether the Trustee ceases to be a member of the
Board of Trustees prior to such date.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the U.S. federal income tax consequences
of Awards made under the Incentive Plan.
Options. A participant will not recognize any income upon the grant of an
Option. Generally, a participant will recognize compensation taxable as
ordinary income (and subject to income tax withholding) upon exercise of a
Non-qualified Option equal to the excess of the fair market value of the Class
A Shares purchased over the exercise price, and the Trust will be entitled to
a corresponding deduction. Generally, a participant will not recognize income
(except for purposes of the alternative minimum tax) upon exercise of an
Incentive Option. If the Class A Shares acquired by exercise of an Incentive
Option are held for the longer of two years from the date the Option was
granted and one year from the date it was exercised, any gain or loss arising
from a subsequent disposition of such Class A Shares will be taxed as a
capital gain or loss, and the Trust will not be entitled to any deduction. If,
however, such Class A Shares are disposed of within the above-described
period, then in the year of such disposition the participant will recognize
compensation taxable as ordinary income equal to the excess of the lesser of
(i) the amount realized upon such disposition and (ii) the fair market value
of such Class A Shares on the date of exercise over the exercise price, and
the Trust will be entitled to a corresponding deduction.
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<PAGE>
Restricted Share Awards. A participant will not recognize taxable income at
the time of the grant of a Restricted Share Award, and the Trust will not be
entitled to a tax deduction at such time unless the participant makes an
election to be taxed at the time such Restricted Share Award is granted. If
such election is not made, the participant will recognize taxable income at
the time the restrictions lapse in an amount equal to the excess of the fair
market value of the Class A Shares at such time over the amount, if any, paid
for such Class A Shares. The amount of ordinary income recognized by a
participant by making the above-described election or upon the lapse of the
restrictions is deductible by the Trust as compensation expense except to the
extent the limit of section 162(m) of the Code applies. In addition, a
participant receiving dividends with respect to Class A Shares subject to a
Restricted Share Award for which the above-described election has not been
made and prior to the time the restrictions lapse will recognize taxable
compensation (subject to income tax withholding), rather than dividend income,
in an amount equal to the dividends paid and the Trust will be entitled to a
corresponding deduction except to the extent the limit of section 162(m) of
the Code applies.
Performance Awards. A participant will not recognize taxable income upon the
grant of a Performance Award, and the Trust will not be entitled to a tax
deduction at such time. Upon the settlement of a Performance Award, the
participant will recognize compensation taxable as ordinary income (and
subject to income tax withholding) in an amount equal to the cash paid to the
participant, and the Trust will be entitled to a corresponding deduction
except to the extent the limit of section 162(m) of the Code applies.
RECOMMENDATION REGARDING THE INCENTIVE PLAN PROPOSAL
Consistent with approval of the Proposals taken as a whole, the Board of
Trustees recommends that you vote FOR approval of the Incentive Plan.
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Trustees has selected Price Waterhouse LLP as the Trust's
independent auditors for the fiscal year ending December 31, 1997, subject to
ratification by the Shareholders. Deloitte & Touche LLP served as the Trust's
independent auditors for the fiscal year ended December 31, 1996. Deloitte &
Touche LLP was not selected by the Board of Trustees to continue to serve as
independent auditors to the Trust for the fiscal year ending December 31, 1997
and was dismissed on December 19, 1997. There have been no disagreements
between the Trust and Deloitte & Touche LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures during the last fiscal year. The Trust expects a member of both
Price Waterhouse LLP and Deloitte & Touche LLP to attend the Annual Meeting to
make a statement, if he or she desires, and to respond to appropriate
questions.
Neither of the reports of Deloitte & Touche LLP on the Trust's financial
statements for the last two years contained an adverse opinion or disclaimer
of opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principles. The decision to change accountants was recommended and
approved by the Audit and Compensation Committee.
During the Trust's two most recent fiscal years and any subsequent interim
period preceding such dismissal there were no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure, auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Deloitte & Touche LLP would have caused it to
make reference to the subject matter of the disagreement in connection with
its report.
RECOMMENDATION REGARDING RATIFICATION OF THE APPOINTMENT OF PRICE WATERHOUSE
LLP
The Board of Trustees recommends that you vote FOR ratification of this
appointment.
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<PAGE>
DESCRIPTION OF THE INTERESTS
SENIOR MORTGAGE LOANS
Description of Senior Mortgage Loans and the Collateral. There are eight (8)
loans (the "Senior Mortgage Loans") in this category with an aggregate
original principal balance of $502,114,000. The Senior Mortgage Loans bear
interest at either a fixed rate per annum or a variable rate based on LIBOR
plus an additional specified amount, requiring either monthly interest
payments or specified amortization payments. One of the Senior Mortgage Loans
permits (i) accrual of interest on a portion of the principal of such loan,
payable at maturity, and (ii) the deferral of certain additional interest
payments under certain circumstances. The Senior Mortgage Loans are generally
secured by mortgages encumbering real properties comprised of a resort
conference center in New York, office buildings in Seattle, Washington, a
mixed use complex in New York, office buildings in Houston, Texas and Dallas,
Texas, an office portfolio in San Diego, California, a residential complex in
San Diego, California, a commercial office building in San Francisco,
California, a mixed used complex in Boston, Massachusetts, a residential
complex in New York, New York and certain pledges of partnership interests.
Maturity Date and Prepayment Terms. The Senior Mortgage Loans have maturity
dates that range from December, 1999 to December, 2007 with certain extension
rights in some cases. Two (2) of the Senior Mortgage Loans are subject to a
prepayment lock-out period during which time such loans may not prepaid.
Otherwise, the remaining Senior Mortgage Loans are generally prepayable at
certain specified dates and in certain specified amounts, subject to certain
conditions, including the payment of prepayment penalties based on specified
yield maintenance formulas and/or other required costs.
Participating Equity Interest. Some of the Senior Mortgage Loans require
payments of participating equity based on specified percentages of cash flow,
property appreciation and a share of funds maintained in certain reserve
accounts.
Limited Non-Recourse. The Senior Mortgage Loans are generally nonrecourse
loans as to which, in the event of a default under such loans, recourse
generally may be had only against the collateral, except for certain standard
carve-outs. One of the Senior Mortgage Loans is fully recourse against the
borrower.
Cross-Default Provisions. Two (2) of the Senior Mortgage Loans are cross-
defaulted with certain lines of credit or loans made to the borrower under
such lines of credit or loans from different lenders.
Prohibition on Sale, Encumbrance and Transfer. The Senior Mortgage Loans
generally prohibit the transfer, sale or encumbrance of the real properties or
interests in the borrowers related to such Senior Mortgage Loans, with certain
specified exceptions.
Guaranties. Some of the Senior Mortgage Loans are supported by certain
secured, limited recourse guaranties of payment and performance.
Environmental Indemnity. Certain of the Senior Mortgage Loans are supported
by environmental indemnities.
Subordinate Financing. Three (3) of the Senior Mortgage Loans are subject to
junior financing in the aggregate original principal amount of $131,935,000
which are part of the Subordinate Mortgage Loans and the Opportunistic
Mortgage Loans that are a part of this portfolio and are referred to below.
One (1) of the other Senior Mortgage Loans may be bifurcated, at the lender's
request under certain circumstances, into a senior lien tranche and a junior
lien tranche, both of which are part of this portfolio. Currently, both such
tranches are secured by a senior mortgage lien.
Forward Additional Loan Commitment. One (1) of the Senior Mortgage Loans
includes an additional commitment for an additional loan of up to $25,000,000
as construction financing, subject to the satisfaction of certain specified
conditions.
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SUBORDINATE MORTGAGE LOANS
Description of Subordinate Mortgage Loans and the Collateral. There are four
(4) loans (the "Subordinate Mortgage Loans") in this category with an
aggregate original principal balance of $157,375,000. The Subordinate Mortgage
Loans bear interest at either fixed or variable rates per annum requiring
either monthly interest payments or specified amortization payments. Under
some of the Subordinate Mortgage Loans, if for any month the interest paid is
less than a specified amount, the difference shall accrue interest at a
specified fixed rate per annum, or cash flow from subsequent months must be
deposited into specified interest accounts to cover previous interest payments
that are not paid. The Subordinate Mortgage Loans are secured by mortgages
encumbering real properties comprised of fifteen (15) hotels located in seven
(7) states, fee and ground leasehold interests in a mixed use complex of
office, retail and hotel space in Washington, D.C., office buildings in
Houston, Texas and Dallas, Texas, and an office portfolio in San Diego,
California.
Maturity Date and Prepayment Terms. The Subordinate Mortgage Loans have
maturity dates that range from May, 2002, to July, 2005, subject to extension
in certain cases. Some of the Subordinate Mortgage Loans are subject to
prepayment lock-out periods during which time such loans may not be prepaid.
At specified periods during the term of the Subordinate Mortgage Loans,
prepayment is generally permitted, subject to certain conditions set forth in
the applicable loan documents, including, in some cases, the payment of
prepayment penalties based on specified yield maintenance formulas or required
internal rates of return.
Limited Non-Recourse Loans. The Subordinate Mortgage Loans are generally
nonrecourse loans as to which, in the event of a default under such loans,
recourse generally may be had only against the collateral, except for certain
standard carve-outs.
Prohibition on Sale, Encumbrances and Transfer. The Subordinate Mortgage
Loans generally prohibit the transfer, sale or encumbrance or release of the
real properties or interests in the borrowers related to such Subordinate
Mortgage Loans, with certain specified exceptions.
Environmental Indemnity. Certain of the Subordinate Mortgage Loans are
supported by certain environmental indemnities.
Existing Senior Financing. Two (2) of the Subordinate Mortgage Loans are
subject to senior financing in the aggregate original principal amount of
$217,700,060 which are part of the Senior Mortgage Loans that are a part of
this portfolio and are referred to herein. The other two (2) Subordinate
Mortgage Loans are subject to senior financing in the aggregate original
principal amount of $205,000,000 which are not a part of this portfolio. The
rights between senior and junior lenders are generally governed by specified
intercreditor agreements which may provide the junior lender with certain
notice and cure rights, but otherwise limit the rights and remedies of the
junior lender.
Management of Hotels. Management of the hotel real properties securing the
Subordinated Mortgage Loans are generally governed by management agreements.
Cross-Default Provisions. One (1) of the Subordinate Mortgage Loans is
cross-defaulted with certain loans entered into by certain partners of the
borrower for such Subordinate Mortgage Loan.
Purchased Promissory Note. One (1) of the promissory notes evidencing a
Subordinated Mortgage Loan was purchased from a third party lending
institution. The original lender has been indemnified for claims relating to
acts of the purchasing lender in connection with the note sale agreement, the
debt evidenced by the subject promissory note, the use or ownership of the
real property securing such note, and any contingency fee contracts with
attorneys or collection agencies.
Guaranties. One (1) of the Subordinated Mortgage Loans is supported by
certain secured, limited recourse unconditional guaranties of payment and
performance, and other limited guaranties of payment and performance.
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Participating Equity Interest. One (1) of the Subordinate Mortgage Loans
requires payments of participating equity, payable with monthly interest
payments, based on specified percentages of cash flow and net proceeds
generated from the sale or refinancing of the real property securing such
loan.
OPPORTUNISTIC MORTGAGE LOANS
Description of Opportunistic Mortgage Loans. The two (2) loans (the
"Opportunistic Loans") in this category consists of (i) debt (the "Middle
Tranche") with an original principal balance of $72,400,000, secured by, among
other non-real property collateral, a second lien mortgage encumbering a
combination hotel and apartment building in Denver, Colorado and debt (the
"Junior Tranche") with an original principal balance of $79,868,613, secured
by a third lien mortgage encumbering the same combined hotel and apartment
building and (ii) debt with an original principal balance of $154 million
secured by five buildings in Seattle, Washington. The Opportunistic Loans bear
interest at fixed or variable rates per annum. One of the loans has monthly
compounding of interest, with payments due on a monthly basis, requiring
either monthly interest payments or specified principal payments at certain
times during the term thereof when certain specified conditions are satisfied.
Maturity Date and Prepayment Terms. The Opportunistic Loans have maturity
dates ranging from December, 1999 to June, 2007, with certain rights for
extensions. The Opportunistic Loans may be prepaid, but where prepayment
occurs before a certain specified date, prepayment must be accompanied by
certain specified yield maintenance payments.
Recourse Loan. The Opportunistic Loans are fully recourse to the borrower
thereunder.
Prohibition on Sale, Encumbrance and Transfer. The Opportunistic Loans
generally prohibit the transfer, sale or encumbrance of the real property or
interests in the borrower related to such Opportunistic Loan, with certain
specified exceptions.
Repayment Guaranty. One of the Opportunistic Loans is supported by a
repayment guaranty, which guaranty terminates upon payment in full of the
senior debt or upon judicial foreclosure by or a deed in lieu to the holder of
the senior debt.
Buy/Sell Agreement. One of the Opportunistic Loans is subject to the terms
of a buy/sell agreement pursuant to which, upon the occurrence of certain
events, the borrower under the Opportunistic Loan would be required to either
agree to buy certain interests or to sell to certain interests in the
underlying collateral. Certain specified parties have the right to elect to
exercise the buy/sell right, in which event the non-triggering party must
either agree to buy the other party's interest or to sell to the other party
the triggering party's interest in the underlying collateral. In the event
that borrower under the Opportunistic Loan initiates this latter two-way
buy/sell option, it must prepay the Middle Tranche in full.
Senior Financing and Intercreditor Agreement. The underlying collateral is
subject to senior financing in the aggregate original amount of $65,000,000
which is not part of the portfolio and $94,700,000 of which is part of the
portfolio. The rights between senior and junior lenders are generally governed
by specified intercreditor agreements which provides for certain cure rights
for defaults under such senior financing.
Hotel Management. In lieu of a management agreement, the general partner of
the borrower under one of the Opportunistic Loans acts a manager of the
underlying collateral, and is entitled to receive property management fees,
construction management fees, leasing commissions, and reimbursement of
certain approved items. All fees are subordinated to the Middle Tranche in the
event of a default thereunder.
UNSECURED LOANS
Description of Unsecured Loans and the Collateral. There are two (2) loans
(the "Unsecured Loans") in this category with an aggregate original principal
balance of $27,300,000. The Unsecured Loans bear interest at
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fixed rates per annum, requiring monthly interest payments. The Unsecured
Loans are generally secured by pledges of partnership, membership or stock
interests, and certain other non-real property collateral. The real properties
owned by the borrowing entities under the Unsecured Loans consist of mixed
office and retail in New York, New York and twenty-one (21) hotel sites in
Georgia, Maryland, North Carolina, Pennsylvania, Tennessee, and Virginia.
Maturity and Prepayment Terms. The Unsecured Loans have maturity dates that
range from April, 2002, to January, 2004. Some of the Unsecured Loans are
subject to prepayment lock-out periods during which time such loans may not be
prepaid. At specified periods during the term of Unsecured Loans, prepayment
is generally permitted, subject to certain conditions, including the payment
of prepayment penalties based on specified yield maintenance formulas.
Participating Equity Interest. Some of the Unsecured Loans require payments
of participating equity based on specified percentages of cash flow and net
proceeds from sale or refinancings generated from properties related to the
Unsecured Loans.
Prohibition on Sale, Encumbrance and Transfer. The Unsecured Loans generally
prohibit the transfer, sale or encumbrance of the real properties or interests
in the borrowers related to such Unsecured Loans, with certain specified
exceptions.
Recourse. The Unsecured Loans are either recourse or non-recourse to the
personal assets of the borrowing entities, but where a loan is non-recourse,
the borrower is personally liable for certain specified carve-outs.
Guarantees. Some of the Unsecured Loans are supported by secured or
unsecured guarantees, subject to specified recourse limitations as to the
guarantor.
Environmental Indemnity. Some of the Unsecured Loans are supported by
environmental indemnities.
Existing Senior Loans on the Real Property. The real properties owned by the
borrowers under the Unsecured Loans are subject to senior financing in the
aggregate original amount of $107,800,000 which is not being contributed to
the Trust. The rights between senior and junior lenders are generally governed
by specified intercreditor agreements.
CONSTRUCTION LOANS
Description of Construction Loans and the Collateral. There are two (2)
loans (the "Construction Loans") in this category with an aggregate original
principal balance of $92,390,000, of which $23,286,000 has not yet been funded
as of September 1997. The Construction Loans are to be disbursed in accordance
with certain approved construction disbursement schedules and budgets. The
Construction Loans bear interest at fixed rates per annum, requiring monthly
interest payments in specified amounts. The Construction Loans are secured by
mortgages encumbering real properties comprised of a to-be-built condominium
project and a to-be-built luxury resort hotel, conference center and beach
club, and golf course both located in Florida, along with certain other
partnership and stock collateral. One (1) of the Construction Loans is also
supported by letters of credit which are subject to return upon the occurrence
of certain repayment conditions and thresholds.
Maturity Date and Prepayment Terms. The Construction Loans have maturity
dates that range from November, 1999, to July, 2004. Periodically during the
term of the Construction Loans, under certain specified conditions, the
Construction Loans may be prepaid either in full or in part, or just in full,
as applicable, upon the satisfaction of certain specified conditions,
including, without limitation, the payment of a specified prepayment fee.
Reserves. The Construction Loans require that the borrowers thereunder fund
certain reserves from, among other specified funds, all of the cash flow and
net sales proceeds generated from the real properties
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securing the Construction Loans, which reserves are to be used for the payment
of interest, certain construction costs, or other operating or capital
expenses.
Guarantees. The Construction Loans are supported by repayment and/or
completion guarantees. The repayment guaranties range from full repayment to
repayment of only certain specified losses. One of the guarantors under one of
the Construction Loans has provided a promissory note which will be returned
to such guarantor when certain specified funds have been contributed to the
reserve established for such Construction Loan.
Environmental Indemnity. The Construction Loans are supported by
environmental indemnities. A maintenance building on one of the real
properties securing one of the Construction Loans on which a golf course will
be developed is subject to environmental contamination, and such portion of
real property is the subject of a monitoring and remediation plan.
Prohibition on Sale, Encumbrance and Transfer. The Construction Loans
generally prohibit the transfer, sale or encumbrance of the real properties or
interests in the borrowers related to such Construction Loans, with certain
specified exceptions.
Senior Encumbrances. A portion of the real property securing one of the
Construction Loans is subject to certain senior mortgages thereon, including
portions of the property on which a condominium project will be developed.
REAL ESTATE LONG-TERM OPERATING LEASE
General. Pursuant to the terms of the RLH lease (the "RLH Lease") Red Lion
Hotels, Inc., a Delaware corporation, a wholly owned subsidiary of Doubletree
Corporation ("Tenant") master leases seventeen (17) parcels of real property
(the "RLH Properties") each of which is improved with Doubletree or Red Lion
hotels (the "Leased Hotels"). The RLH Lease is absolutely net so that Tenant
controls all aspects of the RLH Properties operations and management and is
required to pay all rents and other sums to or on behalf of Landlord (as
defined). Tenant is required, at its own cost, to replace fixtures, furnishing
and equipment ("FF&E") and other fixed assets and operating equipment and
inventory as required, which shall be the property of Tenant and to fund an
FF&E reserve account. The Tenant is required to indemnify the Landlord and
certain others for all costs and expenses imposed upon or incurred by an
indemnified party in connection with the use, alteration, operation,
management, condition (including environmental condition and compliance),
design, construction, maintenance, repair or restoration of any of the leased
premises and employment of any person(s) at the leased premises. Doubletree
Corporation has executed a full guarantee of the punctual payment and
performance of any and all liabilities and obligations of Tenant arising out
of or related to the RLH Lease.
Term. The RLH Lease is a long-term lease that extends through 2010,
including five (5) automatic 5-year extension terms unless a proper
termination notice is delivered by the Tenant. The final expiration of the RLH
Lease, assuming all extensions would be in 2035.
Organization. RLH Partnership, L.P., a Delaware limited partnership (the
"Landlord") is the fee owner or ground lessee of the RLH Properties. The
general partner of the Landlord is Red Lion G.P., Inc. and the limited partner
is RLH Net Lease Investment, LLC ("RLH Net"), each of which is wholly owned by
SOFI IV. RLH Net is also the sole stockholder of Red Lion G.P., Inc. SOFI IV
has a 99% membership interest in RLH Net and is the controlling entity of the
interest.
Base and Percentage Rent. Landlord collects a specified annual base rent
payable quarterly in arrears, and 7.5% of annual operating revenues in excess
of a base amount for all of the Leased Hotels. Under certain conditions,
Tenant's rent is subject to certain increases if Tenant completes an expansion
at any Leased Hotel.
Operation and Maintenance. Tenant is obligated to keep and maintain the
Leased Hotels in at least as good condition as existed on the commencement
date. Tenant is responsible for the payment of all costs and
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expenses incurred in the use, operation or maintenance of the leased premises
including rents and other amounts owed under any ground lease, management
fees, real estate taxes, insurance, supplies and materials, the cost of all
maintenance, janitorial, security and service agreements, electricity, water
and any other utilities supplied to the leased premises.
Limited Nonrecourse to Landlord. Any claim based on the Landlord's liability
under the RLH Lease shall be enforced only against the leased premises and not
against any other tangible or intangible assets, properties or funds of the
Landlord; provided, however, if, as a result of a judicial foreclosure of any
mortgage, the Landlord's interest in any Leased Hotel is transferred to a
mortgagee or other entity, and at such foreclosure Tenant has a legal
proceeding against the Landlord, Tenant shall have the right to enforce any
judgment from any assets or other properties of the Landlord.
LOAN PARTICIPATIONS
Description of Participation Loans and the Collateral. There are three (3)
loans (the "Participation Loans") in this category which are participations in
loans that have an aggregate original principal balance of $17,087,000. The
interest in each of the Participation Loans is limited to a certain specified
participation percentage. The Participation Loans bear interest at either a
variable rate per annum based on LIBOR plus an additional specified amount, or
at a fixed rates per annum subject to certain scheduled increases, and
requiring either no monthly payments, monthly interest payments or specified
amortization payments. The Participation Loans are secured by mortgages
encumbering real properties comprised of an office building in New York, New
York, an office building in Rockville, Maryland, and a leasehold interest in a
hotel in Uniondale, New York, and certain other non-real property collateral.
Maturity and Prepayment Terms. The Participation Loans have maturity dates
that range from May, 1999, to May, 2000. The Participation Loans may either be
prepaid in full or in part without the payment of a prepayment penalty or are
not prepayable.
Guaranties. Some of the Participation Loans are supported by either a
completion guaranty or a repayment guaranty.
Co-Lending Arrangement. Each of the Participation Loans is subject to the
interest of other participants in the loans and the relationship among
participating lenders is generally governed by the terms of certain
participation or co-lending agreements.
Participating Equity Interest. One (1) of the Participation Loans requires
payment of participating equity upon the sale or refinancing of the real
property securing such loan.
OTHER
This category generally includes publicly traded bonds with a market value
of approximately $40.5 million of two issuers, one of which matures in May
2002 with a coupon of 12.75% per annum that pays semi-annually and the other
which matures in March 2007 with a coupon of 12.5% per annum that pays semi-
annually.
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GLOSSARY
"Adjusted Net Income" is defined under "ADVISORY AGREEMENT PROPOSAL--
Advisory Agreement."
"Advisor" means Starwood Financial Advisors, L.L.C., a Connecticut limited
liability company.
"Advisory Agreement" means the agreement between the Trust and the Advisor
to be entered into on the Contribution Date under which the Advisor will
manage the investment affairs of the Trust.
"Advisory Agreement Proposal" means the proposal to amend the Declaration of
Trust to reflect the terms of the Advisory Agreement.
"AMEX" means the American Stock Exchange.
"Angeles" means Angeles Corporation, a California corporation, the
corporation which originally formed the Trust.
"Annual Meeting" refers to the annual shareholders meeting of the Trust to
be held at the American Stock Exchange, 86 Trinity Place, New York, New York
on March 13, 1998 at 10:30 a.m. Eastern Standard Time.
"Audit and Compensation Committee" means the Audit and Compensation
Committee of the Board of Trustees that among other things will administer the
Incentive Plan.
"Awards" means collectively Restricted Share Awards and Performance Awards.
"Base Fee" means the quarterly base management fee the Trust will pay to the
Advisor under the Advisory Agreement as set forth in "ADVISORY AGREEMENT
PROPOSAL--Advisory Agreement."
"Benchmark BB Rate" is defined under "ADVISORY AGREEMENT PROPOSAL--Advisory
Agreement."
"Beneficiary" is the qualified charitable organization designated by the
Trust as the beneficiary of the Charitable Trust.
"BLLC" means B Holdings, L.L.C., a Connecticut limited liability company,
the members of which are Starwood Capital LLC and Starwood Opportunity Fund
II, L.P. and that will own all of the Class B Shares as of the Contribution
Date.
"Board of Trustees" refers to the board of trustees of the Trust.
"Book Equity Value" is defined under "ADVISORY AGREEMENT PROPOSAL--Advisory
Agreement."
"Cause" is defined under "INCENTIVE PLAN PROPOSAL--Description of the Plan."
"Change of Control" is defined under "INCENTIVE PLAN PROPOSAL--Description
of the Plan."
"Charitable Trust" is the trust that will receive any Class A and Class B
Shares in excess of the Ownership Limit or the Starwood Ownership Limit as
described in "TRUST AMENDMENTS PROPOSAL--Summary of the Amendment of the
Declaration of Trust and Effect Thereof and Board of Trustees' Recommendation
Regarding the Trust Amendments Proposal--Amendments to the Excess Share
Provision."
"Charitable Trustee" is the trustee of the Charitable Trust.
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"Class A Shareholders" means the holders of Class A Shares.
"Class A Shares" means the shares of beneficial interest of the Trust
designated as Class A Shares with a par value of $1.00 per share.
"Class A Warrant" means the warrant to purchase 5,000,000 Class A Shares at
$1.00 per share.
"Class B Shares" means the shares of beneficial interest of the Trust
designated as Class B Shares with a par value of $0.01 per share.
"Class B Warrant" means the warrant to purchase 2,500,000 Class B Shares at
$.01 per share.
"CMBS" means commercial mortgage backed securities.
"CMO Bonds or CMOS" means commercial mortgage obligations.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, including successor statutes thereto.
"Contribution" means the Contribution of cash and the Starwood Mezzanine
Interests by Starwood Mezzanine and cash, the Letters of Intent, the SOFI IV
Interests and the First Mortgage Portfolio by SOFI IV to the Trust in exchange
for the issuance of Class A Shares and the payment of cash.
"Contribution Agreement" means the agreement among the Trust, Starwood
Mezzanine and SOFI IV setting forth the terms and conditions of the
Contribution.
"Contribution Date" means the date on which the Contribution is consummated.
"Contribution Proposal" means the proposal pursuant to which the
Shareholders are being asked to approve the Contribution.
"Current Portfolio" is defined in "PROXY STATEMENT SUMMARY--The Trust."
"Current Starwood Group" means SAHI, Inc., SAHI Partners, Starwood
Mezzanine, the Starwood Trustees and their respective affiliates.
"Dealer Property" means property held primarily for sale to customers in the
ordinary course of the Trust's trade or business.
"Declaration of Trust" means the Amended and Restated Declaration of Trust
of the Trust.
"Diversified Portfolio" is defined in PROXY STATEMENT SUMMARY--Changes in
the Investment Policy."
"Effective Date" means the date when the amendment to the Declaration of
Trust effecting the Reverse Split is adopted.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Rights Agreement" means the Exchange Rights Agreement among the
Trust and Starwood Mezzanine granting Starwood Mezzanine the right to exchange
its Units for Class A Shares, cash or a combination thereof that will be
terminated if the Contribution is effected.
"First Mortgage Portfolio" means the portfolio of first mortgages to be
contributed to the Trust by SOFI IV.
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"Foreclosure Property" means property acquired at or in lieu of a
foreclosure of the mortgage secured by such property.
"Houlihan" means Houlihan Lokey Howard & Zulan, the investment banking firm
retained by the Independent Committee as an independent financial advisor.
"Incentive Fee" means the quarterly incentive fee the Trust will pay to the
Advisor under the Advisory Agreement as set forth in "ADVISORY AGREEMENT
PROPOSAL--Advisory Agreement."
"Incentive Option" is an Option that is intended to satisfy Section 422 of
the Code.
"Incentive Plan" means the Amended and Restated Statement Financial Trust
1996 Share Incentive Plan.
"Incidental Registrations" means registrations of Class A Shares under the
Securities Act other than the shelf registration to be filed to permit resales
of certain Class A Shares.
"Independent Committee" means the committee of the Board of Trustees
comprised of the Independent Trustees.
"Independent Trustees" means the Trustees not affiliated with Starwood.
"Interests" means the Starwood Mezzanine Interests and the SOFI IV
Interests.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Investment Restrictions" is defined under "PROXY STATEMENT SUMMARY--Changes
in the Investment Policy."
"IRS" means the Internal Revenue Service.
"Letters of Intent" mean the letters of intent to be contributed to the
Trust by SOFI IV.
"Limited Partnership Agreement" means the Amended and Restated Partnership
Agreement of the Partnership.
"Mezzanine Loans" means loans that are subordinated to first lien mortgage
loans and that are secured by a second lien mortgage or pledge of the
ownership interest in the borrowing property owner.
"Mortgage Collateral" means the mortgage loans securing the CMBS.
"Mortgages" means mortgages, deeds of trust, or other security instruments
on real property or rights or interests in real property or entities owning or
controlling real property.
"1997 Act" means the Taxpayer Relief Act of 1997.
"Non-Employee Trustee" means a Trustee who is not also an officer or
employee of the Trust or an affiliate of the Trust.
"Non-Qualified Option" is an Option not intended to satisfy Section 422 of
the Code.
"Non-Qualifying Investments" means Subordinated Interests that do not
constitute Qualifying Interests.
"Options" means options to purchase Class A Shares granted under the
Incentive Plan.
"Outside Date" is March 31, 1998, the date by which the transactions
contemplated under the Contribution Agreement must be consummated, or the
Contribution Agreement may be terminated under certain conditions.
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"Ownership Limit" is defined in "TRUST AMENDMENTS PROPOSAL--Summary of the
Amendment of the Declaration of Trust and Effect Thereof and Board of
Trustees' Recommendation Regarding the Trust Amendments Proposal--Amendments
to the Excess Share Provision."
"Opportunistic Investments" means subperforming or non-performing loans.
"Partnership" means the APMT Limited Partnership, a Delaware limited
partnership of which the Trust is the sole general partner and Starwood
Mezzanine is the sole limited partner that will be terminated if the
Contribution is consummated.
"Pass-Through Certificates" means commercial mortgage pass through
certificates.
"Performance Award" means an award of right, contingent upon the attainment
of specific performance measures within a specified performance period, to
receive cash under the Incentive Plan.
"Person" means any individual, partnership, corporation, association, trust,
or other entity.
"Prohibited Owner" is defined in "TRUST AMENDMENTS PROPOSAL--Summary of the
Amendment of the Declaration of Trust and Effect Thereof and Board of
Trustees' Recommendation Regarding the Trust Amendments Proposal--Amendments
to the Excess Share Provision."
"Prohibited Transferee" is defined in "TRUST AMENDMENTS PROPOSAL--Summary of
the Amendment of the Declaration of Trust and Effect Thereof and Board of
Trustees' Recommendation Regarding the Trust Amendments Proposal--Amendments
to the Excess Share Provision."
"Prohibited Transaction" is defined in "TRUST AMENDMENTS PROPOSAL--Summary
of the Amendment of the Declaration of Trust and Effect Thereof and Board of
Trustees' Recommendation Regarding the Trust Amendments Proposal--Amendments
to the Excess Share Provision."
"Proposals" means collectively the Contribution Proposal, Advisory Agreement
Proposal, Trust Amendments Proposal, the proposal to approve the Reverse
Split, the proposal to elect eight Trustees to the Board of Trustees, the
proposal to adopt the Incentive Plan and the proposal to ratify Price
Waterhouse LLP as the Trust's independent accountants for the year ended
December 31, 1997, to be voted on at the Annual Meeting.
"Proxy Statement" means the document sent to the Shareholders on or about
February 13, 1998 in connection with the solicitation by the Board of Trustees
of proxies to be voted at the Annual Meeting.
"Qualifying Interests" means mortgages and other liens on real estate.
"Record Date" is January 21, 1998.
"Registration Rights Agreement" means the Registration Rights Agreement
between the Trust and Starwood Mezzanine pursuant to which Starwood Mezzanine
has the right to cause the Trust to, subject to certain limitations and
restrictions, register resale of certain Class A Shares which is proposed to
be amended and restated on the Contribution Date.
"REIT" means a real estate investment trust as defined under the Code.
"REMIC" means a real estate mortgage investment conduit.
"Restricted Share Award" means an Award subject to a restriction period
and/or performance measures granted under the Incentive Plan.
"Reverse Split" means a reverse split of the capital stock of the Trust.
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<PAGE>
"SAHI Partners" means SAHI Partners, a Delaware general partnership.
"SEC" means the Securities and Exchange Commission.
"Securities" means common and preferred stock in a corporation, shares of
beneficial interest in a trust or other unincorporated association, general
partner interests in a general partnership, interests in a joint venture,
general or limited partnership interests in a limited partnership, notes,
debentures, bonds, and other evidences of indebtedness, including Mortgages,
whether secured or unsecured, and includes any options, warrants, and rights
to subscribe to or convert into any of the foregoing.
"Securities Act" means the Securities Act of 1933, as amended.
"Shareholders" means, at any particular time, the Class A Shareholders, the
Class B Shareholders, and all other holders of record of outstanding shares of
the Trust on the records of the Trust at such time.
"Shareholders Agreement" means that certain Restated Shareholders Agreement
dated as of March 15, 1994, restated as of April 27, 1994 and amended as of
March 15, 1996 by and among SAHI, Inc., SAHI Partners, Starwood Mezzanine and
the Trust which is proposed to be amended and restated on the Contribution
Date.
"Shares" means the Class A Shares, the Class B Shares, and all other shares
of beneficial interest of the Trust issued as provided herein.
"SOFI IV" means the Starwood Opportunity Fund IV, L.P., a Delaware
partnership.
"SOFI IV Interests" means the portfolio of mortgage loans and leases to be
contributed by SOFI IV to the Trust in exchange for Class A Shares.
"Starwood" refers collectively to SAHI Partners, SAHI, Inc., Starwood
Mezzanine and SOFI IV.
"Starwood Capital" means Starwood Capital Group, L.P., a Delaware limited
partnership, which is the general partner of the investment partnerships
comprising or which own substantially all of the beneficial interest in
Starwood.
"Starwood Capital LLC" means Starwood Capital Group, L.L.C. and its
predecessor entities.
"Starwood Controlled Party" means any entity controlled by Starwood Capital
or its principals.
"Starwood Group" refers collectively to SAHI Partners, SAHI, Inc., Starwood
Mezzanine, SOFI IV, the Starwood Trustees and Messrs. Silvey, Dishner and
Kleeman or any of their affiliates.
"Starwood Mezzanine" means Starwood Mezzanine Investors, L.P., a Delaware
limited partnership.
"Starwood Mezzanine Interests" means the portfolio of mortgage and
partnership loans to be contributed by Starwood Mezzanine to the Trust in
exchange for additional Class A Shares.
"Starwood Trustees" refers to Messrs. Sternlicht, Eilian, Grose and
Sugarman, who are currently Trustees on the Board of Trustees.
"Subordinated Interests" means subordinated interests in CMBS.
"Ten Percent Holder" means a person that owns greater than ten percent of
the voting power of all capital stock of the Trust.
"Termination Event" is defined in "ADVISORY AGREEMENT PROPOSAL--Advisory
Agreement."
102
<PAGE>
"Transactions" means the Contribution, the exchange of outstanding Units for
Class A Shares and the termination and liquidation of the Partnership.
"Trust" means Angeles Participating Mortgage Trust, a California business
trust.
"Trust Amendments Proposal" means the proposals to amend the Trust's
Declaration of Trust as set forth under "TRUST AMENDMENTS PROPOSAL."
"Trustee Plan" means the Angeles Participation Mortgage Trust 1996 Trustees'
Share Incentive Plan that is proposed to be amended and restated as the
Incentive Plan.
"Trustees" means, as of any particular time, the Persons who are members of
the Board of Trustees.
"UBTI" means unrelated business taxable income.
"Units" means the units of the partnership evidencing partnership interests
in the Partnership.
"Warrants" means the Class A Warrant and the Class B Warrant.
"Warwick Certificates" means the mortgage participation certificates
representing 100% of the beneficial ownership interest in a $3,707,000
performing, non-recourse first mortgage loan secured by the Warwick Hotel.
"Warwick Hotel" means the Warwick Hotel and Apartments located in
Philadelphia, Pennsylvania.
103
<PAGE>
OTHER MATTERS
NO APPRAISAL OR DISSENTER'S RIGHTS
Under California law, Shareholders are not entitled to any statutory
dissenter's rights to appraisal of their Class A Shares or Class B Shares in
connection with any of the Proposals.
ANNUAL REPORTS ON FORM 10-K AND QUARTERLY REPORTS ON FORM 10-Q
The Trust's Annual Report on Form 10-K for the year ended December 31, 1996,
as filed with the SEC, contains detailed information concerning the Trust and
its operations and is attached hereto as Exhibit H. The Trust's quarterly
reports on Form 10-Q for the quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997 are attached hereto as Exhibits I, J and K, respectively.
SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Shareholder proposals intended to be presented at the 1998 Annual Meeting
must be sent in writing, by certified mail, return receipt requested, to the
Trust at its principal office, addressed to the Secretary of the Trust, and
must be received by the Trust a reasonable time before the solicitation of
proxies for the 1998 Annual Meeting which is currently expected to be held in
June 1998, for inclusion in the 1998 proxy materials.
SOLICITATION PROCEDURES
Officers and regular employees of the Trust, without extra compensation, may
solicit the return of proxies by mail, telephone, telegram or personal
interview. Certain holders of record, such as brokers, custodians and
nominees, are being requested to distribute proxy materials to beneficial
owners and to obtain such beneficial owners' instructions concerning the
voting of proxies. All of the costs relating to this Proxy Statement will be
paid by the Trust.
OTHER MATTERS
The management of the Trust does not intend to bring any other matters
before the Annual Meeting and knows of no other matters that are likely to
come before the meeting. In the event any other matters properly come before
the Annual Meeting, the persons named in the accompanying proxy will vote the
shares represented by such proxy in accordance with their best judgment on
such matters.
The Trust urges you to submit your vote on the accompanying proxy card by
completing, signing, dating and returning it in the accompanying postage-paid
return envelope at your earliest convenience, whether or not you presently
plan to attend the meeting in person.
By Order of the Board of Trustees
/s/ Madison F. Grose
Madison F. Grose
Secretary of the Trust
Greenwich, Connecticut
February 11, 1998
104
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ANGELES PARTICIPATING MORTGAGE TRUST
<TABLE>
<S> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Pro Forma Consolidating Balance Sheets as of September 30, 1997.......... F-3
Pro Forma Consolidating Statements of Operations for the nine months
ended September 30, 1997 and for the year ended December 31, 1996....... F-4
Notes and Management's Assumptions to Unaudited Pro Forma Consolidating
Financial Statements.................................................... F-6
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
Report of Independent Accountants........................................ F-10
Divisional Balance Sheets as of September 30, 1997 (unaudited) and Decem-
ber 31, 1996 and 1995................................................... F-11
Statements of Divisional Operations for the nine months ended September
30, 1997 and 1996 (unaudited) and for the years ended December 31, 1996
and 1995 and for the period from
November 1, 1994 (Inception) through December 31, 1994.................. F-12
Statements of Divisional Equity for the nine months ended September 30,
1997 (unaudited) and for the years ended December 31, 1996 and 1995 and
for the period from November 1, 1994 (Inception) through December 31,
1994.................................................................... F-13
Statements of Cash Flows for the nine months ended September 30, 1997 and
1996 (unaudited) and for the years ended December 31, 1996, 1995 and for
the period from November 1, 1994 (Inception) through December 31, 1994.. F-14
Notes to Divisional Financial Statements................................. F-15
SOF IV LOAN INVESTMENT OPERATIONS
Report of Independent Accountants........................................ F-21
Divisional Balance Sheets as of September 30, 1997 (unaudited) and Decem-
ber 31, 1996............................................................ F-22
Statements of Divisional Operations for the nine months ended September
30, 1997 (unaudited) and for the period from July 3, 1996 (Inception)
through December 31, 1996............................................... F-23
Statements of Divisional Equity for the nine months ended September 30,
1997 (unaudited) and for the period from July 3, 1996 (Inception)
through December 31, 1996............................................... F-24
Statements of Divisional Cash Flows for the nine months ended September
30, 1997 (unaudited) and for the period from July 3, 1996 (Inception)
through December 31, 1996............................................... F-25
Notes to Divisional Financial Statements................................. F-26
RLH PORTFOLIO
Report of Independent Accountants........................................ F-33
Statement of Revenue and Certain Expenses for the year ended December 31,
1996.................................................................... F-34
Statement of Revenue and Certain Expenses for the period from January 1,
1997 through May 1, 1997 (unaudited).................................... F-35
Notes to Statement of Revenue and Certain Expenses....................... F-36
</TABLE>
F-1
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited Pro Forma Consolidating Balance Sheet as of
September 30, 1997 and Pro Forma Consolidating Statements of Operations for
the nine months ended September 30, 1997 and the year ended December 31, 1996
have been prepared to reflect the Transaction and the adjustments described in
the accompanying notes. The pro forma financial information is based on the
historical financial statements and should be read in conjunction with the
notes and management's assumptions thereto. The Pro Forma Balance Sheet was
prepared as if the Transactions (as more fully described in Note1 to the Pro
Forma Consolidating Financial Statements) occurred as of September 30, 1997.
The Pro Forma Consolidating Statements of Operations for the nine months ended
September 30, 1997 and the year ended December 31, 1996 were prepared as if
the Transactions occurred on January 1, 1996. The pro forma operating results
are unaudited and not necessarily indicative of the consolidated operating
results which actually would have occurred if the Transaction had been
consummated at the beginning of 1996, nor does it purport to represent the
future financial position of the Trust, as defined, or the results of
operations for future periods. For purposes of this financial information, the
term the "Trust" includes the Angeles Participating Mortgage Trust ("APT"),
APMT Limited Partnership (the "Partnership") and its subsidiaries, in their
collective capacities as the recipients of certain assets of Starwood
Mezzanine Investors, L.P. ("Starwood Mezzanine") and Starwood Opportunity Fund
IV, L.P. ("SOF IV") in the transactions described herein.
F-2
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
PRO FORMA CONSOLIDATING BALANCE SHEET
(NOTE 2)
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------
PRO FORMA TRUST
TRUST MEZZANINE SOF IV ADJUSTMENTS PRO FORMA
-------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Real estate investments.... $ 10,190 $ 144,003 $ 811,130 $ 102,450 (A) $ 1,067,773
Cash and cash equivalents.. 842 5,202 14,278 (B) 20,322
Restricted cash............ 3,143 -- 3,143
Accrued interest receiv-
able...................... 53 1,616 8,745 (10,361)(C) 53
Other assets and deferred
expenses.................. 26 268 3,388 3,682
-------- --------- --------- --------- -----------
Total assets........... $ 11,111 $ 151,089 $ 826,406 $ 106,367 $ 1,094,973
======== ========= ========= ========= ===========
LIABILITIES AND SHAREHOLD-
ERS' EQUITY:
Debt obligations........... $ 341,512 (D) $ 341,512
Other liabilities.......... $ 3,881 3,881
Accrued expenses and ac-
counts payable............ $ 238 $ 86 76 400
-------- --------- --------- --------- -----------
Total liabilities...... 238 86 3,957 341,512 345,793
-------- --------- --------- --------- -----------
Minority interest.......... 4,340 19 (4,340)(E) 19
Division equity............ 151,003 822,430 (973,433)(F)
Shareholders' equity:
Class A Shares $1.0 par
value, 7,550,000 and
314,341,744 shares
issued and outstanding
on a historical and pro
forma basis,
respectively............ 7,550 306,792 (G) 314,342
Class B Shares $.01 par
value, 3,775,000 and
157,170,872 shares
issued and outstanding
on a historical and pro
forma basis,
respectively............ 38 1,533 (H) 1,571
Unrealized gain on
"available for sale"
investments............. 6 6
Additional paid in
capital................. 42,228 434,303 (I) 476,531
Accumulated undistributed
net realized gain from
sale of mortgages....... 2,545 2,545
Accumulated distributions
in excess of cumulative
net income other than
gain from sale of
mortgages............... (45,834) (45,834)
-------- --------- --------- --------- -----------
Total
shareholders'/division
equity................ 6,533 151,003 822,430 (230,805) 749,161
-------- --------- --------- --------- -----------
Total liabilities and
shareholders' equity.. $ 11,111 $ 151,089 $ 826,406 $ 106,367 $ 1,094,973
======== ========= ========= ========= ===========
</TABLE>
The accompanying notes and management's assumptions are an integral part of
this statement.
F-3
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
(NOTE 3)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR NET INCOME (LOSS) PER CLASS A SHARE)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------
PRO FORMA TRUST
TRUST MEZZANINE SOF IV RLH ADJUSTMENTS PRO FORMA
------ --------- -------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Interest income......... $ 704 $ 18,202 $ 27,890 $ (3,075)(a) $ 43,721
Prepayment income....... 13,990 13,990
Rental income........... 6,306 $ 5,000 11,306
Other income............ 2 655 2,258 2,915
------ -------- -------- ------- --------- --------
Total revenue.......... 706 32,847 36,454 5,000 (3,075) 71,932
------ -------- -------- ------- --------- --------
EXPENSES:
Interest expense........ 11,267 (b) 11,267
Depreciation and amorti-
zation................. 2,378 2,473 (c) 4,851
General and administra-
tive................... 261 217 750 (d) 1,228
Management fee.......... 1,337 7,530 (8,867)(e) --
Advisory fee (Note 4)... 5,792 (f) 5,792
Other expenses.......... 172 1,376 1,548
------ -------- -------- ------- --------- --------
Total expenses......... 261 1,509 11,501 11,415 24,686
------ -------- -------- ------- --------- --------
Net income (loss) before
minority interests..... 445 31,338 24,953 5,000 (14,490) 47,246
------ -------- -------- ------- --------- --------
Minority interests of
limited partnership
interests in the
Partnership............ (420) (19) 420 (g) (19)
------ -------- -------- ------- --------- --------
Net income (loss)....... $ 25 $ 31,338 $ 24,934 $ 5,000 $ (14,070) $ 47,227
====== ======== ======== ======= ========= ========
Net income (loss) per
Class A Share.......... $ 0.01 $ 0.15
====== ========
Weighted average number
of Class A Shares
outstanding............ 7,143 314,342
====== ========
</TABLE>
The accompanying notes and management's assumptions are an integral part of
this statement.
F-4
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
(NOTE 3)
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR NET INCOME (LOSS) PER CLASS A SHARE)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------
PRO FORMA TRUST
TRUST MEZZANINE SOF IV RLH ADJUSTMENTS PRO FORMA
------- --------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Interest income......... $ 478 $ 33,100 $ 311 $ (118)(a) $ 33,771
Prepayment income....... 750 750
Rental income........... $ 15,000 15,000
Other income............ 10 394 60 464
------- -------- -------- -------- --------- --------
Total revenue......... 488 34,244 371 15,000 (118) 49,985
------- -------- -------- -------- --------- --------
EXPENSES:
Interest expense........ 272 8,917 (b) 9,189
Depreciation and amorti-
zation................. 6,467 (c) 6,467
General and administra-
tive................... 639 37 1,000 (d) 1,676
Management fee.......... 2,157 1,546 (3,703)(e)
Advisory fee (Note 4)... 3,806 (f) 3,806
Other expenses.......... 220 100 320
------- -------- -------- -------- --------- --------
Total expenses........ 911 2,377 1,683 16,487 21,458
------- -------- -------- -------- --------- --------
Net income (loss) before
minority interests..... (423) 31,867 (1,312) 15,000 (16,605) 28,527
------- -------- -------- -------- --------- --------
Minority interests of
limited partnership
interests in the
Partnership............ (154) 154 (g)
------- -------- -------- -------- --------- --------
Net income (loss)....... $ (577) $ 31,867 $ (1,312) $ 15,000 $ (16,451) $ 28,527
======= ======== ======== ======== ========= ========
Net income (loss) per
Class A Share.......... $ (0.22) $ 0.09
======= ========
Weighted average number
of Class A Shares
outstanding............ 2,550 314,342
======= ========
</TABLE>
The accompanying notes and management's assumptions are an integral part of
this statement.
F-5
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
NOTE 1--PROPOSED TRANSACTION
As more fully discussed in Note 5 to the annual report on Form 10-K of
Angeles Participating Mortgage Trust (the "Trust"), pursuant to a series of
transactions beginning in March 1994 and including the exercise of certain
warrants in January 1997, Starwood Mezzanine and certain entities affiliated
with the General Partners of Starwood Mezzanine (collectively, Starwood
Mezzanine, Starwood Opportunity Fund IV, L.P. and other affiliates are
referred to as "Starwood"), acquired joint ownership of 70% and 100% of the
outstanding Class A Shares and Class B Shares of the Trust through which they
control approximately 80% of the voting interests in the Trust. Starwood
Mezzanine also currently owns the remaining 91.95% of the APMT Limited
Partnership ("APMT") not held by the Trust, which is convertible into either
cash, an additional 4,568,944 Class A Shares of the Trust, or a combination of
the two, as determined by the Trust. Interests in the Partnership are referred
to as "Units".
Immediately prior to the transactions described below, each outstanding Unit
held by Starwood Mezzanine will be exchanged for one Class A Share of the
Trust and, concurrently, the Partnership will be liquidated through a
distribution of its net assets to the Trust, its then sole Partner. Upon
exchange of the Units for Class A Shares, Starwood and its affiliates would
jointly own approximately 80.97% and 100% of the outstanding Class A Shares
and Class B Shares, respectively, of the Trust through which they would
control 87.3% of the voting interests the Trust.
Starwood Mezzanine and Starwood Opportunity Fund IV, L.P. ("SOF IV") (an
affiliate of the General Partners of Starwood Mezzanine) will enter into a
contribution agreement with the Trust to substantially recapitalize and
increase the size of the Trust's operations. Under the Contribution Agreement,
Starwood Mezzanine will contribute various real estate investments to the
Trust in exchange for 55,148,000 Class A Shares (subject to adjustment) and
$28.5 million in cash. SOF IV will contribute existing real estate
investments, $17.9 million in cash and certain letters of intent in exchange
for 247,074,800 Class A Shares (subject to adjustment) of the Trust and a cash
payment of $313.0 million (representing the par value of the senior mortgages
being contributed). Concurrently, the holders of the Class B Shares who are
affiliates of the general partners of Starwood Mezzanine and SOF IV will
acquire additional Class B Shares sufficient to maintain existing voting
preferences pursuant to the Trust's Amended and Restated Declaration of Trust
(the "Declaration of Trust"). Upon consummation of the Transactions, issuance
of additional Class B shares as required by the Declaration of Trust and
assuming exchange of the existing Units, Starwood and its affiliates would own
approximately 99.3% of the outstanding Class A shares of the Trust and 100% of
the Class B Shares. (Collectively, the transactions described in this
paragraph are the "Transactions").
The Trust is currently negotiating with several lenders with respect to bank
credit agreements, which would be entered in concurrently with the
Transactions, under which the Trust may borrow up to approximately $1,100
million to fund loan originations or acquisitions (including funding the cash
portion of the Transactions described above) and provide working capital and
for other general corporate purposes. The Trust expects that the credit
agreement will provide for a revolving line of credit of $500 million, an
additional $300 million revolving line of credit (drawable under certain
conditions) and a $300 million senior participation purchase facility.
NOTE 2--BASIS OF PRESENTATION
The accompanying unaudited pro forma consolidating balance sheet is
presented as if the Transactions were completed on September 30, 1997. The RLH
Portfolio is included in SOF IV's consolidated balance sheet as of September
30, 1997.
F-6
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
The accompanying unaudited pro forma consolidating statements of operations
are presented as if the Transactions and the acquisition of the RLH portfolio
from the predecessor owners, were completed on January 1, 1996 for the year
ended December 31, 1996 and the nine months ended September 30, 1997.
The pro forma financial statements should be read in conjunction with the
related historical financial statements and notes thereto of which these
financial statements are a part. In management's opinion, all adjustments
necessary to reflect the effects of the Transactions have been made.
The unaudited pro forma consolidating financial statements are not
necessarily indicative of the actual financial position of the Trust at
September 30, 1997 or what the actual results of operations of the Trust would
have been assuming that the Transactions had been completed as of January 1,
1996, nor are they indicative of the results of operations for future periods.
NOTE 3--OTHER TRANSACTIONS WITH AFFILIATES:
Advisory Agreement
The Trust intends to enter into an Investment Advisory Agreement (the
"Advisory Agreement") with Starwood Financial Advisors, LLC (the "Advisor"), a
newly formed, affiliate of the general partners of Starwood Mezzanine, SOF IV,
certain Trustees and officers. The Advisor will advise the Trust with respect
to and manage its investment affairs, subject to the supervision of the
Trust's Board of Trustees, certain limitations set forth in the Advisory
Agreement and the investment policy of Trust as set forth in the Declaration
of Trust. In exchange for these services, the Advisor will receive a base
management fee of 1.25% per annum of the net book equity value, as defined.
Such fees are to be estimated and paid quarterly in advance, subject to
subsequent adjustment to actual amounts due.
The Advisor may receive an additional quarterly incentive fee of 5% of the
Trust's Adjusted Net Income, as defined, which is payable if the Trust's
annualized rate of return on book equity value exceeds the "Benchmark BB
Rate", which is defined as the arithmetic average of the various weekly
average rates of return to maturity on "BB" rated commercial mortgage backed
securities during such quarter by domestic U.S. issuers. In calculating the
Trust's annualized rate of return on book equity value, convertible securities
are treated as equity for any given period if the conversion value, based on
average daily closing prices, exceeds their outstanding balance. If treated as
equity, expenses relating to such convertible securities are added back to
income in arriving at Adjusted Net Income. Such fees are to be estimated and
paid quarterly in advance, subject to subsequent adjustment to actual amounts.
In addition, the Advisor will be reimbursed for certain expenses incurred in
connection with administrative expenses of the Trust and expenses incurred in
connection with the origination or disposition of investment assets of the
Trust.
1996 Share Incentive Plan
The Trust also intends to amend and restate its stock option plan to provide
a means of incentive compensation for officers, key employees, Trustees,
consultants and advisors. Stock options, restricted stock awards and other
performance awards may be granted under the Amended and Restated Starwood
Mortgage Trust 1996 Share Incentive Plan (the "Plan"). If approved, up to a
maximum of 9.0% of the outstanding Class A Shares on a fully-diluted basis, as
adjusted for subsequent issuances of Class A Shares, will be reserved for
issuance under the Plan. All grants of shares under the Plan, other than
automatic grants to non-employee Trustees, will be at the sole discretion of
the Board of Trustees or a specifically designated sub-committee of such
Trustees. Options issued to the Advisor will fully vest immediately upon
grant. Approximately 14,963,057 options to purchase Class A Shares at $2.50
per share will be granted to the Advisor under the Plan upon
F-7
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
consummation of the Transactions and future grants may be made to employees of
the Trust in the future. An independent financial advisory firm estimated the
value of these options at date of grant to be approximately $1.19 per share
using a Black-Scholes valuation model. In the absence of comparable historical
market information for the Trust, the advisory firm utilized assumptions
consistent with activity of a comparable peer group of companies including an
estimated option life of five years, a 35% volatility rate and an estimated
dividend rate sufficient to maintain the Trust's status as a REIT (i.e. 95% of
taxable income). Options issued to employees will be accounted for using the
intrinsic method and, accordingly, no earnings charge will be reflected for
options issued to direct employees since the exercise price approximates the
concurrent exchange transaction price at date of grant. Options issued to the
Advisor will be accounted for under the option value method and, accordingly,
result in a charge to earnings upon consummation of the Transactions equal to
the number of options allocated to the Advisor multiplied by the estimated
value at consummation. The charge of up to approximately $17.8 million has
been excluded from these pro forma financial statements as it represents a
non-recurring charge. Future charges may be taken to the extent of additional
option grants which are at the discretion of the Board of Trustees.
NOTE 4--ADJUSTMENTS TO PRO FORMA CONSOLIDATING BALANCE SHEET:
(A) Represents:
<TABLE>
<S> <C>
New originations, loan draws, & additional principal fundings sub-
sequent to
September 30, 1997............................................... $ 80,060
Principal prepayments............................................. (53,945)
Scheduled principal amortization payments......................... (843)
Adjustment to reflect market value................................ 76,350
--------
Total adjustments to SOF IV investments........................... 101,622
Adjustment in basis of Mezzanine assets........................... 828
--------
$102,450
========
</TABLE>
(B) Represents the following:
<TABLE>
<S> <C>
Cash contributed by SOF IV......................................... $ 17,947
Proceeds from issuance of Class B Shares........................... 1,533
Cash payment to Mezzanine.......................................... (28,500)
Cash payment to SOF IV............................................. (313,012)
Proceeds from borrowings under bank credit agreements ............. 341,512
Elimination of Starwood Mezzanine cash not acquired................ (5,202)
--------
$ 14,278
========
</TABLE>
(C) Represents the elimination of certain assets of Starwood Mezzanine and
SOF IV not to be acquired by the Trust.
(D) Represents the estimated amount to be borrowed under a bank credit
agreements to consummate the Transactions.
(E) Represents the conversion of the Units in exchange for Class A Shares.
(F) Represents the elimination of divisional equity of Starwood Mezzanine
and SOF IV in connection with the Transactions.
F-8
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
(G) Represents the par value of the Class A Shares to be issued to Starwood
Mezzanine and SOF IV in connection with the Transactions and upon conversion
of the Units as follows:
<TABLE>
<CAPTION>
PAR VALUE
--------------
(IN THOUSANDS)
<S> <C>
Contribution transactions:
Starwood Mezzanine........................................... $ 55,148
SOF IV....................................................... 247,075
--------
302,223
Conversion of Units by Starwood Mezzanine...................... 4,569
--------
$306,792
========
</TABLE>
(H) Proceeds from issuance of additional Class B Shares.
(I) Represents the additional paid-in-capital as a result of the
Transactions.
NOTE 5--ADJUSTMENTS TO PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS:
(a) Represents the adjustment to recognized revenue on the contributed real
estate related loan investments to reflect the effects of an increased basis
of assets acquired over contributor's historical cost which is amortized into
post transaction income using the effective interest method.
(b) Represents an adjustment to reflect the estimated interest expense which
would have been incurred under the Trust's new bank credit agreements under
the post transaction capital structure based on the weighted average assets
outstanding assuming approximately a 30% leverage ratio and actual LIBOR rates
for the related periods.
(c) Represents additional depreciation on the RLH Portfolio, real estate
held under a long term operating lease as follows:
<TABLE>
<CAPTION>
FOR NINE FOR YEAR
MONTHS ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Depreciation for period prior to May 2, 1997 ac-
quisition by SOF IV............................ $1,903 $5,708
Increased depreciation resulting from the
Trust's acquisition at a higher basis.......... 570 759
------ ------
$2,473 $6,467
====== ======
</TABLE>
(d) Represents estimated additional general and administrative expenses
(i.e. salaries, office rent, legal, insurance costs etc.) to be incurred by
the Trust in connection with the increase in overall operations as a result of
consummation of the Transactions.
(e) Represents the elimination of management fees previously charged to
Starwood Mezzanine and SOF IV results of operations.
(f) Represents the pro forma base and incentive Advisor Fees which would
have been earned under the terms the Advisory Agreement for the related
periods based on the post transaction capital structure, at an assumed 30%
leverage rate on actual investments made. The incentive fee was calculated
using pro forma returns, published "BB" spread rates and historical 10 year
treasury rates.
(g) Represents the adjustment to eliminate the minority interests allocated
to the Units in APMT currently held by Starwood Mezzanine which will be
converted to Class A Shares prior to the consummation of the Transactions.
F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Starwood Mezzanine Investors, L.P.
We have audited the accompanying balance sheets of the Starwood Mezzanine
Loan Investment Operations (the "Division"), a division of Starwood Mezzanine
Investors, L.P. (the "Partnership") at December 31, 1996 and 1995 and the
related statements of operations and of cash flows of the Division for the
years ended December 31, 1996 and 1995 and the period from November 1, 1994
("Inception") through December 31, 1994. 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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing 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.
The accompanying financial statements were prepared to comply with the rules
and regulations of the Securities and Exchange Commission and on the basis of
presentation as described in Note 1, to present the balance sheets of the
Division to be contributed to Angeles Participating Mortgage Trust ("APT"),
and the related statements of operations and cash flows of the Division and
are not intended to be a complete presentation of the Partnership's financial
position, results of operations or cash flows.
In our opinion, the financial statements present fairly, in all material
respects, the balance sheets of the Division at December 31, 1996 and 1995 and
the related statements of operations and of cash flows of the Division for the
years ended December 31, 1996 and 1995 and the period from Inception through
December 31, 1994, in conformity with generally accepted accounting
principles.
Price Waterhouse LLP
New York, New York
November 14, 1997
F-10
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
DIVISIONAL BALANCE SHEETS
(NOTES 1 AND 2)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, AS OF DECEMBER 31,
------------- -------------------
1997 1996 1995
------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Real estate and related investments (Note
4)......................................... $144,003 $ 180,485 $ 208,464
Cash and cash equivalents................... 5,202 4,540 4,056
Accrued interest receivable................. 1,616 2,238 3,710
Other assets and deferred expenses.......... 268 356 361
-------- --------- ---------
Total assets.............................. $151,089 $ 187,619 $ 216,591
======== ========= =========
LIABILITIES AND DIVISIONAL EQUITY:
Accrued expenses and other liabilities...... $ 86 $ 45 $ 97
Divisional equity........................... 151,003 187,574 216,494
-------- --------- ---------
Total liabilities and divisional equity... $151,089 $ 187,619 $ 216,591
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
STATEMENTS OF DIVISIONAL OPERATIONS
(NOTES 1 AND 2)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE FOR THE NOVEMBER 1, 1994
NINE MONTHS YEAR ENDED (INCEPTION) THROUGH
ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------------- --------------- -------------------
1997 1996 1996 1995 1994
--------- --------- ------- ------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Interest income from in-
vestments.............. $ 18,202 $ 25,368 $33,100 $15,169 $ 112
Prepayment income....... 13,990 350 750 -- --
Other income............ 655 225 394 232 --
--------- --------- ------- ------- -----
Total revenues........ 32,847 25,943 34,244 15,401 112
--------- --------- ------- ------- -----
EXPENSES:
Management fee (Note
3)..................... 1,337 1,651 2,157 2,201 367
Other expenses.......... 172 165 220 223 51
--------- --------- ------- ------- -----
Total expenses........ 1,509 1,816 2,377 2,424 418
--------- --------- ------- ------- -----
Net income (loss)..... $ 31,338 $ 24,127 $31,867 $12,977 $(306)
========= ========= ======= ======= =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
STATEMENTS OF CHANGES IN DIVISIONAL EQUITY
(NOTES 1 AND 2)
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash contributions.................................................... $ 27,161
Net loss for period from Inception to December 31, 1994............... (306)
--------
Capital balances at December 31, 1994................................. 26,855
Cash contributions.................................................... 183,441
Cash distributions.................................................... (6,779)
Net income for year................................................... 12,977
--------
Capital balances at December 31, 1995................................. 216,494
Cash contributions.................................................... 17,825
Cash distributions.................................................... (74,852)
Non-cash distributions................................................ (3,760)
Net income for year................................................... 31,867
--------
Capital balances at December 31, 1996................................. 187,574
Cash contributions.................................................... 4,951
Cash distributions.................................................... (72,860)
Net income for nine months ended September 30, 1997 (unaudited)....... 31,338
--------
Capital balances at September 30, 1997 (unaudited).................... $151,003
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
STATEMENTS OF DIVISIONAL CASH FLOWS
(NOTES 1 AND 2)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE FOR THE NOVEMBER 1, 1994
NINE MONTHS YEAR ENDED (INCEPTION) THROUGH
ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
-------------------- ------------------ -------------------
1997 1996 1996 1995 1994
--------- --------- -------- -------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income (loss).... $ 31,338 $ 24,127 $ 31,867 $ 12,977 $ (306)
Reconciliation of net
income (loss) to net
cash provided (used)
by operating
activities
Amortization......... 60 60 80 80 13
Changes in assets and
liabilities:
(Increase) decrease
in interest
receivable........ 622 408 1,472 (3,620) (112)
(Increase) decrease
in other assets... 28 5 (75) 168 (222)
Increase (decrease)
in accounts
payable and
accrued expenses.. (15) (47) (52) 20 77
Increase in other
liabilities....... 56 -- -- -- --
--------- --------- -------- -------- -------
Net cash provided
(used) by
operating
activities...... 32,089 24,553 33,292 9,625 (550)
--------- --------- -------- -------- -------
Cash flows from invest-
ing activities:
Principal repayments
from unsecured notes
and mortgage notes.. 77,066 18,121 61,914 169 --
Investments in
unsecured notes and
mortgage notes...... (40,584) (18,264) (37,695) (183,611) (25,000)
--------- --------- -------- -------- -------
Net cash provided
(used) by
investing
activities...... 36,482 (143) 24,219 (183,442) (25,000)
--------- --------- -------- -------- -------
Cash flows from financ-
ing activities:
Organization costs... -- -- -- -- (400)
Contributions to di-
visional equity..... 4,951 7,186 17,825 183,441 27,161
Distributions from
divisional equity... (72,860) (35,433) (74,852) (6,779) --
--------- --------- -------- -------- -------
Net cash provided
(used) by
financing
activities...... (67,909) (28,247) (57,027) 176,662 26,761
--------- --------- -------- -------- -------
Net increase (decrease)
in cash and cash
equivalents........... 662 (3,837) 484 2,845 1,211
Cash and cash
equivalents, beginning
of period............. 4,540 4,056 4,056 1,211 --
--------- --------- -------- -------- -------
Cash and cash
equivalents, end of
period................ $ 5,202 $ 219 $ 4,540 $ 4,056 $ 1,211
========= ========= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements were prepared to reflect certain
assets and operations which will be contributed to Angeles Participating
Mortgage Trust ("APT"), a real estate investment trust which is publicly
traded on the American Stock Exchange, in exchange for Class A Shares of APT
as more fully described in Note 2.
Starwood Mezzanine Investors, L.P. (the "Partnership" or "Starwood
Mezzanine"), a Delaware limited partnership, was formed on February 15, 1994.
Starwood Capital Group, L.P. as managing general partner, and Starwood
Mezzanine Holdings, L.P. as the general partner, in the Partnership
(collectively, the "General Partners"), and certain entities or persons, as
limited partners in the Partnership, entered into a Limited Partnership
Agreement (the "Partnership Agreement") dated August 29, 1994. The Partnership
Agreement was amended as of November 1, 1994 (date of inception) to admit
additional limited partners to Starwood Mezzanine resulting in an effective
termination of the old partnership. Investing activity including loan
investments commenced upon this date. Under the amended Partnership Agreement,
the General Partners and limited partners (collectively, the "Partners") have
aggregate 1% and 99% interests in the Partnership, respectively. The term of
the Partnership is seven years after the admission of additional limited
partners on November 1, 1994 but may be extended upon majority approval of the
limited partners.
As stated in the Partnership's offering memorandum, the purpose of Starwood
Mezzanine is to seek current returns and capital appreciation through
investment in high yielding, senior and subordinated real estate related debt
interests including unrated credit support for the first loss tranches of
commercial mortgage-backed securities, junior or subordinated mortgage loans,
and other high-yielding securities collateralized by various types of real
estate properties.
The Partnership, at the sole discretion of the General Partners, was
originally permitted to reinvest the proceeds of any disposition or prepayment
from its real estate investments and real estate related investments through
November 1, 1996. After this period, proceeds from any dispositions or
prepayments from real estate and related investments were to be distributed,
net of any required reserves. Notwithstanding the foregoing, the Partnership
was permitted to make reinvestments subsequent to November 1, 1996 with the
approval of the limited partners.
Basis of accounting
The accompanying financial statements include Starwood Mezzanine's loan
investment operations (the "Division"), as included in the financial records
of the Partnership, as if it were a separate legal entity. All of the
allocations and estimates in the financial statements are based on assumptions
that the Partnership's management believes are reasonable under the
circumstances. However, these allocations and estimates are not necessarily
indicative of the costs that would have resulted if the Division had been
operated as a separate entity.
For purposes of these financial statements, the investments in APT
stock/warrants and in the APMT (see Note 2) have been excluded since they will
not be contributed by Starwood Mezzanine in the proposed transaction.
Interim financial statements
The accompanying financial statements as of September 30, 1997 and for the
nine months ended September 30, 1997 and 1996, are unaudited; however, in the
opinion of the General Partners, they include all adjustments necessary for a
fair presentation of such financial statements in accordance with generally
accepted accounting principles. The results for the interim periods are not
necessarily indicative of the results for the full year.
F-15
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED)
Revenue recognition
Interest income, including amortization of discounts, commitment fees, and
amortization fees, is recognized using the effective interest method. Income
under participation features is recognized when earned and payable. Income
from prepayment penalties is recognized when received.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
in banks and short-term investments. Short-term investments are comprised of
highly liquid instruments with original maturities of three months or less.
Income taxes
No provision for income taxes has been made in the financial statements
because the Division and the Partnership are not subject to income tax. The
tax effects of its activities accrue to the partners of the Partnership.
Risks and uncertainties
In the normal course of business, the Division encounters economic risk.
There are three main components of economic risk: interest rate risk, credit
risk and market risk. The Division would be subject to interest rate risk to
the degree that its interest-bearing liabilities mature or reprice at
different speeds, or different bases, than its interest earning assets.
However, the Division has not historically entered into interest bearing
relationships to finance its investment activity or operations. Credit risk is
the risk of default on the Division's loan portfolio that results from a
borrowers' inability or unwillingness to make contractually required payments.
Market risk reflects changes in the value of loans held for sale, securities
available for sale and purchased mortgage servicing rights due to changes in
interest rates or other market factors including the rate of prepayments of
principal and the value of the collateral underlying loans and the valuation
of real estate held by the Division.
Allowance for estimated loan losses on loan portfolio
The Division's accounting policies require that an allowance for estimated
loan losses be maintained at a level that management, based upon an evaluation
of known and inherent risks in the portfolio, considers adequate to provide
for potential losses. Specific valuation allowances are established for
impaired loans in the amount by which the carrying value, before allowance for
estimated losses, exceeds the fair value of collateral less costs to dispose
on an individual loan basis. Management considers a loan to be impaired when,
based upon current information and events, it believes that it is probable
that management will be unable to collect all amounts due according to the
contractual terms of the loan agreement on a timely basis. Management measures
these impaired loans at the fair value of the loans' underlying collateral
less estimated disposal costs. Impaired loans may be left on accrual status
during the period Starwood Mezzanine is pursuing repayment of the loan. These
loans are placed on non-accrual status at such time that the loans either: (i)
become 90 days delinquent or (ii) management determines the borrower is
incapable of, or has ceased efforts toward, curing the cause of the
impairment. Impairment losses are recognized through an increase in the
allowance for loan losses and a corresponding charge to the provision for loan
losses. Charge-offs occur when loans, or a portion thereof, are considered
uncollectible and of such little value that further pursuit of collection is
not warranted. Management's periodic evaluation of the allowance for estimated
loan losses is based upon an analysis of the portfolio, historical loss
experience, economic conditions and trends, collateral values and other
relevant factors. As of September 30, 1997 and December 31, 1996 and 1995, no
allowances were considered necessary, however, such allowances may be required
in the future. Further, no charge-offs have been taken since inception.
F-16
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED)
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of Starwood Mezzanine to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 2. TRANSACTIONS WITH APT AND APMT
On March 15, 1994, APT entered into an agreement with SAHI Partners, L.P.,
and SAHI, Inc. (affiliates of the General Partners of Starwood Mezzanine) for
the sale of warrants (the "Warrants") for the right to purchase five million
shares of APT's Class A Shares at a price of $1 per share and 2,500,000 shares
of the Class B Shares at a price of $0.01 per share. The Class B Shares are
convertible 49 for 1 into Class A Shares. SAHI Partners, L.P. and SAHI, Inc.
purchased the Warrants for $101,000, which amount was applied against the
purchase price for the Class A and Class B Shares purchased upon the
subsequent exercise of the Warrants. On March 28, 1996, the Class A Warrants
were assigned to the Partnership at an amount equal to the cost to the
affiliates.
On September 26, 1996, APT became sole general partner (with an 8.05%
interest) of the APMT Limited Partnership ("APMT"), a newly formed entity, in
exchange for a contribution of $400,000 in cash. Concurrently, Starwood
Mezzanine received a 91.95% limited partner interest in APMT in exchange for
its entire interest in the Warwick Hotel mortgage note then valued at
approximately $4.6 million. The Partnership's interest in APMT is evidenced by
4,568,944 partnership units ("Units"), which are exchangeable for either Class
A Shares of APT, cash or a combination of each as determined by APT.
On January 22, 1997, Starwood Mezzanine exercised the Warrants and acquired
five million APT Class A Shares for an additional $4.9 million in cash.
Assuming exchange of the Units, the Partnership and its affiliates would own
approximately 80.97% of the outstanding Class A Shares of APT and 100% of the
Class B Shares. The Class B Shares have disproportionate voting rights which
provide for 33.33% of the votes in all actions requiring shareholder votes.
Starwood Mezzanine and Starwood Opportunity Fund IV, L.P. ("SOF IV") (an
affiliate of the General Partners of Starwood Mezzanine) will enter into a
contribution agreement with the Trust to substantially recapitalize and
increase the size of APT's operations. Under the Contribution Agreement,
Starwood Mezzanine will contribute various real estate to APT's in exchange
for 55,148,000 Class A Shares of APT (subject to adjustment) and $28.5 million
in cash. SOF IV will contribute existing real estate investments plus $17.9
million in cash and certain letters of intent in exchange for 247,074,800
Class A Shares of the APT (subject to adjustment) and a cash payment of $313.0
million (representing the par value of the senior mortgages being
contributed). It is further anticipated that prior to the contribution
transaction described above that Starwood Mezzanine will convert its existing
holdings of Units to APT Class A Shares and APMT will terminate with a
liquidating distribution to APT. Concurrently, current affiliated holders of
the Class B Shares will acquire additional Class B Shares sufficient to
maintain existing voting preferences.
For purposes of these financial statements, the investments in the warrants,
APT Class A Shares and Units of APMT have been excluded since they will not be
contributed by Starwood Mezzanine in the proposed transactions.
F-17
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. RELATED PARTY TRANSACTIONS
Starwood Mezzanine pays to the General Partners an annual asset management
fee calculated as follows: (i) 1% of the total amount of capital commitments
for the first and second years of the Partnership's term, beginning at the
date of inception, (ii) 1% of the weighted average amount of capital
contributions invested in real estate interests for the third year and (iii)
.75% of the weighted average amount of capital contributions invested in real
estate interests for the fourth year through the dissolution or termination of
Starwood Mezzanine. Such fees are to be limited to actual direct costs and
allocated overhead, as determined by the General Partners, in connection with
managing Starwood Mezzanine's affairs. These fees are payable quarterly in
advance.
NOTE 4. INVESTMENTS IN REAL ESTATE AND RELATED INVESTMENTS
Summary information regarding the Division's investments is included in the
table on the following page:
F-18
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)
NOTE 4. INVESTMENTS IN REAL ESTATE AND RELATED INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
CURRENT CARRYING BALANCE AS OF
NUMBER OF ORIGINAL -------------------------------
BORROWERS BALANCE OF SEPTEMBER 30, DECEMBER 31, INTEREST INTEREST
UNDERLYING IN COMMITMENT ------------- ----------------- ACCRUAL PAYMENT
INVESTMENT CLASS PROPERTY TYPES CLASS(A) AMOUNT(A) 1997 1996 1995 MATURITIES(A) RATES(A) RATES(A)
- ---------------- --------------- --------- ---------- ------------- -------- -------- ------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Senior Hotel/Apartment -- -- -- -- 4,006(d) N/A N/A N/A
mortgages.......
Subordinate Hotel/Office/Resort 2 79,750 $ 75,825 $151,076 $138,433 2002 & 10.00% to 10.00% to
mortgages....... Planned communities 2005 15.25% 15.25%
Unsecured Apartment/Hotel/Office 2 27,300 25,295 25,161 66,026 2002 & 11.25% to 11.25% to
Notes........... 2004 15.00% 15.00%
Construction Assisted Living 1 40,000 40,000 -- -- 1999 12.00% 12.00%
loans...........
Loan Office 1 5,954 2,883 4,248 various LIBOR + LIBOR +
participation 1.50-175% 1.50-175%
interests.......
-------- -------- --------
$144,003 $180,485 $208,465
======== ======== ========
<CAPTION>
PRINCIPAL PARTICIPATION
INVESTMENT CLASS AMORTIZATION(A) FEATURES(A)
- ---------------- --------------- -------------
<S> <C> <C>
Senior N/A N/A
mortgages.......
Subordinate Yes(b) None(c)
mortgages.......
Unsecured None Yes(e)
Notes...........
Construction None None
loans...........
Loan Yes(b) None
participation
interests.......
</TABLE>
FOOTNOTES TO TABLE
- ----
(a) Information relates only to assets outstanding as of September 30, 1997
(b) The remaining loans require fixed monthly payments of interest and
principal resulting in partial principal amortization over the loan term
with the balance due at maturity. Further, one of the loans allows for
additional annual prepayments of $1.3 million without penalty at the
borrowers option.
(c) On June 26, 1997, one of the loans was refinanced. As part of this
refinancing, Starwood Mezzanine received net proceeds which included a
$14.0 million yield maintenance payment which has been reflected in
prepayment income in the results of operations for the nine months ended
September 30, 1997.
(d) Contributed to APMT in exchange for Units effective September 26, 1996--
See Note 2.
(e) Under the terms of one of the loans, the Division is to receive additional
interest equal to 12% of the cash flow from operation of the underlying
property and the proceeds, in excess of the base amount, from a sale or
refinancing of the property.
F-19
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENTS OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED)
Prepayment terms
The terms of the loan investments generally provide some protection against
re-investment risks associated with early repayments of the loans for a
substantial portion of the loan's term. This protection is achieved through
various specific loan terms including one or more of the following: prepayment
lock-outs, prepayment penalties or yield maintenance provisions based on the
loans accrual rates.
NOTE 5. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of the Divisional financial instruments
are presented in accordance with generally accepted accounting principles
which define fair value as the amount at which a financial instrument could be
exchanged for cash in a current transaction with third parties, other than in
a forced or liquidation sale. These estimated fair values, however, do not
necessarily represent the liquidation value or the market value of the
Division as an operating entity.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Real Estate and related investments
For investments in unsecured notes, senior mortgages, subordinated
mortgages, construction loans, and loan participations, fair value is
estimated by discounting the future contractual cash flows (excluding cash
flow or collateral appreciation participation features which are not currently
"in the money") using the current market rates at which similar loans would be
made to borrowers with similar credit ratings for the same remaining
maturities. Investments in real estate under long-term operating leases are
not considered financial instruments. Estimated Fair Values of the Division's
real estate and related investments were $200.5 and $216.9 million at December
31, 1996 and 1995, respectively.
Cash and cash equivalents
Accrued interest receivable
Accrued expenses and other liabilities
For these short-term instruments, the carrying value is a reasonable
approximation of the fair value.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Starwood Opportunity Fund IV, L.P.
We have audited the accompanying balance sheet of the SOF IV Loan Investment
Operations (the "Division"), a division of Starwood Opportunity Fund IV, L.P.
(the "Partnership") at December 31, 1996 and the related statement of
operations and of cash flows of the Division for the period from July 3, 1996
("Inception") through December 31, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying financial statements were prepared to comply with the rules
and regulations of the Securities and Exchange Commission and on the basis of
presentation as described in Note 1, to present the balance sheet of the
Division contributed to Angeles Participating Mortgage Trust (the "APT"), and
the related statement of operations and cash flows of the Division and are not
intended to be a complete presentation of the Division's financial position,
results of operations or cash flows.
In our opinion, the financial statements present fairly, in all material
respects, the balance sheet of the Division at December 31, 1996 and the
related statement of operations and of cash flows of the Division for the
period from July 3, 1996 ("Inception") through December 31, 1996, in
conformity with generally accepted accounting principles.
Price Waterhouse LLP
New York, New York
November 14, 1997, except for
Note 7, which is as of
January 2, 1998
F-21
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
DIVISIONAL BALANCE SHEETS
(NOTES 1 AND 2)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Real estate and related investments (Note 4)......... $ 811,130 $ 8,420
Cash and cash equivalents............................ -- 2,094
Restricted cash...................................... 3,143 --
Accrued interest and rents receivable................ 8,745 --
Other assets......................................... 3,388 401
--------- --------
Total assets....................................... $ 826,406 $ 10,915
========= ========
LIABILITIES AND DIVISIONAL EQUITY:
Accounts payable and accrued expenses................ $ 76 $ 1,606
Due to affiliates.................................... 2 536
Other liabilities.................................... 3,879 --
Minority interest.................................... 19 --
--------- --------
Total liabilities.................................. 3,976 2,142
Divisional equity.................................... 822,430 8,773
--------- --------
Total liabilities and divisional equity............ $ 826,406 $ 10,915
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
STATEMENTS OF DIVISIONAL OPERATIONS
(NOTES 1 AND 2)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE
FOR THE PERIOD FROM PERIOD FROM
NINE MONTHS JULY 3, 1996 JULY 3, 1996
ENDED ("INCEPTION") THROUGH ("INCEPTION") THROUGH
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------- --------------------- ---------------------
1997 1996 1996
------------- --------------------- ---------------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Interest income from in-
vestments.............. $27,890 -- $ 311
Rental revenue.......... 6,306 -- --
Other interest income... 2,258 -- 60
------- ----- -------
Total revenues........ 36,454 -- 371
------- ----- -------
EXPENSES:
Management fee.......... 7,530 -- 1,546
Depreciation............ 2,378 -- --
General and administra-
tive................... 217 4 37
Other expenses.......... 1,376 13 100
------- ----- -------
Total expenses........ 11,501 17 1,683
------- ----- -------
Net income (loss) before
minority interest...... 24,953 (17) (1,312)
Minority interest....... (19) -- --
------- ----- -------
Net income (loss)..... $24,934 $ (17) $(1,312)
======= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
STATEMENTS OF CHANGES IN DIVISIONAL EQUITY
(NOTES 1 AND 2)
(IN THOUSANDS)
<TABLE>
<S> <C>
Contributions to divisional equity.................................. $ 10,085
Net loss for the period from July 3, 1996 (inception) through
December 31, 1996.................................................. (1,312)
--------
Divisional equity at December 31, 1996.............................. 8,773
Contributions to divisional equity.................................. 788,723
Net income for the nine months ended September 30, 1997
(unaudited)........................................................ 24,934
--------
Divisional equity at September 30, 1997 (unaudited)................. $822,430
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
STATEMENTS OF DIVISIONAL CASH FLOWS
(NOTES 1 AND 2)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM PERIOD FROM
FOR THE JULY 3, 1996 JULY 3, 1996
NINE MONTHS ("INCEPTION") ("INCEPTION")
ENDED THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------- ------------- -------------
1997 1996 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................. $ 24,934 $ (17) $(1,312)
Reconciliation of net income (loss)
to cash used by operating
activities:
Depreciation..................... 2,378 -- --
Changes in assets and
liabilities:
Increase in accrued interest
receivable.................... (8,745) -- --
Increase in restricted cash.... (3,143) -- --
Increase in other assets....... (2,984) (101) (401)
Increase in real estate
investments from deferred
interest or amortization...... (6,139) -- --
(Decrease) Increase in accounts
payable and accrued expenses.. (1,530) -- 1,606
Increase in other liabilities.. 3,879 118 --
--------- ----- -------
Net cash provided (used) by
operating activities........ 8,650 -- (107)
--------- ----- -------
Cash flows from investing activities:
Purchase of real estate
investments....................... (801,112) (8,420)
Repayment of mortgage notes
receivable........................ 2,162 --
--------- ----- -------
Net cash used by investing
activities.................. (798,950) -- (8,420)
--------- ----- -------
Cash flows from financing activities:
Contributions to divisional
equity............................ 788,723 -- 10,085
Due to affiliates.................. (536) -- 536
Proceeds from debt obligations,
net............................... -- -- --
Contributions from minority
interest partner.................. 19 -- --
--------- ----- -------
Net cash provided by
financing activities........ 788,206 -- 10,621
--------- ----- -------
Net increase (decrease) in cash and
cash equivalents.................... (2,094) -- 2,094
Cash and cash equivalents,
beginning of period............... 2,094 -- --
--------- ----- -------
Cash and cash equivalents, end of
period............................ $ 0 $ -- $ 2,094
========= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements were prepared to reflect certain
assets and operations which will be contributed to Angeles Participating
Mortgage Trust ("APT"), a real estate investment trust which is publicly
traded on the American Stock Exchange, in an exchange for Class A Shares of
APT and cash as more fully described in Note 2.
Starwood Opportunity Fund IV, L.P. ("SOF IV" or the "Partnership"), a
Delaware limited partnership, was formed with SOFI IV Management L.L.C. ("the
General Partner") as general partner in the Partnership, and certain entities
or persons, as limited partners (collectively, the "Partners"), entered into a
Limited Partnership Agreement (the "Partnership Agreement") dated July 3, 1996
(the "Inception"). Under the Partnership Agreement, as amended, the General
Partners and limited partners to SOF IV have aggregate 1% and 99% interests in
SOF IV, respectively. The term of SOF IV is eight years after February 27,
1997, the "Final Date", but may be extended by the General Partner with the
consent of the limited partners advisory committee for up to two consecutive
one-year periods.
As stated in SOF IV's offering memorandum, the objective of SOF IV is to
generate returns for its Partners by (i) originating or purchasing mortgage
loans, including, without limitation, mortgage loans with equity
characteristics, and by locating, analyzing, investing in and managing real
estate-related debt interests and pools of such interests, including without
limitation, junior or subordinated mortgage loans, unsecured loans to
companies or entities involved in real estate related activities, unrated
credit support or first loss tranches of commercial mortgage-backed
securities, and other high-yielding securities collateralized by various types
of real estate properties and, in furtherance thereof, where appropriate to
participate in or substantially influence the management of the obligors of
such debt interests, to hold such assets for investment purposes, and to sell,
distribute, convert into equity, or otherwise dispose of such investments,
(ii) acquiring, holding, maintaining, operating, leasing, managing,
developing, improving, mortgaging, encumbering, and selling for profit equity
interests in real estate and in securities and other interests related to real
estate, including, without limitation, rental apartment buildings, office
properties and zoned residential land, (iii) lending to and/or participating
as a partner, owner or investor in other general or limited partnerships,
limited liability companies, corporations or other vehicles or entities, the
business of which is related to real estate, and (iv) engaging in all other
activities related or incidental thereto.
Basis of accounting
The accompanying financial statements include SOF IV's loan investment
operations (the "Division"), as included in the financial records of SOF IV,
as if they were a separate legal entity. All of the allocations and estimates
in the financial statements are based on assumptions that the Partnership's
management believes are reasonable under the circumstances. However, these
allocations and estimates are not necessarily indicative of the costs that
would have resulted if the Division had been operated as a separate entity.
The Partnership has outstanding debt obligations aggregating $933.4 million
at September 30, 1997 and December 31, 1996, respectively, which are secured
by the partners capital commitments and certain of the Partnership's
investments, including those of the Division. As part of the proposed
transaction, a portion of the cash proceeds will be utilized to reduce the
outstanding obligations and the Division's investments will be released as
collateral. None of the Partnerships debt obligations will be assumed by APT.
Accordingly, for purposes of these divisional financial statements, the
investments which will not be contributed and loan obligations which will not
be assumed by APT, along with their related effects on the Division's
operating results and cash flows, have been excluded.
F-26
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED)
Interim financial statements
The accompanying financial statements as of September 30, 1997 and for the
nine months ended September 30, 1997, are unaudited; however, in the opinion
of the General Partners, they include all adjustments necessary for a fair
presentation of such financial statements in accordance with generally
accepted accounting principles. The results for the interim periods are not
necessarily indicative of the results for the full year.
Revenue recognition
Interest income, including amortization of discounts, commitment fees, and
amortization fees, is recognized using the effective interest method. Income
under participation features is recognized when earned and payable. Income
from prepayment penalties is recognized when received.
Rental revenue from tenants under operating leases is recognized on a
straight-line basis regardless of when payments are due.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
in banks and short-term investments. Short-term investments are comprised of
highly liquid instruments with original maturities of three months or less.
Allowance for estimated loan losses on loan portfolio
The Division's accounting policies require that an allowance for estimated
loan losses be maintained at a level that management, based upon an evaluation
of known and inherent risks in the portfolio, considers adequate to provide
for potential losses. Specific valuation allowances are established for
impaired loans in the amount by which the carrying value, before allowance for
estimated losses, exceeds the fair value of collateral less costs to dispose
on an individual loan basis. Management considers a loan to be impaired when,
based upon current information and events, it believes that it is probable
that SOF IV will be unable to collect all amounts due according to the
contractual terms of the loan agreement on a timely basis. Management measures
these impaired loans at the fair value of the loans' underlying collateral
less estimated disposal costs. Impaired loans may be left on accrual status
during the period SOF IV is pursuing repayment of the loan. These loans are
placed on non-accrual status at such time that the loans either: (i) become 90
days delinquent; or (ii) management determines the borrower is incapable of,
or has ceased efforts toward, curing the cause of the impairment. Impairment
losses are recognized through an increase in the allowance for loan losses and
a corresponding charge to the provision for loan losses. Charge-offs occur
when loans, or a portion thereof, are considered uncollectible and of such
little value that further pursuit of collection is not warranted. Management's
periodic evaluation of the allowance for estimated loan losses is based upon
an analysis of the portfolio, historical loss experience, economic conditions
and trends, collateral values and other relevant factors. As of September 30,
1997 and December 31, 1996, no allowances were considered necessary, however,
such allowances may be required in the future. Further, no charge-offs have
been taken since inception.
Income taxes
No provision for income taxes has been made in the divisional financial
statements because its owner, SOF IV, is a partnership which is not directly
subject to income tax. The tax effects of its activities accrue to the
Partners of SOF IV.
F-27
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED)
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2. TRANSACTIONS WITH APT AND APMT
On March 15, 1994, Angeles Participating Mortgage Trust ("APT") entered into
an agreement with SAHI Partners, L.P., and SAHI, Inc. (affiliates of the
General Partners of Starwood Mezzanine Investors, L.P. ) for the sale of
warrants (the "Warrants") for the right to purchase five million shares of
APT's Class A Shares at a price of $1 per share and 2,500,000 shares of the
Class B Shares at a price of $0.01 per share. The Class B Shares are
convertible 49 for 1 into Class A Shares. SAHI Partners, L.P. and SAHI, Inc.
purchased the Warrants for $101,000, which amount was applied against the
purchase price for the Class A and Class B Shares purchased upon the
subsequent exercise of the Warrants. On March 28, 1996, the Class A Warrants
were assigned to the Starwood Mezzanine Investors, L.P. ("Starwood Mezzanine")
at an amount equal to the cost to the affiliates.
On September 26, 1996, APT became sole general partner (with an 8.05%
interest) of the APMT Limited Partnership ( "APMT"), a newly formed entity, in
exchange for a contribution of $400,000 in cash. Concurrently, Starwood
Mezzanine received a 91.95% limited partner interest in APMT in exchange for
its entire interest in the Warwick Hotel mortgage note then valued at
approximately $4.6 million. The Partnership's interest in APMT is evidenced by
4,568,944 partnership units ("Units") , which are exchangeable for Class A
Shares of APT, cash or a combination of each as determined by APT.
On January 22, 1997, Starwood Mezzanine exercised the Warrants and acquired
five million APT Class A Shares for an additional $4.9 million in cash.
Assuming exchange of the Units, the Starwood Mezzanine and its affiliates
would own approximately 81% of the outstanding Class A Shares of APT and 100%
of the Class B Shares. The Class B Shares have disproportionate voting rights
which provide for 33.33% of the votes in all actions requiring shareholder
votes.
Starwood Mezzanine and SOF IV will enter into a contribution agreement with
APT to substantially recapitalize and increase the size of APT's operations.
Under the Contribution Agreement, Starwood Mezzanine will contribute various
real estate investments to APT in exchange for 55,148,000 Class A Shares of
APT (subject to adjustment) and $28.5 million in cash. SOF IV will contribute
existing real estate investments, $17.9 million in cash and certain letters of
intent in exchange for 247,074,800 Class A Shares of APT (subject to
adjustment) and a cash payment of $313.0 million (representing the par value
of the senior mortgages being contributed). It is further anticipated that
prior to the contribution transaction described above that Starwood Mezzanine
will convert its existing holdings of Units to APT Class A Shares and APMT
will terminate with a liquidating distribution to APT. Concurrently, current
affiliated holders of the Class B Shares will acquire additional Class B
Shares sufficient to maintain existing voting preferences.
For purposes of these divisional financial statements, the investments which
will not be contributed and loan obligations which will not be assumed by APT
have been excluded.
NOTE 3. RELATED PARTY TRANSACTIONS
The Partnership pays to the General Partners an annual management fee
calculated as follows: (i) 1.25% of the total amount of capital commitments
for three years from the Closing Date and thereafter, (ii) 1.25% of the
F-28
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED)
weighted average amount of capital contributions invested in real estate
interests for the earlier of (a) the Partnership's dissolution date or (b) the
actual termination of the Partnership. These fees are payable quarterly in
advance and adjustments shall be made at the end of each calendar year to
reflect the actual management fee payable for the year. Divisional management
fees payable of $891,000 at December 31, 1996 were paid in January 1997.
NOTE 4. INVESTMENTS IN REAL ESTATE AND RELATED INVESTMENTS
REAL ESTATE UNDER LONG-TERM OPERATING LEASES
RLH Portfolio
On May 2, 1997, a 99% owned subsidiary of the Partnership ("RLH"), acquired
a portfolio of seventeen hotels for a price of approximately $172.5 million.
The properties are leased under a triple net lease to and operated by Red Lion
Hotels, Inc. ("Red Lion") under a Master Lease Agreement (the "Lease") between
RLH, the lessor, and Red Lion, the lessee. The properties are seventeen full
service hotels located in seven states and contain a total of 3,989 rooms. On
November 8, 1996, Doubletree Corporation ("Doubletree") acquired Red Lion and
assumed the Lease with RLH.
The Lease is a triple net lease under which Doubletree controls all aspects
of the properties' operation and pays all costs associated with the operation
of the hotels, including real estate taxes, insurance, utilities, services and
capital expenditures. The initial term of the lease expires on December 31,
2010, and can be extended for up to five, five-year terms at Doubletree's
option. Rent payments under the Lease consist of base rent equal to $15
million annually and additional rent equal to 7.5% of the amount by which the
aggregate operating revenue for any given year exceeds the aggregate operating
revenue of the twelve months ended September 30, 1996. Payments under the
lease are guaranteed by Doubletree.
The components of the related investments are as follows (In thousands):
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
-------------
1997
-------------
(UNAUDITED)
<S> <C>
Land........................................................... $ 23,210
Building....................................................... 130,388
Land improvements.............................................. 10,201
Office and other............................................... 1,013
Furniture, fixtures & equipment................................ 7,698
---------
172,510
Less: Accumulated depreciation................................. (2,378)
---------
$ 170,132
=========
</TABLE>
Summary information regarding the Division's lending investments is included
in the table on the following page:
F-29
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. INVESTMENTS IN REAL ESTATE AND RELATED INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
CURRENT CARRYING BALANCE AS OF
NUMBER OF ORIGINAL --------------------------
BORROWERS BALANCE OF SEPTEMBER 30, DECEMBER 31,
UNDERLYING IN COMMITMENT ------------- ------------ MATURITIES INTEREST
INVESTMENT CLASS PROPERTY TYPE CLASS(A) AMOUNT(A) 1997 1996 (A) ACCRUAL RATES(A)
- ---------------- -------------- --------- ---------- ------------- ------------ ---------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Senior Office/Hotel/Mixed use 6 459,014 $425,767 -- 1999-2004 Fixed: 10.30-10.82%
mortgages....... Variable: LIBOR +
1.25-2.00%
Subordinated
mortgages....... Office/Hotel 2 77,625 75,125 -- 2002-2004 Fixed 12-15.00%
Variable:
LIBOR + 1.75%
Opportunistic
Loan
Investments..... Office/Hotel/Apartment 2 126,710 61,492 -- 1999 & 2007 Fixed: 5.00-7.00%
Construction Resort 1 52,390 29,728 -- 2004 12.50%
loans...........
Real estate
under long term
operating
leases.......... Hotels 1 N/A(e) 170,132 -- N/A(e) N/A(e)
Loan
participation Various 2 15,422 8,419 8,420 1999 Fixed: 7.13%
interests....... Variable:
LIBOR + 58%
Other........... Public bonds 2 40,250 40,467 -- 2002 & 2007 12.50% - 12.75%
-------- -----
$811,130 8,420
======== =====
<CAPTION>
INTEREST PRINCIPAL PARTICIPATION
INVESTMENT CLASS PAYMENT RATES (A) AMORTIZATION(A) FEATURES(A)
- ---------------- ----------------- --------------- -------------
<S> <C> <C> <C>
Senior Fixed 10.30-10.82% Yes (c) Yes(d)
mortgages....... Variable: LIBOR +
1.25-2.00%
Subordinated
mortgages....... Fixed 11-12.00% None Yes(b)
Variable:
LIBOR + 1.75%
Opportunistic
Loan
Investments..... Fixed: 5.00-7.00% Yes (c) Yes(b)
Construction 10.00-12.50% None None
loans...........
Real estate
under long term
operating
leases.......... N/A(e) N/A(e) N/A(e)
Loan
participation Fixed 5.65-6.40%
interests....... Variable:
LIBOR + 58% Yes (c) None
Other........... 12.50% - 12.75% None None
</TABLE>
FOOTNOTES TO TABLE
- ----
(a) Information relates only to assets outstanding as of September 30, 1997
(b) Under the terms of one of the loans in this class, the Division is to
receive additional interest of up to 50% of the cash flow from operation of
the underlying property and the proceeds, in excess of the base amount,
from a sale or refinancing of the property.
(c) These loans require fixed monthly payments of interest and principal
resulting in partial principal amortization over the loan term with the
balance due at maturity.
(d) Under the terms of one of the loans, the Division is to receive additional
interest equal to 10% of the cash flow from operation of the underlying
property and the proceeds, in excess of the base amount, from a sale or
refinancing of the property. The cash flow participation is reduced to 5%
if certain collateral operating performance targets are met.
(e) See discussion of lease terms of RLH lease contained elsewhere in this
note.
F-30
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED)
Prepayment terms
Except for the opportunistic loan investments, the terms of the loan
investments generally provide for some protection against re-investment risks
associated with early repayment of the loans for a substantial portion of the
loan's terms. This protection is achieved through various specific loan terms
including one or more of the following; prepayment lock-outs, prepayment
penalties or yield maintenance provisions based on the loans accrual rates.
NOTE 5. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
Risk management
In the normal course of business, SOF IV encounters economic risk. There are
three main components of economic risk: interest rate risk, credit risk and
market risk. SOF IV is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or
different bases, than its interest earning assets. Credit risk is the risk of
default on SOF IV's loan portfolio that results from a borrowers' inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of loans held for sale, securities available for sale and
purchased mortgage servicing rights due to changes in interest rates or other
market factors including the rate of prepayments of principal and the value of
the collateral underlying loans and the valuation of real estate held by SOF
IV.
Use of financial instruments
SOF IV's use of derivative financial instruments is primarily limited to the
utilization of interest rate agreements or other instruments to manage
interest rate exposures. The principal objective of such arrangements is to
minimize the risks and/or costs associated with SOF IV's operating and
financial structure as well as to hedge specific anticipated transactions. The
counterparties to these contractual arrangements are major financial
institutions with which SOF IV and its affiliates also have other financial
relationships. The Partnership is potentially exposed to credit loss in the
event of nonperformance by these counterparties. However, because of their
high credit ratings, the General Partner does not anticipate that any of the
counterparties will fail to meet their obligations.
In 1997, SOF IV utilized interest rate instruments such as interest rate
swaps as well as caps and collars agreements to reduce the impact of changes
in interest rates on its floating rate debt obligations or in anticipation of
securitization transactions or planned sales of portions of fixed rate debt
investments. As of September 30, 1997, the Division had an aggregate of $3.125
million included in other assets representing the purchase price of the
following interest rate instruments/agreements outstanding which are being
used to hedge existing variable rate exposure or for anticipated transactions:
Interest rate collar agreements: These instruments effectively set maximum
and minimum interest rates for 30 day LIBOR on a $125 million notional
principal amount ranging from a floor of 5.5% (the partnership would pay 5.5%
even if rates fall below that level) to a maximum or cap of 6.5% for a period
expiring on March 27, 2002.
Treasury Lock: These instruments are settled in cash at a predetermined
settlement date and are used to hedge the impact of interest rate movements.
At September 30, 1997, the Division had four short-term outstanding treasury
locks with an aggregate of $130.0 million notional amount at base interest
rates of between 6.1175--7.095% for 5 or 10 year U.S. Treasury Notes. Under
these agreements, the Division would receive
F-31
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED)
payments for an increase in the base interest rates and make payments in the
event of a decrease in the base rates.
NOTE 6. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of the divisional financial instruments
are presented in accordance with generally accepted accounting principles
which define fair value as the amount at which a financial instrument could be
exchanged for cash in a current transaction with third parties, other than in
a forced or liquidation sale. These estimated fair values, however, do not
necessarily represent the liquidation value or the market value of the
Division as an operating entity.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Real estate and related investments
For investments in unsecured notes, senior mortgages, subordinated
mortgages, construction loans, and loan participations, fair value is
estimated by discounting the future contractual cash flows (excluding cash
flow or collateral appreciation participation features which are not currently
"in the money") using the current market rates at which similar loans would be
made to borrowers with similar credit ratings for the same remaining
maturities. Investments in real estate under long term operating leases are
not considered financial instruments. Estimated fair values of the Division's
real estate and related investments were $8.3 million at December 31, 1996.
Cash and cash equivalents
Accrued interest receivable
Accrued expenses and other liabilities
For these short-term instruments, the carrying value is a reasonable
approximation of the fair value.
Interest rate protection instruments
The fair value of interest rate protection agreements such as interest rate
caps, floors, collars etc. (used for hedging purposes) is the estimated amount
that SOF IV could receive or pay to terminate these agreements at the
reporting date, taking into account current interest rates and current credit
worthiness of the respective counterparties. Interest rate protection
agreements centered into by the Division have an unrealized net loss basis of
approximately $2.6 million at September 30, 1997. No such instruments were
outstanding at December 31, 1996.
NOTE 7. SUBSEQUENT EVENTS
The following events occurred subsequent to September 30, 1997:
A) On November 4, 1997: SOF IV originated a $6.1 million senior mortgage
secured by a multi-family property.
B) On November 20, 1997: SOF IV originated a $55 million senior mortgage
secured by a mixed use Hotel/Office/Apartment property.
C) On December 31, 1997: SOF IV received partial payments of $38.6 million
and $15.3 million on a Senior and a subordinated mortgage, respectively,
representing the required portion of the proceeds from the sale of a
portion of the underlying collateral by a common borrower. A
participation payment on the loan of $8.0 million was also received in
connection with this partial sale by the borrower.
D) On January 2, 1998: SOF IV restructured and expanded by $11.0 million an
existing $56 million senior mortgage loan and modified the interest rate
of which $10.0 million has been funded.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of Angeles Participating Mortgage
Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
for the properties known as the RLH Portfolio for the year ended December 31,
1996. This financial statement is the responsibility of management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amount 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 presentation
of the financial statement. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared as
described in Note 2, for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (for inclusion in the
Proxy Statement of Angeles Participating Mortgage Trust) and is not intended
to be a complete presentation of RLH Portfolio's revenues and expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenue and certain expenses for RLH Portfolio,
on the basis described in Note 2, for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
New York, New York
November 14, 1997
F-33
<PAGE>
RLH PORTFOLIO
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUE:
Base rents (Note 3).................................................. $15,000
Additional rent (Note 3)............................................. --
-------
CERTAIN EXPENSES (NOTE 3).............................................. --
-------
Revenue in excess of certain expenses................................ $15,000
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
RLH PORTFOLIO
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE PERIOD ENDED JANUARY 1, 1997 TO MAY 1, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUE:
Base rents (Note 3)................................................... $5,000
Additional rent (Note 3).............................................. --
------
CERTAIN EXPENSES (NOTE 3)............................................... --
------
Revenue in excess of certain expenses................................. $5,000
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
RLH PORTFOLIO
STATEMENT OF REVENUE AND CERTAIN EXPENSES
NOTE 1. ORGANIZATION AND OPERATION OF PROPERTY
For the purpose of the accompanying statement of revenue and certain
expenses, RLH (the "Property") consists of seventeen full service hotels
located in seven states and contain a total a total of 3,989 rooms. The
Property was originally leased to and operated by Red Lion Hotels, Inc. ("Red
Lion") under a master lease agreement between RLH Partnership, L.P. as the
lessor and Red Lion as the lessee. On November 8, 1996, Doubletree Corporation
("Doubletree") acquired Red Lion and assumed the lease with RLH Partnership,
L.P.
On May 2, 1997, subsidiaries of Starwood Opportunity Fund IV, L.P. (the "SOF
IV") acquired all of the outstanding partnership interests of RLH Partnership,
L.P.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying statement of revenue and certain expenses has been prepared
on the accrual basis of accounting.
The accompanying financial statement is not representative of the actual
operations for the period presented, as certain revenue and expenses, which
may not be comparable to the revenues and expenses to be earned or incurred by
the SOF IV in the future operations of the Property, have been excluded.
Revenues excluded consist of interest and other revenues unrelated to the
continuing operations of the Property. Expenses excluded consist of
depreciation of the building and improvements, and amortization of
organization and other intangible costs and other expenses not directly
related to the future operations of the Property.
Revenue Recognition
Base rents are recognized on a straight-line basis over the terms of the
respective leases.
Interim Statements
The interim financial data for the period of January 1, 1997 to May 1, 1997
is unaudited; however, in the opinion of management, the interim data includes
all adjustments, consisting only of normally recurring adjustments, necessary
for a fair statement of the results for the interim periods. The results for
the periods presented are not necessarily indicative of the results to be
expected for the entire fiscal year or any other period.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Actual results could differ from
those estimates.
NOTE 3. LEASES
The lease is a triple net lease under which Doubletree pays all costs
associated with the operation of the Hotels, including real estate taxes,
insurance, utilities, services and capital expenditures. The initial term of
the lease expires on December 31, 2010, and can be extended for up to five,
five-year terms at Doubletree's option. Rent payments under the lease consist
of base rent equal to $15 million annually and additional rent equal to 7.5%
of the amount by which the aggregate operating revenue for any given year
exceeds the aggregate operating revenue of the twelve months ended September
30, 1996 (i.e. the base year).
F-36
<PAGE>
RHL PORTFOLIO
STATEMENT OF REVENUE AND CERTAIN EXPENSES--(CONTINUED)
Further minimum rents to be received over the next five years and thereafter
under the current term, as of December 31, 1996 is as follows:
<TABLE>
<S> <C>
1997................................................................ $ 15,000
1998................................................................ 15,000
1999................................................................ 15,000
2000................................................................ 15,000
2001................................................................ 15,000
Thereafter.......................................................... 135,000
--------
Total............................................................. $210,000
========
</TABLE>
F-37
<PAGE>
PROXY
This proxy is solicited on behalf of
ANGELES PARTICIPATING MORTGAGE TRUST
Board of Trustees
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS To Be Held ON MARCH 13, 1998. TO
VOTE AT THE ANNUAL MEETING IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD
OF TRUSTEES OF ANGELES PARTICIPATING MORTGAGE TRUST, SIGN AND DATE THE REVERSE
SIDE OF THIS CARD WITHOUT CHECKING ANY BOX.
The undersigned holder of Class A Shares or Class B Shares of Angeles
Participating Mortgage Trust (the "Trust") hereby appoints Madison F. Grose and
Jay Sugarman, or either of them, with full power of substitution in each, as
proxies to cast all votes which the undersigned shareholder is entitled to cast
at the Annual Meeting of Shareholders (the "Annual Meeting") to be held on March
13, 1998, at 10:30 a.m. Eastern Standard Time, at the American Stock Exchange,
86 Trinity Place, New York, New York and at any adjournments thereof, upon the
following matters. The undersigned shareholder hereby revokes any proxy or
proxies heretofore given. Capitalized terms not otherwise defined have the
meanings given in the Proxy Statement to which this Proxy relates.
1. A proposal to approve the payment of cash and the issuance of Class A Shares
to Starwood Mezzanine in exchange for the Starwood Mezzanine Interests.
[__] For [__] Against [__] Abstain
2. A proposal to approve the payment of cash and the issuance of Class A Shares
to SOFI IV in exchange for cash, the Letters of Intent, the SOFI IV Interests
and the First Mortgage Portfolio.
[__] For [__] Against [__] Abstain
Approval of each of the proposals listed in 1 and 2 is contingent upon approval
of all of the proposals listed in 1 and 2.
3. If the foregoing proposals are approved, a proposal to amend the Declaration
of Trust to conform it to the Advisory Agreement with respect to the termination
of the Advisory Agreement.
[__] For [__] Against [__] Abstain
<PAGE>
4. A proposal to amend the Declaration of Trust with respect to the independence
of the Trustees from the Advisor.
[__] For [__] Against [__] Abstain
Approval of each of the proposals listed in 3 and 4 is contingent upon approval
of both of the proposals listed in 3 and 4.
5. If the foregoing proposals are approved, a proposal to amend the Declaration
of Trust to change the name of the Trust to Starwood Financial Trust.
[__] For [__] Against [__] Abstain
6. A proposal to amend the Trust's Declaration of Trust to change the purpose
and investment policy of the Trust.
[__] For [__] Against [__] Abstain
7. A proposal to amend the Declaration of Trust to require the approval of
Shareholders holding two-thirds of the voting shares to approve certain asset
transactions.
[__] For [__] Against [__] Abstain
8. A proposal to amend the Declaration of Trust to eliminate cumulative voting.
[__] For [__] Against [__] Abstain
9. A proposal to amend the Declaration of Trust to establish a classified Board
of Trustees.
[__] For [__] Against [__] Abstain
10. A proposal to amend the Declaration of Trust to amend the "Excess Share"
provision thereof.
[__] For [__] Against [__] Abstain
<PAGE>
11. A proposal to amend the Declaration of Trust to eliminate certain
limitations on indemnification by the Trust and to clarify certain provisions
with respect to shareholder liability and indemnification.
[__] For [__] Against [__] Abstain
12. A proposal to amend the Declaration of Trust to permit certain amendments
without the consent of shareholder.
[__] For [__] Against [__] Abstain
<PAGE>
13. A proposal to amend the Declaration of Trust to effect certain technical
amendments.
[__] For [__] Against [__] Abstain
Approval of each of the proposals listed in 5 through 13 is contingent upon
approval of all of the proposals listed in through 13.
14. If the foregoing proposals are approved, a proposal to approve the Reverse
Split and to grant the Board of Trustees to determine the magnitude and timing
of the Reverse Split and to amend the Declaration of Trust to effect the Reverse
Split.
[__] For [__] Against [__] Abstain
15. If the foregoing proposals are approved, the election of eight members to
the Board of Trustees.
[_] FOR all nominees listed below (except as marked to the contrary below)
[_] WITHHOLD AUTHORITY to vote for all nominees listed below
(INSTRUCTIONS: SHAREHOLDERS HAVE CUMULATIVE VOTING RIGHTS IN THE ELECTION OF
TRUSTEES. TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW. IN THE EVENT THAT A
SHAREHOLDER WITHHOLDS AUTHORITY TO VOTE FOR ONE OR MORE NOMINEES, THAT
SHAREHOLDER'S CUMULATIVE VOTES WILL BE DISTRIBUTED PRO RATA AMONG THE NOMINEES
FOR WHOM AUTHORITY IS NOT WITHHELD.)
Barry S. Sternlicht, Jay Sugarman, Jeffery G. Dishner Jonathan D.
Eilian, William Mattes, Kneeland Youngblood, M.D., Merrick R.
Kleeman, Robin Josephs
If a nominee becomes unavailable for election or unable to serve as a trustee,
the votes will be cast for a person that will be designated by the Board of
Trustees of the Trust.
16. If the foregoing proposals are approved, a proposal to approve the Amended
and Restated Starwood Financial Trust 1996 Share Incentive Plan.
[__] For [__] Against [__] Abstain
17. A proposal to ratify the appointment of Price Waterhouse LLP as the
independent auditors of the Trust for the fiscal year ended December 31, 1997.
[__] For [__] Against [__] Abstain
<PAGE>
17. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the Annual Meeting, or any adjournments
thereof and which the Trust did not know, a reasonable time before the Annual
Meeting, would be presented at the Annual Meeting or any adjournment thereof.
This proxy, when properly executed, will be voted in the manner as directed
herein by the undersigned shareholder. UNLESS CONTRARY DIRECTION IS GIVEN, THIS
PROXY WILL BE VOTED FOR PROPOSALS 1 THROUGH 17 AND IN ACCORDANCE WITH THE
UNANIMOUS DETERMINATION OF THE BOARD OF TRUSTEES AS TO OTHER MATTERS. The
undersigned shareholder may revoke this proxy at any time before it is voted by
delivering to the Secretary of the Trust either a written revocation of the
proxy or a duly executed proxy bearing a later date, or by appearing at the
Annual Meeting and voting in person. The undersigned shareholder hereby
acknowledges receipt of the Notice of Annual Meeting of Shareholders and Proxy
Statement.
PLEASE MARK, SIGN, DATE AND RETURN THIS CARD PROMPTLY USING THE ENCLOSED
ENVELOPE. If you receive more than one proxy card, please sign and return ALL
cards in the enclosed envelope.
DATED:
Signature
Signature (if held jointly)
Please date and sign exactly as the name
appears hereon. When signing as
executor, administrator, trustee,
guardian, attorney-in-fact or other
fiduciary, please give title as such.
When signing as corporation, please sign
in full corporate name by President or
other authorized officer. If you sign
for a partnership, please sign in
partnership name by an authorized
person.
<PAGE>
[LETTERHEAD OF HOULIHAN LOKEY HOWARD & ZUKIN]
Exhibit A
February 11, 1998
To The Independent Committee of the Board of Trustees
of Angeles Participating Mortgage Trust
Gentlemen:
We understand that the following regarding the Angeles Participating Mortgage
Trust (the "Trust") and its affiliates:
i) The Class A Shares of the Trust are listed on the American Stock Exchange;
ii) the Trust's largest shareholder is Starwood Capital Group, L.P. and/or its
affiliates (collectively, "Starwood"), which, in the aggregate, controls
approximately 80% of the Trust's outstanding voting securities;
iii) Starwood is the general partner of, and owns, directly or indirectly, an
interest in, two limited partnerships, Starwood Mezzanine Investors, L.P.
("SMI") and Starwood Opportunity Fund IV, L.P. ("SOFI") (SMI and SOFI are
collectively referred to herein as the "Mortgage Funds");
iv) the Mortgage Funds collectively own a portfolio of leases and mortgages and
partnership loans;
v) the Trust intends to enter into a contribution transaction with the
Mortgage Funds whereby the Trust will pay cash and issue new Class A Shares
in exchange for the contribution of certain assets (the "Assets") of the
Mortgage Funds. Accordingly, following the contribution, Assets will be
owned by the Trust, and the Mortgage Funds will be shareholders of the
Trust.
The contributions to the Trust and other related transactions disclosed to
Houlihan Lokey are referred to collectively herein as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Trust's underlying business decision to
effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Trust,
the Mortgage Funds, or the Assets. Furthermore, at your request, we have not
negotiated the Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Trust's Schedule 14A Preliminary Proxy Statement and
exhibits thereto (the Proxy) filed with the Securities and Exchange
Commission on December 15, 1997 regarding the Transaction as updated,
amended and revised through the date hereof, such Proxy Statement
included the Trust's annual reports to shareholders and on Form 10-K
for the fiscal year ended December 31, 1996 and quarterly reports on
Form 10-Q for the three quarters ended March 31, 1997, June 30, 1997
and September 30, 1997;
2. reviewed drafts dated as of the date hereof, of certain agreements
pertaining to the Transaction (Exhibits C through G of the Proxy)
including the following:
[LETTERHEAD]
<PAGE>
To The Independent Committee of the Board of Trustees
of Angeles Participating Mortgage Trust
February 11, 1998 -2-
- Form of Amended and Restated Registration Rights Agreement
- Form of Amended and Restated Shareholders Agreement
- Form of Advisory Agreement
- Form of Amended and Restated Declaration of Trust
- Form of Amended and Restated Starwood Financial Trust 1996 Share
Incentive Plan
3. reviewed an execution copy of the Contribution Agreement pertaining to
the Transaction (Exhibit B of the Proxy);
4. reviewed unaudited pro forma condensed consolidating financial
statements of the Trust for the fiscal year ended December 31, 1996
and the nine months ended September 30, 1997 and as of September 1997;
5. reviewed audited financial statements for Starwood Mezzanine Loan
Investment Operations, a division of SMI for the two fiscal years
ended December 31, 1996 and unaudited financial statements for
Starwood Mezzanine Loan Investment Operations for the nine months
ended September 30, 1997 and 1996 and as of September 30, 1997;
6. reviewed audited financial statements for SOF IV Loan Investment
Operations, a division of SOFI for the two fiscal years ended December
31, 1996 and unaudited financial statements for SOF IV Loan Investment
Operations for the nine months ended September 30, 1997 and 1996 and
as of September 30, 1997;
7. reviewed unaudited statements of revenues and certain expenses for RLH
Portfolio, a division of SOFI, for the year ended December 31, 1996
and the period from January 1, 1997 through May 1, 1997;
8. reviewed unaudited statements of revenue and certain expenses for RLH
Portfolio, a division of SOFI for the year ended December 31, 1996 and
the period from January 1, 1997 through May 1, 1997;
9. reviewed unaudited profit and loss information with respect to the
Assets, to the extent available, for the period from the date of the
acquisition of such Asset to the period ended approximately August 31,
1997, which the Mortgage Funds' management has identified as being the
most current financial information available, and reviewed certain
documents and agreements relating to each Asset including, to the
extent available, a description of such Asset, a description of the
collateral underlying such Asset, a loan agreement summary, an
inter-creditor agreement summary, a summary of any first mortgage
agreement on the same collateral, underlying collateral appraisals,
and financial forecasts for the underlying collateral, (collectively,
the "Financial Information");
10. met with certain members of the senior management of Starwood, the
Trust, and the Mortgage Funds to discuss the operations, financial
condition, future prospects and projected operations and performance
of the Trust and the Mortgage Funds, and held discussions with
<PAGE>
To The Independent Committee of the Board of Trustees
of Angeles Participating Mortgage Trust
February 11, 1998 -3-
representatives of the Trust's and Mortgage Funds' investment bankers
and counsel to discuss certain matters;
11. visited certain facilities and business offices of Starwood, the
Trust, and the Mortgage Funds;
12. reviewed forecasts and projections prepared by the Mortgage Funds'
management with respect to certain of the Mortgage Funds' Assets for
the months ended January 31, 1998 through the maturity of the subject
Asset (the "Projections");
13. reviewed the historical market prices and trading volume for the
Trust's Class A Shares and reviewed the historical market prices, to
the extent available, for certain of the Assets;
14. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Trust, both immediately prior
to and immediately after giving effect to the Transaction;
15. reviewed certain other publicly available financial data for certain
assets, including collateralized mortgage backed securities, that we
deem comparable to the Assets; and
16. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
With respect to the Mortgage Funds, we have relied upon and assumed, without
independent verification, that the Financial Information and Projections
provided to us have been reasonably prepared and reflect the best currently
available estimates of the future financial results and condition of the
Mortgage Funds and the Assets, and that there has been no material change in the
Mortgage Funds assets, financial condition, business or prospects of the
Mortgage Funds since the date of the most recent financial statements made
available to us. Furthermore, with respect to the Trust, we have relied upon and
assumed, without independent verification, that the financial information
provided to us has been reasonably prepared and reflect the best currently
available estimates of the future financial results and condition of the Trust,
and that there has been no material change in the assets, financial condition,
business or prospects of the Trust since the date of the most recent financial
statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Trust, the Mortgage Funds, and
the Assets and do not assume any responsibility with respect to it. Other than
as set forth above, we have not made any physical inspection of any of the
properties or assets of the Trust or the Mortgage Funds. Our opinion is
necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
Transaction is fair to the Public Stockholders of the Trust from a financial
point of view.
HOULIHAN, LOKEY, HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
/s/ HOULIHAN, LOKEY, HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
- ------------------------------------------------------------
<PAGE>
Exhibit B
CONTRIBUTION AGREEMENT
AMONG
ANGELES PARTICIPATING MORTGAGE TRUST,
STARWOOD MEZZANINE INVESTORS, L.P.,
AND
STARWOOD OPPORTUNITY FUND IV, L.P.
--------------------
Dated as of February 11, 1998
B-1
<PAGE>
TABLE OF CONTENTS
ARTICLE I
CONTRIBUTION OF ASSETS; ISSUANCE OF CLASS A SHARES
<TABLE>
<S> <C> <C>
Section 1.1 Contributed Assets ........................................... 6
Section 1.2 Purchase Price ............................................... 6
Section 1.3 Adjustments to Purchase Price ................................ 7
Section 1.4 Prorations ................................................... 8
ARTICLE II
CLOSING
Section 2.1 Closing Date ................................................. 8
Section 2.2 Closing Date Deliveries ...................................... 8
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE TRUST
Section 3.1 Organization of the Trust .................................... 8
Section 3.2 No Subsidiaries .............................................. 8
Section 3.3 Capitalization ............................................... 9
Section 3.4 Authority .................................................... 9
Section 3.5 Litigation ................................................... 10
Section 3.6 Certain Matters .............................................. 10
Section 3.7 SEC Documents ................................................ 10
Section 3.8 Shareholder Agreement ........................................ 10
Section 3.9 Financial Information ........................................ 10
Section 3.10 No Finder .................................................... 10
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
STARWOOD MEZZANINE
Section 4.1 Organization of Starwood Mezzanine ........................... 11
Section 4.2 Authority .................................................... 11
Section 4.3 Investment Representations ................................... 12
Section 4.4 Litigation ................................................... 12
Section 4.5 Proxy Statement .............................................. 12
Section 4.6 Employee Benefit Plans ....................................... 12
Section 4.7 No Finder .................................................... 13
Section 4.8 Environmental ................................................ 13
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
SOFI IV
Section 5.1 Organization of SOFI IV ...................................... 13
Section 5.2 Authority .................................................... 13
Section 5.3 Investment Representations ................................... 14
Section 5.4 Litigation ................................................... 14
</TABLE>
B-2
<PAGE>
<TABLE>
<S> <C> <C>
Section 5.5 Proxy Statement .................................................................... 15
Section 5.6 Employee Benefit Plans ............................................................. 15
Section 5.7 No Finder .......................................................................... 15
Section 5.8 Environmental ...................................................................... 15
ARTICLE VI
REPRESENTATIONS OF BOTH CONTRIBUTORS
Section 6.1 Good Title ......................................................................... 15
Section 6.2 Record Keeping; Mortgage Files; Escrow Deposits .................................... 16
Section 6.3 Additional Representations ......................................................... 16
ARTICLE VII
ACTIONS PRIOR TO THE CLOSING DATE
Section 7.1 Proxy Statement .................................................................... 20
Section 7.2 Action by the Trust and Shareholders of the Trust .................................. 20
Section 7.3 Lawsuits, Proceedings, etc ......................................................... 21
Section 7.4 Conduct of Business by the Trust, Starwood Mezzanine and SOFI IV Pending the Closing 21
Section 7.5 Mortgagor Solicitations ............................................................ 22
Section 7.6 Mutual Cooperation; Best Efforts ................................................... 23
Section 7.7 No Public Announcement ............................................................. 23
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST
Section 8.1 No Misrepresentation or Breach of Covenants and Warranties ......................... 23
Section 8.2 No Material Adverse Effect ......................................................... 23
Section 8.3 Opinion of Counsel for Starwood .................................................... 24
Section 8.4 No Injunctions or Restraints ....................................................... 24
Section 8.5 Necessary Governmental Approvals ................................................... 24
Section 8.6 Transaction Agreements ............................................................. 24
Section 8.7 Shareholder and Stockholder Action ................................................. 24
Section 8.8 Termination of Partnership and Exchange Rights Agreement ........................... 24
Section 8.9 Fairness Opinion ................................................................... 24
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS
OF STARWOOD MEZZANINE AND SOFI IV
Section 9.1 No Misrepresentation or Breach of Covenants and Warranties ......................... 25
Section 9.2 No Material Adverse Effect ......................................................... 25
Section 9.3 Opinion of Counsel for the Trust ................................................... 25
Section 9.4 No Injunctions or Restraints ....................................................... 25
Section 9.5 Necessary Governmental Approvals ................................................... 25
Section 9.6 Transaction Agreements; Advisory Agreement ......................................... 25
Section 9.7 Shareholder and Stockholder Action ................................................. 26
ARTICLE X
INDEMNIFICATION; SURVIVAL
Section 10.1 Indemnification .................................................................... 26
Section 10.2 Notice of Claims ................................................................... 27
Section 10.3 Third-Party Claims ................................................................. 27
Section 10.4 Survival of Representations and Warranties ......................................... 28
</TABLE>
B-3
<PAGE>
ARTICLE XI
TERMINATION
<TABLE>
<S> <C> <C>
Section 11.1 Termination ................................................. 28
ARTICLE XII
OTHER PROVISIONS
Section 12.1 Confidential Nature of Information .......................... 29
Section 12.2 Expenses .................................................... 29
Section 12.3 Notices ..................................................... 30
Section 12.4 Definitions ................................................. 31
Section 12.5 Partial Invalidity .......................................... 33
Section 12.6 Successors and Assigns ...................................... 33
Section 12.7 Execution in Counterparts ................................... 33
Section 12.8 Titles and Headings ......................................... 33
Section 12.9 Schedules and Exhibits ...................................... 33
Section 12.10 Entire Agreement; Amendments and Waivers; Assignment ........ 33
Section 12.11 Governing Law ............................................... 33
Section 12.12 No Third-Party Beneficiaries ................................ 34
Section 12.13 The Trust; Starwood General Partners ........................ 34
Section 12.14 Determinations and Interpretations by the Trust ............. 34
Section 12.15 Submission to Jurisdiction .................................. 34
Section 12.16 Approvals and Consents ...................................... 34
SCHEDULE 1.1(a) Starwood Mezzanine Interests
SCHEDULE 1.1(b) SOFI IV Interests
EXHIBIT A - Form of Registration Rights Agreement
EXHIBIT B - Form of Shareholders Agreement
EXHIBIT C - Form of Advisory Agreement
</TABLE>
B-4
<PAGE>
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT (this "Agreement") is made and entered into
this 11th day of February, 1998, by and between ANGELES PARTICIPATING MORTGAGE
TRUST, a California business trust, ("the Trust"), STARWOOD MEZZANINE INVESTORS,
L.P., a Delaware limited partnership ("Starwood Mezzanine") and STARWOOD
OPPORTUNITY FUND IV, L.P., a Delaware limited partnership ("SOFI IV", and
together with Starwood Mezzanine, the "Contributors"). Unless otherwise
indicated, certain terms used herein are used as defined in Section 12.4 hereof.
W I T N E S S E T H:
WHEREAS, Starwood Mezzanine intends, subject to the terms of this
Agreement, to contribute certain assets (the "Starwood Mezzanine Interests") to
the Trust in exchange for cash and Class A Shares, par value $0.01 per share, of
the Trust ("Class A Shares");
WHEREAS, SOFI IV intends, subject to the terms of this Agreement, to
contribute cash, certain letters of intent to purchase or originate debt
interests (the "Letters of Intent"), a portfolio of mortgage loans and leases
and other debt related assets, (the "SOFI IV Interests") and a portfolio of
first mortgage loans (the "First Mortgage Portfolio" and together with the
Letters of Intent, the SOFI IV Interests and the Starwood Mezzanine Interests,
the "Interests") to the Trust in exchange for cash and Class A Shares to be
issued to SOFI-IV SMT Holdings, L.L.C. ("SOFI Holdings");
WHEREAS, the Trust is the sole general partner and Starwood Mezzanine is
the sole limited partner of Angeles Participating Mortgage Trust, L.P. (the
"Partnership");
WHEREAS, on the Closing Date pursuant to an Exchange Rights Agreement dated
as of September 26, 1996 between the Trust and Starwood Mezzanine (the "Exchange
Rights Agreement") each of the outstanding interests in the Partnership, which
are referred to as "Units," will be exchanged for one Class A Share and the
Partnership and the Exchange Rights Agreement will be terminated;
WHEREAS, the Trust and Starwood Mezzanine are parties to a Registration
Rights Agreement that will be amended and restated (as amended and restated the
"Registration Rights Agreement") on the Closing Date by the Trust, Starwood
Mezzanine, SOFI Holdings and SAHI Partners in substantially the form attached
hereto as Exhibit A.
WHEREAS, the Trust, Starwood Mezzanine and certain other parties are
parties to a Shareholders Agreement originally made and entered into as of March
15, 1994, as restated as of April 27, 1994, and as amended March 15, 1996 (the
"Original Shareholders Agreement") that will be amended and restated by the
Trust, B Holdings, LLC ("BLLC"), SAHI Partners, Starwood Mezzanine and SOFI
Holdings (as amended and restated, the "Shareholders Agreement") in
substantially the form attached hereto as Exhibit B on the Closing Date;
WHEREAS, the general partner of each of Starwood Mezzanine and SOFI IV and
the Advisory Committee of SOFI IV and the requisite number of limited partners
of Starwood Mezzanine have approved the transactions provided for in this
Agreement, and the Board of Trustees of the Trust has
B-5
<PAGE>
approved the transactions provided for in this Agreement and has directed that
the transactions contemplated by this Agreement be submitted for adoption to the
shareholders of the Trust; and
WHEREAS, the Trust, Starwood Mezzanine and SOFI IV desire to make certain
representations, warranties and agreements in connection with the transactions
contemplated by this Agreement and also to prescribe various conditions to the
consummation of such transactions.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties hereto agree as follows:
ARTICLE I
CONTRIBUTION OF ASSETS; ISSUANCE OF CLASS A SHARES
Section 1.1 Contributed Assets. (a) Subject to the terms and conditions set
forth in this Agreement, at the Closing, each of Starwood Mezzanine and SOFI IV
shall contribute, assign, transfer and deliver to the Trust all of their rights,
title and interests in and to the Mortgage Files, the Letters of Intent and the
Interests, regardless of when such rights, title and interests arise and such
obligation to contribute, assign and transfer all of their rights, title and
interests in the Mortgage Files, the Letters of Intent and the Interests shall
continue after the date of this Agreement and the Trust shall acquire and take
assignment and delivery of, the Mortgage Files, the Letters of Intent and the
Interests as described on Schedules 1.1(a) and (b) hereto, subject to changes
occurring after the date of this Agreement and prior to the Closing Date as
provided herein.
(b) In the event that the transactions contemplated by any Letter of Intent
are consummated prior to the Closing Date, the asset acquired or originated will
be contributed to the Trust in place of the Letter of Intent and the amount of
cash required to consummate the transaction to which it relates. The value of
the acquired or originated asset shall be equal for purposes of this Agreement
to the value of the amount of cash paid by SOFI IV to acquire or originate the
asset.
(c) Starwood Mezzanine and SOFI IV shall have the option to contribute at
the Closing additional assets to the Trust with a value equal to the amount of
any decrease in the value attributable to the payment of principal of any
Interest; provided that the new asset shall be reasonably acceptable to the
Trust and Schedule 1.1(a) and/or Schedule 1.1 (b), as applicable, shall be
updated accordingly. The value of any substituted assets shall be the actual
amount paid by Starwood Mezzanine or SOFI IV to acquire or originate the asset.
Section 1.2 Purchase Price. On the Closing Date, the Trust shall (i) pay
cash to Starwood Mezzanine in an amount equal to $28.5 million, (ii) issue to
Starwood Mezzanine that number of Class A Shares equal to (a) the dollar value
of the Starwood Mezzanine Interests on December 31, 1997 as set forth on
Schedule 1.1(a) less $28.5 million (b) divided by $2.50, (ii) issue to SOFI
Holdings that number of Class A Shares equal to 302,222,800 less the aggregate
number of Class A Shares issued to Starwood Mezzanine and (iii) pay cash to SOFI
IV in an amount equal (x) to the aggregate value of the cash, the Letters of
Intent, the SOFI IV Interests and the First Mortgage Portfolio contributed by
SOFI IV on December 31, 1997 as set forth on Schedule 1.1(b) less (y) the sum of
(1) the aggregate number of Class A Shares issued to SOFI Holdings on the
Closing Date multiplied by (2) $2.50. The value of the assets to
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be contributed by Starwood Mezzanine and SOFI IV will be adjusted as set forth
in Sections 1.1(c) and 1.3. Subject to adjustment as set forth in Sections
1.1(c) and 1.3, the value of the Starwood Mezzanine Interests as of December 31,
1997 is set forth on Schedule 1.1(a) and based on such value Starwood Mezzanine
will receive 55,148,000 Class A Shares, and the value of the SOFI IV Interests,
the Letters of Intent and the First Mortgage Portfolio as of December 31, 1997
is set forth on Schedule 1.1(b) and based on such value SOFI IV will receive
$313 million in cash and SOFI Holdings will receive 247,074,800 Class A Shares
(collectively, the "Purchase Price").
Section 1.3 Adjustments to Purchase Price. (a) Adjustments shall be made,
at the Closing, to the Purchase Price in the event of any full or partial
repayment of principal of any Mortgage Loan or the termination of any Letter of
Intent during the period from January 1, 1998 to the Closing Date (the
"Adjustment Period") by adjusting the value of the Interests. In the event of
the full repayment of any Mortgage Loan, the value of the Interests shall be
reduced by the value given to such Mortgage Loan on Schedule 1.1(a) or (b). In
the event of a regularly scheduled payment of principal or any other partial
repayment of principal occurring during the Adjustment Period, the value of the
Interests shall be reduced by the dollar amount of the principal repayment. In
the event of any principal draw by the borrower with respect to any Mortgage
Loan occurring during the Adjustment Period in excess of that anticipated on
Schedule 1.1(b), the Purchase Price shall be adjusted upward in the amount of
such excess. In the event that principal draws by the borrower with respect to
any Mortgage Loan occurring during the Adjustment Period do not equal or exceed
the anticipated amount of such draws as set forth in Schedule 1.1(b), the
Purchase Price shall be reduced by such shortfall. With respect to SOFI IV only,
adjustments to the Purchase Price shall be made by first reducing the cash
portion of the Purchase Price as set forth in Section 1.2, if any, by the amount
of any reduction in dollar value of the Interests. In the case of SOFI IV only,
when the entire cash portion of the Purchase Price has been used to offset the
reduction in dollar value of the Interests, and in the case of Starwood
Mezzanine in the event of any adjustment, the number of Class A Shares issued in
exchange for the Interests will be reduced by a number of Class A Shares
determined by dividing (i) the amount of any additional reduction in dollar
value of the Interests contributed by the Contributors by (ii) $2.50.
(b) The purchase price per share of Class A Shares issued to Starwood
Mezzanine and SOFI Holdings will be adjusted in the event of any stock split,
reverse stock split or other recapitalization of the capital stock of the Trust,
so that the percentage of issued and outstanding Class A Stock purchased by each
of Starwood Mezzanine and SOFI Holdings is equal to the percentage of issued and
outstanding Class A Stock that such party would have purchased had such split,
reverse split or other recapitalization not occurred.
(c) If cash adjustments result in a decrease of the cash portion of the
Purchase Price payable to SOFI IV below $313 million, SOFI IV may, at its
option, elect to reduce the number of Class A Shares that SOFI Holdings will
acquire and instead of issuing Class A Shares the Trust will pay cash to SOFI IV
equal to the number of Class A Shares SOFI IV elects not to receive multiplied
by $2.50, provided that SOFI IV may not elect to receive cash pursuant to
Section in excess of $313 million.
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Section 1.4 Prorations. Interest which has accrued, whether or not paid, on
the Starwood Mezzanine Interests and the SOFI IV Interests during the Adjustment
Period shall be paid by Starwood Mezzanine or SOFI IV, as applicable, to the
Trust on the Closing Date and interest which has accrued, and not been paid, on
the First Mortgage during the Adjustment Period shall be paid by the Trust to
SOFI IV on the Closing Date. All interest accruing on the Interests subsequent
to December 31, 1997 shall be payable to the Trust.
ARTICLE II
CLOSING
Section 2.1 Closing Date. Upon the terms and subject to the conditions set
forth in this Agreement, the transactions contemplated by this Agreement shall
be consummated (the "Closing") at 10:00 a.m., local time, on the next business
day after the meeting of the shareholders of the Trust provided for in Section
7.2 at which the Trust Shareholders Matters are approved, or such other date as
may be agreed upon by the parties hereto, at the offices of Mayer, Brown &
Platt, 1675 Broadway, New York, New York 10019, or at such other place or at
such other time as shall be agreed upon by the parties hereto (such date and
time being herein called the "Closing Date").
Section 2.2 Closing Date Deliveries. On the Closing Date, the Trust,
Starwood Mezzanine, SOFI IV, SOFI Holdings, BLLC and SAHI Partners, as
appropriate, shall execute and deliver (a) the Registration Rights Agreement,
(b) the Shareholders Agreement (c) a consent to terminate the Partnership and
the Exchange Rights Agreement, (d) the Mortgage Files and (e) all the other
documents, instruments and agreements (including instruments of transfer)
reasonably necessary to carry out the terms and provisions of this Agreement and
each of the other documents referred to in this Section 2.2 and each outstanding
Unit will be exchanged for one Class A Share. The documents described in clauses
(a) and (b) above shall hereinafter be referred to as the "Transaction
Agreements."
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE TRUST
As an inducement to the other parties to enter into this Agreement and to
consummate the transactions contemplated hereby, the Trust represents, warrants
and agrees as follows:
Section 3.1 Organization of the Trust. The Trust is a business trust duly
organized and validly existing under the laws of the State of California and no
personal liability attaches to the holders of the Class A Shares by reason of
the ownership thereof. The Trust is duly qualified to transact business in each
of the jurisdictions in which the ownership or leasing of the properties used in
its business or the conduct of its business requires such qualification, other
than in such jurisdictions where the failure to be so qualified would not have a
Material Adverse Effect on the Trust. The Trust has all requisite trust power
and authority to own or lease and operate its properties and to carry on its
business as now conducted.
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Section 3.2 No Subsidiaries. The Trust has no subsidiaries of any kind
whatsoever except for its interest in the Partnership.
Section 3.3 Capitalization. On the date hereof, (i) 7,550,000 Class A
Shares are validly issued and outstanding and are fully paid and nonassessable,
and (ii) 3,775,000 Class B Shares are validly issued and outstanding and are
fully paid and nonassessable. Subject to approval by the Shareholders of the
Trust of the Trust Shareholder Matters (as defined in Section 7.2), the Class A
Shares to be issued to Starwood Mezzanine and SOFI Holdings on the Closing Date,
upon issuance on the terms and conditions specified in the instrument pursuant
to which such shares are issuable, shall be duly authorized, validly issued,
fully paid and nonassessable. Except for this Agreement and any options or other
awards issued pursuant to the Incentive Plans, and except as contemplated by the
Transaction Agreements, the Exchange Agreement and the Trust Declaration, there
are no options, warrants or other rights to acquire, or agreements or
commitments pursuant to which the Trust is obligated to issue, sell, purchase or
redeem, shares of capital stock of the Trust. The Class A Shares are currently
publicly traded on the American Stock Exchange ("AMEX") and will remain so at
Closing.
Section 3.4 Authority.
(a) The Trust has full trust power and authority to enter into this
Agreement, the Transaction Agreements and the other agreements and instruments
contemplated hereby and thereby to be entered into by the Trust and, subject to
the approval by the shareholders of the Trust of the Trust Shareholder Matters,
to consummate the transactions contemplated hereby and thereby.
(b) The execution, delivery and performance by the Trust of this Agreement,
the Transaction Agreements and the other agreements and instruments contemplated
hereby and thereby and the consummation by the Trust of the transactions
contemplated hereby and thereby have been duly authorized by all necessary trust
action on the part of the Trust, subject to the approval by the shareholders of
the Trust of the Trust Shareholder Matters. This Agreement is, and each other
agreement or instrument contemplated hereby (including, without limitation, the
Transaction Agreements) to be executed by the Trust, when executed and delivered
by the Trust, will be, the legal, valid and binding agreement of the Trust,
enforceable against the Trust in accordance with its respective terms.
(c) Neither the execution nor delivery by the Trust of this Agreement, the
Transaction Agreements or the other agreements and instruments contemplated
hereby or thereby, nor consummation of the transactions contemplated hereby or
thereby or compliance with or fulfillment of the terms and provisions hereof or
thereof by the Trust, will (i) conflict with, result in a breach of the terms,
conditions or provisions of, or constitute a default, an event of default or an
event creating rights of acceleration, termination or cancellation or a loss of
rights, or result in the creation or imposition of any encumbrance upon any of
the assets of the Trust or the Partnership, under any organizational document of
the Trust or the Partnership or any other instrument, agreement, mortgage,
indenture, deed of trust, permit, concession, grant, franchise, license,
judgment, order, award, decree or other restriction to which the Trust or the
Partnership is a party or any of their properties are subject or by which either
the Trust or the Partnership is bound or any statute, other law or regulatory
provision affecting either the Trust or the Partnership, (ii) require the
approval, consent or authorization of, or the making of any declaration, filing
or registration with, any third party or any foreign, federal, state or local
court, governmental authority or regulatory body, by or on behalf of the Trust
or the Partnership, (iii) cause personal liability to attach to
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the holders of the Class A Shares by reason of the ownership thereof or (iv)
cause the Trust to fail to qualify to be taxed as a "real estate investment
trust," as defined in Section 856 of the Code ("REIT"), for the taxable year
ending December 31, 1998, except for (A) the filing of appropriate documents
with the Securities and Exchange Commission (the "SEC") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (B) approval by the
shareholders of the Trust of the Trust Shareholder Matters, (C) the filing of
the Trust's Declaration of Trust with certain governmental authorities and (D)
such conflicts, breaches, defaults, events, creations, impositions, approvals,
consents, declarations, filings or authorizations which would not reasonably be
expected to either (x) have a Material Adverse Effect on the Trust or (y)
prevent or hinder the consummation of the transactions contemplated hereby.
Section 3.5 Litigation. To the knowledge of the Trust, there are no
actions, suits or proceedings or court orders or decrees pending or threatened
to which the Trust is a party or any of its assets is subject or by which the
Trust is bound before or by any court or governmental agency, which if
determined adversely to the interests of the Trust, would reasonably be expected
to either (a) have a Material Adverse Effect on the Trust or (b) prevent or
hinder the consummation of the transactions contemplated hereby.
Section 3.6 Certain Matters.
(a) As of the date hereof, the Trust has no assets or properties other than
short term real estate investments, cash and cash equivalents and a 8.05%
interest in the Partnership, or as otherwise disclosed in the SEC Documents (as
defined in Section 3.7).
(b) The Trust will continue to qualify to be taxed as a REIT for the
taxable year ending December 31, 1998.
(c) As of the close of the 1997 taxable year, the Trust has no material
current or accumulated earnings and profits. The Trust has no material
liabilities for U.S. Federal or state income taxes.
Section 3.7 SEC Documents. The Trust has previously delivered or made
available to Starwood Mezzanine and SOFI IV complete and correct copies of all
reports and statements filed by the Trust with the SEC since September 26, 1996
(the "SEC Documents"). As of their respective dates, none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading.
Section 3.8 Shareholder Agreement. The Trust has delivered to each of
Starwood Mezzanine and SOFI IV a true and complete copy of the Original
Shareholders Agreement. Said document is in full force and effect and no
defaults or breaches exist thereunder.
Section 3.9 Financial Information. The financial statements (excluding the
pro forma financial data) included in the SEC Documents present fairly the
financial condition, results of operation and changes in the financial condition
of the Trust at the dates and for the periods indicated and have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods indicated (except as otherwise indicated
therein). The pro forma financial data included in the Proxy Statement (as
defined in Section 7.1) has been prepared in accordance with all
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applicable rules and guidelines of the SEC with respect to pro forma financial
data, and the adjustments used therein are appropriate to give effect to the
transaction or circumstance referred to therein.
Section 3.10 No Finder. Neither the Trust nor any party acting on the
behalf of the Trust has paid or become obligated to pay any fee or commission to
any broker, finder or intermediary for or on account of the transactions
contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
STARWOOD MEZZANINE
As an inducement to the other parties to enter into this Agreement and to
consummate the transactions contemplated hereby, Starwood Mezzanine represents,
warrants and agrees as follows:
Section 4.1 Organization of Starwood Mezzanine. Starwood Mezzanine is a
limited partnership duly formed, validly existing and in good standing as a
limited partnership under the Delaware Revised Uniform Limited Partnership Act.
Starwood Mezzanine is duly qualified to transact business and is in good
standing in each of the jurisdictions in which the ownership or leasing of the
properties used in its business or the conduct of its business requires such
qualification, other than in such jurisdictions where the failure to be so
qualified and in good standing would not have a Material Adverse Effect on
Starwood Mezzanine. Starwood Mezzanine has all requisite partnership power and
authority to carry on its business as now conducted.
Section 4.2 Authority.
(a) Starwood Mezzanine has full partnership power and authority to enter
into this Agreement, the Transaction Agreements and the other agreements and
instruments contemplated hereby and thereby to be entered into by it and to
consummate the transactions contemplated hereby and thereby.
(b) The execution, delivery and performance by Starwood Mezzanine of this
Agreement, the Transaction Agreements and the other agreements and instruments
contemplated hereby and thereby and the consummation by Starwood Mezzanine of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary partnership action except for the required consent of its limited
partners and the amendment to the partnership agreement that will be obtained
prior to the Closing Date. This Agreement is, and each other agreement or
instrument contemplated hereby (including, without limitation, the Transaction
Agreements) to be executed by Starwood Mezzanine, when executed and delivered by
Starwood Mezzanine, will be, the legal, valid and binding agreement of Starwood
Mezzanine, enforceable against Starwood Mezzanine in accordance with its
respective terms.
(c) Except for consents and approvals that will be obtained prior to the
Closing Date, neither the execution and delivery by Starwood Mezzanine of this
Agreement, the Transaction Agreements or the other agreements and instruments
contemplated hereby and thereby, nor consummation of the transactions
contemplated hereby or thereby or compliance with or fulfillment of the terms
and provisions hereof or thereof by Starwood Mezzanine will (i) conflict with,
result in a breach of the terms, conditions or provisions of, or constitute a
default, an event of default or an event creating
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rights of acceleration, termination or cancellation or a loss of rights under
the agreement of limited partnership of Starwood Mezzanine, any document
relating to the Starwood Mezzanine Interests, any instrument, agreement,
mortgage, indenture, deed of trust, permit, concession, grant, franchise,
license, judgment, order, award, decree or other restriction to which Starwood
Mezzanine is a party or any statute, other law or regulatory provision affecting
any of them, or (ii) require the approval, consent or authorization of, or the
making of any declaration, filing or registration with, any third party or any
foreign, federal, state or local court, governmental authority or regulatory
body, by or on behalf of Starwood Mezzanine, except for conflicts, breaches,
defaults, events, creations, impositions, approvals, consents, declarations,
filings or authorizations which would not reasonably be expected to either (x)
have a Material Adverse Effect on Starwood Mezzanine or (y) prevent or hinder
the consummation of the transactions contemplated hereby.
Section 4.3 Investment Representations. Starwood Mezzanine is an
"accredited investor" within the meaning of Rule 501 under the Securities Act of
1933, as amended (the "Securities Act"), and was not organized for the purpose
of acquiring Class A Shares. Starwood Mezzanine has sufficient knowledge and
experience in financial and business matters and in investing in entities
similar to the Trust so as to be able to evaluate the risks and merits of its
investment in the Trust and it is able financially to bear the risks thereof.
Starwood Mezzanine has had an opportunity to discuss the business, management
and financial affairs of the Trust with the management of the Trust. The Class A
Shares of the Trust are being acquired by Starwood Mezzanine for its own account
for the purpose of investment and not with a view to or for sale in connection
with any distribution thereof in violation of the securities laws. Starwood
Mezzanine understands that (i) the Class A Shares have not been registered under
the Securities Act by reason of their issuance in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
or Rule 505 or 506 promulgated under the Securities Act, and (ii) such Class A
Shares must be held indefinitely unless such Class A Shares are registered upon
receipt thereof, or unless a subsequent disposition thereof is registered under
the Securities Act and applicable state securities laws or is exempt from such
registration.
Section 4.4 Litigation. To the knowledge of Starwood Mezzanine, there are
no actions, suits or proceedings or court orders or decrees pending or
threatened to which Starwood Mezzanine is a party or the Starwood Mezzanine
Interests are subject or by which it is bound before or by any court or
governmental agency, which if determined adversely to the interests of Starwood
Mezzanine would reasonably be expected to either (a) have a Material Adverse
Effect on Starwood Mezzanine or (b) prevent or hinder the consummation of the
transactions contemplated hereby.
Section 4.5 Proxy Statement. None of the information respecting Starwood
Mezzanine or its partners or the Starwood Mezzanine Interests supplied or to be
supplied by Starwood Mezzanine, its partners or any of its representatives for
inclusion in the Proxy Statement (as defined in Section 7.1) will, at the time
of the mailing of the Proxy Statement to the shareholders of the Trust and at
the time of the meetings of such shareholders referred to in Section 7.2,
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein relating to Starwood
Mezzanine or its partners not misleading.
Section 4.6 Employee Benefit Plans. Starwood Mezzanine is not (a) an
"employee benefit plan" as defined in and subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), (b) a "plan" as defined in
and subject to Section 4975 of the Code or (c) an entity any portion
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or all of the assets of which are deemed pursuant to United States Department of
Labor Regulation ss.2510.3-101 or otherwise pursuant to ERISA to be, for any
purpose of ERISA or Section 4975 of the Code, assets of any "employee benefit
plan" or "plan" described in clause (a) or (b) above which invests in such
entity by virtue of such investment.
Section 4.7 No Finder. Neither Starwood Mezzanine nor any party acting on
its behalf has paid or become obligated to pay any fee or any commission to any
broker, finder or intermediary for or on account of the transactions
contemplated by this Agreement.
Section 4.8 Environmental. Starwood Mezzanine has no actual knowledge
(without independent investigation) of any violation of Environmental Laws
related to the properties secured by the Starwood Mezzanine Interests or the
presence or release of Hazardous Materials on or from such properties, except as
reflected in the environmental reports acknowledged and approved by the Trust at
or prior to the Closing. The term "Environmental Laws" includes, without
limitation, the Resource Conservation and Recovery Act and the Comprehensive
Environmental Response Compensation and Liability Act and other federal laws
governing the environment as in effect on the date of this Agreement together
with their implementing regulations and guidelines as of the date of this
Agreement, and all state, regional, county, municipal and other local laws,
regulations and ordinances that are equivalent or similar to the federal laws
recited above or that purport to regulate Hazardous Materials. The term
"Hazardous Materials" includes petroleum, including crude oil or any fraction
thereof, natural gas, natural gas liquids, liquefied natural gas or synthetic
gas usable for fuel (or mixtures of natural gas or such synthetic gas), and any
substance, material waste, pollutant or contaminant listed or defined as
hazardous or toxic, or otherwise regulated, under any Environmental Law.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
SOFI IV
As an inducement to the other parties to enter into this Agreement and to
consummate the transactions contemplated hereby, SOFI IV represents, warrants
and agrees as follows:
Section 5.1 Organization of SOFI IV. SOFI IV is a limited partnership duly
formed, validly existing and in good standing as a limited partnership under the
Delaware Revised Uniform Limited Partnership Act. SOFI IV is duly qualified to
transact business and is in good standing in each of the jurisdictions in which
the ownership or leasing of the properties used in its business or the conduct
of its business requires such qualification, other than in such jurisdictions
where the failure to be so qualified and in good standing would not have a
Material Adverse Effect on SOFI IV. SOFI IV has all requisite partnership power
and authority to carry on its business as now conducted.
Section 5.2 Authority.
(a) SOFI IV has full partnership power and authority to enter into this
Agreement, the Transaction Agreements and the other agreements and instruments
contemplated hereby and thereby to be entered into by it and to consummate the
transactions contemplated hereby and thereby.
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(b) The execution, delivery and performance by SOFI IV of this Agreement,
the Transaction Agreements and the other agreements and instruments contemplated
hereby and thereby and the consummation by SOFI IV of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
partnership action except for the required consent of its Advisory Committee and
the related amendment to its partnership agreement that will be obtained prior
to the Closing Date. This Agreement is, and each other agreement or instrument
contemplated hereby (including, without limitation, the Transaction Agreements),
to be executed by SOFI IV when executed and delivered by SOFI IV, will be, the
legal, valid and binding agreement of SOFI IV, enforceable against SOFI IV in
accordance with its respective terms.
(c) Except for consents and approvals that will be obtained prior to the
Closing Date, neither the execution and delivery by SOFI IV of this Agreement,
the Transaction Agreements or the other agreements and instruments contemplated
hereby and thereby, nor consummation of the transactions contemplated hereby or
thereby or compliance with or fulfillment of the terms and provisions hereof or
thereof by SOFI IV will (i) conflict with, result in a breach of the terms,
conditions or provisions of, or constitute a default, an event of default or an
event creating rights of acceleration, termination or cancellation or a loss of
rights under the agreement of limited partnership of SOFI IV, any document
relating to the Letters of Intent, SOFI IV Interests or First Mortgage Portfolio
any instrument, agreement, mortgage, indenture, deed of trust, permit,
concession, grant, franchise, license, judgment, order, award, decree or other
restriction to which SOFI IV is a party or any statute, other law or regulatory
provision affecting any of them, or (ii) require the approval, consent or
authorization of, or the making of any declaration, filing or registration with,
any third party or any foreign, federal, state or local court, governmental
authority or regulatory body, by or on behalf of SOFI IV, except for conflicts,
breaches, defaults, events, creations, impositions, approvals, consents,
declarations, filings or authorizations which would not reasonably be expected
to either (x) have a Material Adverse Effect on SOFI IV or (y) prevent or hinder
the consummation of the transactions contemplated hereby.
Section 5.3 Investment Representations. SOFI Holdings is an "accredited
investor" within the meaning of Rule 501 under the Securities Act of 1933, as
amended (the "Securities Act"), and was not organized for the purpose of
acquiring the Class A Shares. SOFI Holdings has sufficient knowledge and
experience in financial and business matters and in investing in entities
similar to the Trust so as to be able to evaluate the risks and merits of its
investment in the Trust, and it is able financially to bear the risks thereof.
SOFI Holdings has had an opportunity to discuss the business, management and
financial affairs of the Trust with the management of the Trust. The Class A
Shares are being acquired by SOFI Holdings for its own account for the purpose
of investment and not with a view to or for sale in connection with any
distribution thereof in violation of the securities laws. SOFI Holdings
understands that (i) the Class A Shares of the Trust have not been registered
under the Securities Act by reason of their issuance in a transaction exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof or Rule 505 or 506 promulgated under the Securities Act, and (ii)
such Class A Shares must be held indefinitely unless such Class A Shares are
registered upon receipt thereof, or unless a subsequent disposition thereof is
registered under the Securities Act and applicable state securities laws or is
exempt from such registration.
Section 5.4 Litigation. To the knowledge of SOFI IV, there are no actions,
suits or proceedings or court orders or decrees pending or threatened to which
SOFI IV is a party or the Letters of Intent, SOFI IV Interests or First Mortgage
Portfolio are subject or by which it is bound before or by any court or
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governmental agency, which if determined adversely to the interests of SOFI IV
would reasonably be expected to either (a) have a Material Adverse Effect on
SOFI IV or (b) prevent or hinder the consummation of the transactions
contemplated hereby.
Section 5.5 Proxy Statement. None of the information respecting SOFI IV or
its partners or the Letters of Intent, SOFI IV Interests or First Mortgage
Portfolio supplied or to be supplied by SOFI IV, its partners or any of its
representatives for inclusion in the Proxy Statement (as defined in Section 7.1)
will, at the time of the mailing of the Proxy Statement to the shareholders of
the Trust and at the time of the meetings of such shareholders referred to in
Section 7.2, contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein relating to
SOFI IV or its partners not misleading.
Section 5.6 Employee Benefit Plans. SOFI IV is not (a) an "employee benefit
plan" as defined in and subject to ERISA, (b) a "plan" as defined in and subject
to Section 4975 of the Code or (c) an entity any portion or all of the assets of
which are deemed pursuant to United States Department of Labor Regulation
ss.2510.3-101 or otherwise pursuant to ERISA to be, for any purpose of ERISA or
Section 4975 of the Code, assets of any "employee benefit plan" or "plan"
described in clause (a) or (b) above which invests in such entity by virtue of
such investment.
Section 5.7 No Finder. Neither SOFI IV nor any party acting on its behalf
has paid or become obligated to pay any fee or any commission to any broker,
finder or intermediary for or on account of the transactions contemplated by
this Agreement.
Section 5.8 Environmental. SOFI IV has no actual knowledge (without
independent investigation) of any violation of Environmental Laws related to the
properties which are the subject of the Letters of Intent or secured by the SOFI
IV Interests or the First Mortgage Portfolio or the presence or release of
Hazardous Materials on or from such properties, except as reflected in the
environmental reports acknowledged and approved by the Trust at or prior to the
Closing. The term "Environmental Laws" includes, without limitation, the
Resource Conservation and Recovery Act and the Comprehensive Environmental
Response Compensation and Liability Act and other federal laws governing the
environment as in effect on the date of this Agreement together with their
implementing regulations and guidelines as of the date of this Agreement, and
all state, regional, county, municipal and other local laws, regulations and
ordinances that are equivalent or similar to the federal laws recited above or
that purport to regulate Hazardous Materials. The term "Hazardous Materials"
includes petroleum, including crude oil or any fraction thereof, natural gas,
natural gas liquids, liquefied natural gas or synthetic gas usable for fuel (or
mixtures of natural gas or such synthetic gas), and any substance, material
waste, pollutant or contaminant listed or defined as hazardous or toxic, or
otherwise regulated, under any Environmental Law.
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ARTICLE VI
REPRESENTATIONS OF BOTH CONTRIBUTORS
Each of Starwood Mezzanine and SOFI IV severally, and not jointly,
represents, warrants and agrees as follows with respect to Schedule 1.1(a) and
Schedule 1.1(b), respectively:
Section 6.1 Good Title. The Contributor has and will have, until the
consummation of the transactions contemplated by this Agreement, good title to,
and is and shall be the sole owner of (i) each Mortgage Loan and the related
Mortgage File (except to the extent any Mortgage Loan is prepaid in full prior
to the consummation of the transactions contemplated by this Agreement) and (ii)
the Ground Lease, in each case of clauses (i) and (ii) above free and clear of
any and all adverse claims, liens, pledges , assignments, charges or security
interests of any nature (including, without limitation, liens arising under the
federal tax laws or ERISA), except as shall be released or discharged at the
Closing.
Section 6.2 Record Keeping; Mortgage Files; Escrow Deposits. The
origination, servicing, record keeping, collection and foreclosure practices
used by the Contributor with respect to each Mortgage Loan have been in all
respects legal. The Contributor will deliver to the Trust on the Closing Date
all documents, instruments and files in its possession relating to each Letter
of Intent, Mortgage Loan and Ground Lease. All copies of the material, original
loan documents forwarded to the Trust are true and correct and include all
documents and other instruments known to the Contributor relating to each Letter
of Intent, Mortgage Loan and Ground Lease. Schedule 1.1(a) or (b) as applicable
is true, correct and complete in all material respects. With respect to any
escrow deposits and payments, all of these deposits and payments, if any, which
have been made and not expended for their intended purposes, are in the
possession of, or under the control of, the Contributor, except in those cases
in which the Contributor holds only a minority participation interest or the
interest of a junior lender in a Mortgage Loan, in which event the terms and
conditions of such minority participation interest are contained in an
intercreditor agreement, or similar agreement, which agreements have been
disclosed in writing to the Trust. Concurrently with the closing of this
transaction, the Contributor will, to the extent permitted by the documents
pertaining to a Mortgage Loan, deliver possession and control of all such
deposits and payments (or its rights to and under any escrow) to the Trust or
its designee, provided that the Contributor makes no representation or warranty
as to the sufficiency of such deposits and payments for their intended purposes.
There are no documents or other instruments in the possession of, or actually
known to the Contributor, which would cause the materials provided to the Trust
to be inaccurate or misleading, and, to the knowledge of the Contributor, all
documents and other instruments provided to the Trust are accurate and truthful.
Section 6.3 Additional Representations.
(a) each Mortgage Loan of the Contributor either (A) was originated by the
Contributor or (B) was purchased by the Contributor in the ordinary course of
its business, for valuable consideration to the transferor, and neither the
transferor nor any other person or entity has any residual or other rights to
such Mortgage Loan, except in those cases in which the Contributor holds only a
minority participation interest or the interest of a junior lender in a Mortgage
Loan;
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(b) the proceeds of each Mortgage Loan of the Contributor have been fully
disbursed and there is no requirement for future advances under such Mortgage
Loan except as expressly provided in documents evidencing or securing any
Mortgage Loan as disclosed to the Trust, and all costs and expenses incurred in
making, or closing or recording, the Mortgage Loans have been paid; the
Contributor has no continuing obligations under such Mortgage Loan relating to
stop notices, set aside letters, letters of credit, subdivision agreements or
bonds except as expressly provided in documents evidencing or securing any
Mortgage Loan as disclosed to the Trust;
(c) to the knowledge of the Contributor, each Mortgage Loan of the
Contributor, as of the date of its origination complied with or is exempt from,
and as of the date hereof complies with or is exempt from, (x) applicable state
or federal laws, regulations and other requirements pertaining to usury, and (y)
any and all other requirements of any federal, state or local law, including,
without limitation, truth-in-lending, real estate settlement procedures,
consumer credit protection, equal credit opportunity or disclosure laws,
applicable to each such Mortgage Loan;
(d) the Contributor has not received any notice asserting that any Mortgage
Note, related Mortgage or other agreements executed in connection therewith of
the Contributor has not been duly authorized, executed and delivered, or is not
the legal, valid and binding obligation of the maker thereof (subject to any
non-recourse provisions therein), enforceable in accordance with its terms,
except as such enforcement may be limited by (x) bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally, and (y) general principles of equity (regardless of whether
such enforcement is considered in a proceeding in equity or at law) and (z)
contractual provisions and laws limiting or eliminating recourse to the
Mortgagor or any other obligor or surety (including, without limitation,
principles such as the so-called "one action rule" and anti-deficiency
legislation). Except as disclosed to the Trust in writing, the Contributor has
not received notice asserting any offset, defense (including without limitation
the defense of usury), claim, counterclaim, or right to rescission with respect
to such Mortgage Note, Mortgage or other related agreements;
(e) except as disclosed in the schedules attached to the assignment of loan
relating to the Mortgage, each Mortgage of the Contributor has not been waived,
impaired, modified, altered, superseded, amended, satisfied, cancelled,
subordinated or otherwise changed in any material respect in writing by any
Person, or otherwise by the Contributor, or rescinded, and the related mortgaged
property has not been released from the lien or other encumbrance of, nor has
the Mortgagor been released from, its obligations under the Mortgage, in whole
or in any part, nor has any instrument been executed that would effect any such
amendment, satisfaction, cancellation, subordination, rescission or release,
except, in each case, by a written instrument which is part of the related
Mortgage File;
(f) Each Mortgage of the Contributor is insured by an ALTA lender's title
insurance policy (each, a "Title Policy"), and the Contributor will provide true
and complete copies of each such Title Policy to the Trust. To the actual
knowledge of the Contributor, without any inquiry, each such Title Policy is in
full force and effect. Unless disclosed in the applicable Mortgage File, the
Contributor has not done, by act or omission, anything which would impair the
coverage of any such Title Policies, and the Contributor has not received any
notice by the title insurer of any such Title Policy of any impairment,
diminution or negation of such coverage;
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(g) to the actual knowledge of the Contributor, without any inquiry, each
Mortgaged Property (including all improvements thereon) of the Contributor is
insured by a hazard insurance policy as required by the applicable Mortgage, and
the Contributor has provided true and complete copies of each policy to the
Trust. To the actual knowledge of the Contributor, without any inquiry, if upon
origination of the Mortgage Loan the Mortgaged Property was in an area
identified in the Federal Register by the Federal Emergency Management Agency as
having special flood hazards (and such flood insurance has been made available),
and if required by applicable law, a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
is in effect;
(h) there is no monetary default, breach, violation or event of
acceleration existing under any Mortgage or the related Mortgage Note of the
Contributor and no event has occurred during the last twelve months that, with
the passage of time or with notice and the expiration of any grace or cure
period, would constitute a monetary default, breach, violation or event of
acceleration; to the current actual knowledge of the Contributor without inquiry
or investigation, except as set forth in the applicable Mortgage File there is
no non-monetary default, breach, violation or event of acceleration existing
under any Mortgage or the related Mortgage Note;
(i) the Contributor has not waived any material default, breach, violation
or event of acceleration under any Mortgage Loan of the Contributor, which would
materially impair the Trust's rights to enforce the documents evidencing,
securing or pertaining to such Mortgage Loan (the "Mortgage Loan Documents");
(j) with respect to the Ground Lease of the Contributor, to the knowledge
of the Contributor, after due inquiry:
(i) the Ground Lease is valid and enforceable, is in full force and
effect, and is binding upon the parties thereto and their respective
successors and assigns, in accordance with its terms;
(ii) the Ground Lease has not been amended, restated, supplemented,
extended or otherwise modified in any respect, and a true and correct copy
of the Ground Lease has been provided to the Trust;
(iii) the Contributor, as the lessor under the Ground Lease, has fully
performed all obligations under the Ground Lease to be performed by the
lessor thereunder, and the lessee under the Ground Lease has fully
performed all obligations under the Ground Lease to be performed by the
lessee thereunder;
(iv) neither the Contributor, as lessor under the Ground Lease nor the
lessee thereunder, is in default under the Ground Lease; and
(v) no consents or approvals of any party having an interest in the
Ground Lease, including, without limitation, the lessee, is required, under
the Ground Lease or otherwise, in order for the Contributor to validly
transfer all right, title and interest of the Contributor in and to the
Ground Lease to the Trust, or, to the extent such consent is required or
necessary, upon
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consummation of the transactions contemplated by this Agreement, such
consent will have been delivered to the Trust in full satisfaction of such
consent requirements;
(k) with respect to each Letter of Intent of the Contributor:
(i) the Letter of Intent is valid and enforceable, is in full force
and effect, and is binding upon the parties thereto except as otherwise
specified in the Letter of Intent and their respective successors and
assigns, in accordance with its terms;
(ii) the Letter of Intent has not been amended, restated,
supplemented, extended or otherwise modified in any respect, and a true and
correct copy of the Letter of Intent has been provided to the Trust;
(iii) the Contributor has fully performed all obligations under the
Letter of Intent to be performed by the acquiror or originator thereunder,
and the borrower or seller under the Letter of Intent has fully performed
all obligations under the Letter of Intent to be performed by the seller or
borrower thereunder;
(iv) neither the Contributor nor the counter party is in default under
the Letter of Intent; and
(v) no consents or approvals of any party having an interest in the
Letter of Intent, including, without limitation, the seller or borrower, is
required, under the Letter of Intent or otherwise, in order for the
Contributor to validly transfer all right, title and interest of the
Contributor in and to the Letter of Intent to the Trust, or, to the extent
such consent is required or necessary, upon consummation of the
transactions contemplated by this Agreement, such consent will have been
delivered to the Trust in full satisfaction of such consent requirements;
(l) there has been no fraud, dishonesty, or material misrepresentation by
Contributor, and Contributor has not received from any borrower any notice that
any predecessor to Contributor engaged in fraud, dishonesty or material
misrepresentation, in connection with the origination, servicing, collection or
foreclosure under any Mortgage or the related Mortgage Note of the Contributor;
and the Contributor has made no oral or written promises with respect to any
Mortgage Loan of the Contributor not reflected in the Mortgage File provided to
the Trust;
(m) if any Mortgage Loan of the Contributor has been participated with
other lenders, such participation is indicated on Schedule 1.1(a) or (b), as
applicable, and unless otherwise indicated, the Contributor is the lead lender
in such participation and either has the right under the related participation
agreement to sell its interest in the Mortgage Loan and to transfer the
servicing thereof without the consent of any participant required or, as of the
Closing Date for such Mortgage Loan, has obtained all required consents;
(n) there has been no fraud, dishonesty, or material misrepresentation in
connection with the Contributor's actions as lead lender in the participations
described in subsection (l) above;
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(o) each Mortgage Loan of the Contributor (except in those cases in which
the Contributor holds only a minority participation interest or the interest of
a junior lender in a Mortgage Loan) is being and has been serviced by the
Contributor, and from the date hereof until the Closing Date the Contributor or
its affiliate shall service and administer the Mortgage Loans of the
Contributor, in accordance with Contributor's customary servicing standards.
ARTICLE VII
ACTIONS PRIOR TO THE CLOSING DATE
Each of the Trust, Starwood Mezzanine and SOFI IV, as applicable, covenants
and agrees to take the following actions between the date hereof and the Closing
Date:
Section 7.1 Proxy Statement. The Trust has prepared and filed with the SEC
a proxy statement to solicit proxies in connection with the meeting of the
shareholders of the Trust referred to in Section 7.2 (the form of definitive
such proxy statement, together with any amendments thereof or supplements
thereto, mailed to the shareholders of the Trust in connection with such meeting
is herein referred to as the "Proxy Statement"). A true and complete copy of the
Proxy Statement (and all exhibits thereto) filed with the SEC has been and to
the extent amended will be delivered to Starwood Mezzanine and SOFI IV promptly
when available. The Trust will cause the Proxy Statement to comply as to form in
all material respects with the applicable requirements of the Exchange Act and
the respective rules and regulations thereunder and will cause the Proxy
Statement, at the time of its mailing or delivery to the shareholders of the
Trust and at the time of the meeting referred to above, to not include any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
provided, however, that the foregoing shall not apply to the extent that any
such untrue statement of a material fact or omission to state a material fact
was made by the Trust in reliance upon and in conformity with information
concerning Starwood Mezzanine, SOFI IV and their partners or representatives or
the Interests for inclusion in the Proxy Statement. Each of Starwood Mezzanine
and SOFI IV shall, and shall cause their representatives to, furnish the Trust
all information concerning themselves and their partners and the Interests
reasonably required for use in the Proxy Statement. If, at any time prior to the
Closing Date, any event should occur which is required to be described in an
amendment of, or a supplement to, the Proxy Statement, the Trust will cause such
event to be so described, and such amendment shall be promptly filed with the
SEC and, as required by law, disseminated to any shareholders of the Trust.
Starwood Mezzanine and SOFI IV and their partners will cooperate fully in
connection with such amendment or supplement, including supplying any and all
information with respect to Starwood Mezzanine, SOFI IV, and their partners and
the Interests which is necessary to prepare any such amendment or supplement.
The Proxy Statement includes many proposals for shareholder approval in addition
to the transaction contemplated hereby. Subject to the last sentence of Section
7.2, the Trust shall not amend or delete any of proposals relating to the
transactions contemplated hereby without the approval of both Starwood Mezzanine
and SOFI IV, it being understood that shareholder approval of all such proposals
(without any amendments thereto objectionable to Starwood Mezzanine or SOFI IV,
notwithstanding the last sentence of Section 7.2) shall be a condition to the
obligation of Starwood Mezzanine and SOFI IV to close the transactions
contemplated hereby.
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Section 7.2 Action by the Trust and Shareholders of the Trust. The Trust
shall, as soon as practicable after the Proxy Statement shall be cleared by the
SEC, duly call, give notice of, convene and hold a meeting of the shareholders
of the Trust for the purposes set forth in the Proxy Statement (collectively,
the "Trust Shareholders Matters"). Subject to the fiduciary duties of the Board
of Trustees of the Trust under applicable law and to the last sentence of this
Section 7.2 , the Board of Trustees of the Trust will recommend to its
shareholders approval of the Trust Shareholder Matters. The Board of Trustees of
the Trust may at any time prior to the Closing Date withdraw, modify or change
any recommendation regarding the Trust Shareholder Matters, this Agreement or
the transactions contemplated hereby or recommend and declare advisable any
other offer, proposal or transaction if in any such case it determines upon
advice of legal counsel that the failure to so withdraw, modify or change such
recommendation could reasonably be expected to involve it in a breach of
fiduciary duties under applicable law.
Section 7.3 Lawsuits, Proceedings, etc. Each party hereto shall notify the
other party hereto promptly upon becoming aware of any lawsuit, proceeding,
claim or investigation that may be threatened, brought, asserted or commenced
against it (a) involving in any way the transactions contemplated by this
Agreement or (b) that would have been listed or specified as an exception to
Sections 3.5, 4.4 or 5.4, as the case may be, if such lawsuit, proceeding, claim
or investigation had arisen prior to the date hereof.
Section 7.4 Conduct of Business by the Trust, Starwood Mezzanine and SOFI
IV Pending the Closing.
(a) During the period from the date of this Agreement through the Closing
Date, except as expressly contemplated by this Agreement, each of the Trust and
the Partnership and each of Starwood Mezzanine and SOFI IV with respect to the
Interests only, shall carry on its business in accordance with the ordinary
course and shall not enter into any material transaction outside of the ordinary
course of business with respect thereto without the prior written consent of the
Trust in the case of Starwood Mezzanine or SOFI IV, or Starwood Mezzanine and
SOFI IV in the case of the Trust (not to be unreasonably withheld).
(b) Without limiting the generality of the foregoing, and except as
expressly contemplated by this Agreement, during the period from the date of
this Agreement through the Closing Date, the Trust shall not, without the prior
written consent of Starwood Mezzanine and SOFI IV (not to be unreasonably
withheld):
(i) take any action or omit to take any action that would cause it to
fail to be taxed as a REIT, for its taxable year ending December 31, 1998
or omit to take any action necessary to cause the Trust to be taxed as a
REIT for such taxable year;
(ii) take any action or omit to take any action that would cause
personal liability to attach to the holders of the Class A Shares by reason
of the ownership thereof;
(iii) acquire any real estate or other assets (other than receipt of
cash or investments of cash in short term, liquid real estate assets or
cash equivalents);
(iv) issue or enter into any executory agreement to issue any new debt
securities;
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(v) issue or enter into any executory agreement to issue any new
equity securities other than common shares issued in replacement of lost,
stolen or transferred outstanding shares or as described in the Proxy
Statement;
(vi) declare and pay any dividends or make other distributions to
holders of shares other than as are necessary to preserve the REIT status
of the Trust; or
(vii) repay any indebtedness.
(c) Without limiting the generality of the foregoing, and except as
expressly contemplated by this Agreement, during the period from the date of
this Agreement through the Closing Date, Starwood Mezzanine and SOFI IV shall
not, without the prior written consent of the Trust (not to be unreasonably
withheld), except as required by law, or the documents evidencing, securing or
pertaining to the Mortgage Loans, or in the ordinary course in accordance with
Starwood Mezzanine's and SOFI IV's customary practice:
(i) voluntarily dispose of any portion of the Interests or of the
underlying collateral other than as required to maintain the venture
capital operating company status of Starwood Mezzanine;
(ii) release any collateral or any party from any liability on or with
respect to the Mortgage Loans;
(iii) compromise or settle any claims of any kind or character with
respect to the Letters of Intent, the Mortgage Loans or the Ground Lease;
(iv) initiate, complete or otherwise take any action with respect to a
foreclosure on any of the Mortgaged Property or exercise any remedies under
the related Mortgage Note or Mortgage or under any Letter of Intent or
Ground Lease;
(v) sell or encumber, or contract to sell or encumber, the Interests,
or any portion thereof or any interest therein;
(vi) agree to any amendments or modifications to any Letter of Intent,
Mortgage Loan or Ground Lease;
(vii) subordinate any Mortgage Loan or Ground Lease;
(viii) accept any prepayment of any Mortgage Note at a discount from
the face amount thereof;
(ix) give any notice of default or make any demand on any Mortgagor or
any party to a Letter of Intent or Ground Lease;
(x) accelerate the maturity of any Mortgage Loan, except in case of a
default; or
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(xi) initiate any litigation against any Mortgagor or any party to a
Letter of Intent or Ground Lease.
Section 7.5 Mortgagor Solicitations. Other than in connection with
solicitations or promotions directed at the general public, each Contributor
agrees severally that it will not after the Closing Date solicit any Mortgagor
for the purpose of refinancing the related Mortgage Loan or otherwise agree at
any time to refinance, restructure or replace any Mortgage Loan.
Section 7.6 Mutual Cooperation; Best Efforts. Subject to the fiduciary
duties of the Board of Trustees of the Trust under applicable law, the fiduciary
duties of general partners of Starwood Mezzanine under applicable law, and the
fiduciary duties of the general partner of SOFI IV, the parties hereto shall
cooperate with each other, and shall use their respective best efforts to cause
the fulfillment of the conditions to the parties' obligations hereunder and to
obtain as promptly as possible all consents, authorizations, orders or approvals
from each and every third party, whether private or governmental, required in
connection with the transactions contemplated by this Agreement; provided,
however, that the foregoing shall not require Starwood Mezzanine, any partner
thereof, SOFI IV, any partner thereof, or the Trust to make any divestiture or
consent to any divestiture in order to obtain any waiver, consent or approval.
Section 7.7 No Public Announcement. No party hereto shall, without the
approval of the other parties hereto (which may not be unreasonably withheld),
make any press release or other public announcement concerning the transactions
contemplated by this Agreement, except as and to the extent that such party
shall be so obligated by law, in which case the other parties hereto shall be
advised and the parties hereto shall use their reasonable best efforts to cause
a mutually agreeable release or announcement to be issued.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST
The obligations of the Trust under this Agreement to consummate the
transactions contemplated hereby to be consummated at the Closing shall, at the
option of the Trust, be subject to the satisfaction, on or prior to the Closing
Date, of the following conditions:
Section 8.1 No Misrepresentation or Breach of Covenants and Warranties.
There shall have been no material breach by Starwood Mezzanine or SOFI IV in the
performance of the covenants and agreements herein to be performed by each of
them at or prior to the Closing Date; on the Closing Date, each of the
representations and warranties of Starwood Mezzanine and SOFI IV that is
qualified as to materiality shall be true and correct as though made on the
Closing Date; on the Closing Date, each of the representations and warranties of
Starwood Mezzanine and SOFI IV that is not so qualified as to materiality shall
be true and correct in all material respects as though made on the Closing Date;
and there shall have been delivered to the Trust a certificate or certificates
to the foregoing effect, dated the Closing Date, signed on behalf of each of
Starwood Mezzanine and SOFI IV. Notwithstanding anything to the contrary, the
prepayment of any mortgage after the date hereof but prior to the Closing Date
shall not constitute a breach of the representations and warranties of SOFI IV
or Starwood Mezzanine. In the event of a breach of the warranties under Section
6.3(h), the Trust, at its option, may elect not to purchase
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the defaulted Mortgage and to reduce the Purchase Price accordingly pursuant to
Section 1.3 or to purchase the defaulted Mortgage and to negotiate with the
Contributors in good faith in order to determine the appropriate reduction in
the Purchase Price, if the Trust reasonably determines that the occurrence of
such default adversely affects the value of such Mortgage Loan.
Section 8.2 No Material Adverse Effect. Between the date hereof and the
Closing Date, there shall have been no Material Adverse Effect on Starwood
Mezzanine, SOFI IV or any of the Interests or the collateral therefore and there
shall have been delivered to the Trust a certificate to that effect, dated the
Closing Date, signed on behalf of Starwood Mezzanine and SOFI IV (with respect
to itself and the Interests owned by it).
Section 8.3 Opinion of Counsel for Starwood. The Trust shall have received
from Katten Muchin & Zavis, counsel for Starwood Mezzanine and SOFI IV, an
opinion, dated the Closing Date, in form and substance reasonably satisfactory
to the Trust.
Section 8.4 No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect, it
being agreed by each of the Trust, Starwood Mezzanine and SOFI IV, however, that
it shall use its best efforts to prevent the entry of any such injunction or
other order and to appeal as promptly as possible any injunction or other order
that may be entered.
Section 8.5 Necessary Governmental Approvals. The parties hereto shall have
received all governmental and regulatory approvals and actions reasonably
necessary to consummate the transactions contemplated hereby, which are either
required to be obtained prior to the Closing Date by applicable law or
regulation or are necessary to prevent a Material Adverse Effect on the Trust,
Starwood Mezzanine or SOFI IV.
Section 8.6 Transaction Agreements. Each of the parties (other than the
Trust) to each of the Transaction Agreements and any other documents
contemplated hereby and thereby shall have entered into such Transaction
Agreements and any other documents contemplated hereby and thereby substantially
in the forms attached hereto as exhibits or, if not so attached, as agreed to by
the parties.
Section 8.7 Shareholder and Stockholder Action. The Shareholders of the
Trust shall have approved, by the requisite vote of the holders of Class A and
Class B Shares, the Contribution Proposal (as defined in the Proxy Statement),
and the Advisory Agreement Proposal (as defined in the Proxy Statement).
Section 8.8 Termination of Partnership and Exchange Rights Agreement. The
Partnership and the Exchange Rights Agreement shall be terminated effective as
of the Closing Date.
Section 8.9 Fairness Opinion. The Trust shall have received from the
Financial Advisor a favorable opinion as to the fairness of the transactions
contemplated hereby, from a financial point of view, to the shareholders of the
Trust.
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Section 8.10 REIT Qualifications. The Trust shall be eligible to elect to
be qualified as a REIT for its taxable year ending December 31, 1998.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS
OF STARWOOD MEZZANINE AND SOFI IV
The obligations of each of Starwood Mezzanine and SOFI IV under this
Agreement to consummate the transactions contemplated hereby to be consummated
at the Closing shall be subject to the satisfaction, on or prior to the Closing
Date, of the following conditions:
Section 9.1 No Misrepresentation or Breach of Covenants and Warranties.
There shall have been no material breach by the Trust in the performance of its
covenants and agreements herein to be performed at or prior to the Closing Date;
on the Closing Date, each of the representations and warranties of the Trust
that is qualified as to materiality shall be true and correct as though made on
the Closing Date, on the Closing Date, each of the representations and
warranties of the Trust that is not so qualified as to materiality shall be true
and correct in all material respects as though made on the Closing Date; and
there shall have been delivered to Starwood Mezzanine and SOFI IV a certificate
or certificates to the foregoing effect, dated the Closing Date, signed on
behalf of the Trust. Without limitation of the foregoing, the Class A Shares
shall continue to be listed and publicly traded on the AMEX.
Section 9.2 No Material Adverse Effect. Between the date hereof and the
Closing Date, there shall have been no Material Adverse Effect on the Trust or
the Partnership; and there shall have been delivered to Starwood Mezzanine and
SOFI IV a certificate to that effect, dated the Closing Date, signed on behalf
of the Trust.
Section 9.3 Opinion of Counsel for the Trust. Starwood Mezzanine and SOFI
IV shall have received from Mayer, Brown & Platt, counsel for the Trust, an
opinion dated the Closing Date, in form and substance reasonably satisfactory to
Starwood Mezzanine and SOFI IV.
Section 9.4 No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect, it
being agreed by each of the Trust, Starwood Mezzanine and SOFI IV, however, that
it shall use its best efforts to prevent the entry of any such injunction or
other order and to appeal as promptly as possible any injunction or other order
that may be entered.
Section 9.5 Necessary Governmental Approvals. The parties hereto shall have
received all governmental and regulatory approvals and actions reasonably
necessary to consummate the transactions contemplated hereby, which are either
required to be obtained prior to the Closing Date by applicable law or
regulation or are necessary to prevent a Material Adverse Effect on the Trust,
Starwood Mezzanine or SOFI IV.
Section 9.6 Transaction Agreements; Advisory Agreement. Each of the parties
(other than Starwood Mezzanine, SOFI IV and SOFI Holdings) to each of the
Transaction Agreements and any other documents contemplated hereby and thereby
shall have entered into such Transaction Agreements and any other
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documents contemplated hereby and thereby substantially in the forms attached
hereto as exhibits or, if not so attached, as agreed to by the parties. The
Advisory Agreement between the Trust and Starwood Financial Advisors, L.L.C.
shall be entered into on the Closing Date substantially in the form attached
hereto as Exhibit C.
Section 9.7 Shareholder and Stockholder Action. The Shareholders of the
Trust shall have approved, by the requisite vote of the holders of Class A
Shares and Class B Shares, the Trust Shareholder Matters and each of William M.
Matthes and Kneeland C. Youngblood, M.D. shall be elected as Trustees with a
term that expires on the date of the 1999 annual meeting of the Trust's
shareholders and Robin Josephs shall be elected as a Trustee with a term that
expires on the date of the 1998 annual meeting of the Trust's shareholders.
Section 9.8 REIT Qualifications. The Trust shall be eligible to elect to be
qualified as a REIT for its taxable year ending December 31, 1998.
ARTICLE X
INDEMNIFICATION; SURVIVAL
Section 10.1 Indemnification. (a) Each of the Trust, Starwood Mezzanine and
SOFI IV shall indemnify and hold harmless each other and their respective
subsidiaries, affiliates, employees, agents, partners and successors from and
against any and all (x) liabilities, losses or damages ("Loss") and (y)
reasonable out-of-pocket expenses, including without limitation attorneys' fees
and expenses ("Expense") incurred by such party in connection with (i) its
respective breach or failure to perform its obligations under this Agreement or
any other agreement entered into by it in connection therewith (including the
Transaction Agreements) and (ii) any breach of any warranty or the inaccuracy of
any representation, or misrepresentation or material omission, made by it
respectively in this Agreement, any Transaction Agreement or in any certificate
delivered by or on behalf of it respectively pursuant hereto or thereto;
provided however, that the obligation of each Contributor to indemnify and hold
harmless pursuant to this Section 10.1 shall be limited to the payment by such
Contributor in the aggregate of an amount equal to the value of the Class A
Shares and cash received by such Contributor pursuant to this Agreement.
(b) The Trust shall indemnify and hold harmless each of Starwood Mezzanine
and SOFI IV and their respective subsidiaries, affiliates, employees, agents,
partners and successors from and against any and all Loss and Expenses incurred
by such party in connection with any untrue statement of a material fact or
omission of a material fact required to be stated in the Proxy Statement, at the
time of its mailing or delivery to the shareholders of the Trust and at the time
of the shareholders meeting referenced therein or necessary to make the
statements therein not misleading; provided, however, that the foregoing shall
not apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by the Trust in reliance upon and in
conformity with information concerning Starwood Mezzanine, SOFI IV and their
partners or representatives or the Interests for inclusion in the Proxy
Statement.
(c) Each of Starwood Mezzanine and SOFI IV severally agrees that it shall
indemnify and hold harmless the Trust and its subsidiaries, affiliates,
employees, agents, partners and successors
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<PAGE>
from and against any and all Loss and Expenses incurred by such party in
connection with any untrue statement of a material fact or omission of a
material fact required to be stated in the Proxy Statement, at the time of its
mailing or delivery to the shareholders of the Trust and at the time of the
shareholders meeting referenced therein or necessary to make the statements
therein not misleading; provided, however, that the foregoing shall only apply
to the extent that any such untrue statement of a material fact or omission to
state a material fact was made by the Trust in reliance upon and in conformity
with information concerning the indemnifying party and its partners or
representatives or its Interests supplied by such indemnifying party for
inclusion in the Proxy Statement.
Section 10.2 Notice of Claims. If a party believes that any of the persons
entitled to indemnification under this Article X has suffered or incurred any
Loss or incurred any Expense, whether or not the applicable dollar limitation
specified by Section 10.1 has been exceeded, such party shall notify the
indemnifying party promptly in writing describing such Loss or Expense, the
amount thereof, if known, and the method of computation of such Loss or Expense,
all with reasonable particularity and containing a reference to the provisions
of this Agreement, any Transaction Agreement, the Proxy Statement or any
certificate delivered pursuant hereto in respect of which such Loss or Expense
shall have occurred; provided, however, that the omission by such indemnified
party to give notice as provided herein shall not relieve the indemnifying party
of its indemnification obligation under this Article X except to the extent that
such indemnifying party is materially damaged as a result of such failure to
give notice. If any action at Law or suit in equity is instituted against a
third party with respect to which any of the persons entitled to indemnification
under this Article X intends to claim any liability or expense as Loss or
Expense under this Article X, any such person shall promptly notify the
indemnifying party of such action or suit as specified in this Section 10.2 and
10.3. Any party entitled to indemnification hereunder shall use reasonable
efforts to minimize any Loss or Expense for which indemnification is sought
hereunder.
Section 10.3 Third-Party Claims. In the event of any claim for
indemnification hereunder resulting from or in connection with any claim or
legal proceeding by a third party, the indemnified persons shall give notice
thereof to the indemnifying party not later than twenty (20) business days prior
to the time any response to the asserted claim is required, if possible, and in
any event within fifteen (15) days following the date such indemnified person
has actual knowledge thereof; provided, however, that the omission by such
indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its indemnification obligation under this Article X except
to the extent that such indemnifying party is materially damaged as a result of
such failure to give notice. In the event of any such claim for indemnification
resulting from or in connection with a claim or legal proceeding by a third
party, the indemnifying party may, at its sole cost and expense, assume the
defense thereof; provided, however, that counsel for the indemnifying party, who
shall conduct the defense of such claim or legal proceeding, shall be reasonably
satisfactory to the indemnified party; and provided, further, that if the
defendants in any such actions include both the indemnified persons and the
indemnifying party and the indemnified persons shall have reasonably concluded
based on a written opinion of counsel that there may be legal defenses or rights
available to them which have not been waived and are in actual or potential
conflict with those available to the indemnifying party, the indemnified persons
shall have the right to select one law firm reasonably acceptable to the
indemnifying party to act as separate counsel, on behalf of such indemnified
persons, at the expense of the indemnifying party. Unless the indemnified
persons are represented by separate counsel pursuant to the second proviso of
the immediately preceding sentence, if an indemnifying party assumes the defense
of any such claim or legal proceeding, such
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<PAGE>
indemnifying party shall not consent to entry of any judgment, or enter into any
settlement, that (a) is not subject to indemnification in accordance with the
provisions in this Article X, (b) provides for injunctive or other nonmonetary
relief affecting the indemnified persons or (c) does not include as an
unconditional term thereof the giving by each claimant or plaintiff to such
indemnified persons of a release from all liability with respect to such claim
or legal proceeding, without the prior written consent of the indemnified
persons (which consent, in the case of clauses (b) and (c), shall not be
unreasonably withheld); and provided, further, that unless the indemnified
persons are represented by separate counsel pursuant to the second proviso of
the immediately preceding sentence, the indemnified persons may, at their own
expense, participate in any such proceeding with the counsel of their choice
without any right of control thereof. So long as the indemnifying party is in
good faith defending such claim or proceeding, the indemnified persons shall not
compromise or settle such claim or proceeding without the prior written consent
of the indemnifying party, which consent shall not be unreasonably withheld. If
the indemnifying party does not assume the defense of any such claim or
litigation in accordance with the terms hereof, the indemnified persons may
defend against such claim or litigation in such manner as they may deem
appropriate, including, without limitation, settling such claim or litigation
(after giving prior written notice of the same to the indemnifying party and
obtaining the prior written consent of the indemnifying party, which consent
shall not be unreasonably withheld) on such terms as the indemnified persons may
deem appropriate, and the indemnifying party will promptly indemnify the
indemnified persons in accordance with the provisions of Article X.
Section 10.4 Survival of Representations and Warranties. All
representations and warranties contained in this Agreement shall survive until
the first (1st) anniversary of the Closing Date, at which time such
representations and warranties will terminate and be of no force and effect. Any
claim under this Article X for Loss or Expense in respect of any representations
and warranties must be asserted in writing prior to the first (1st) anniversary
of the Closing Date. Notwithstanding the foregoing, if a claim of a breach of a
representation or warranty under this Article X is asserted in writing prior to
the applicable time period set forth above in this Section 10.4, then such
representation or warranty, as it relates to such claim, shall survive until the
Loss or Expense in respect thereof, if any, is finally determined and paid by
the indemnifying party.
ARTICLE XI
TERMINATION
Section 11.1 Termination. Anything contained in this Agreement to the
contrary notwithstanding, this Agreement may be terminated at any time prior to
the Closing Date:
(a) by the mutual consent of the parties;
(b) by the Trust upon any material breach by Starwood Mezzanine or SOFI IV
of any of their respective representations, warranties or covenants contained in
this Agreement that is not qualified as to materiality and upon any breach by
Starwood Mezzanine or SOFI IV of any of their respective representations,
warranties or covenants contained in this Agreement that is qualified as to
materiality; provided that either Starwood Mezzanine or SOFI IV, as the case may
be, shall have been given a reasonable opportunity to cure such breach;
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<PAGE>
(c) by Starwood Mezzanine or SOFI IV upon any material breach by the Trust
of any of its representations, warranties or covenants contained in this
Agreement that is not qualified as to materiality and upon any breach by the
Trust of any of its representations, warranties or covenants contained in this
Agreement that is qualified as to its materiality; provided that the Trust shall
have been given a reasonable opportunity to cure such breach;
(d) by the Trust if any of the conditions specified in Article VIII has not
been met or waived at such time as it is no longer possible to satisfy such
condition;
(e) by Starwood Mezzanine and SOFI IV if any of the conditions specified in
Article IX has not been met or waived at such time as it is no longer possible
to satisfy such condition;
(f) by the Trust, Starwood Mezzanine, or SOFI IV if the transactions
contemplated by this Agreement are not consummated on or before March 31, 1998
(the "Outside Date"); except that on or after the Outside Date no party may
terminate this Agreement pursuant to this Section 10.1(f) if such party is then
in material breach of its representations, warranties or covenants in this
Agreement; or
(g) upon 15 days' written notice by the Trust, Starwood Mezzanine or SOFI
IV if the Trust enters into an agreement with any party other than Starwood
Mezzanine, SOFI IV or any other entity controlled by Starwood Capital Group,
L.P., Starwood Capital Group, L.L.C. or their principals (a "Starwood Controlled
Party") which is not consistent with the obligations of the Trust set forth in
this Agreement or with the consummation of the transactions contemplated by this
Agreement. For the purposes hereof, an agreement with a party other than
Starwood Mezzanine, SOFI IV or a Starwood Controlled Party will be deemed to be
inconsistent with the obligations of the Trust set for this Agreement in the
event that such agreement would impose any exclusivity or non-competition
agreements on the Trust or would require a commitment of the Trust capital in
excess of $1,000,000 in the aggregate.
ARTICLE XII
OTHER PROVISIONS
Section 12.1 Confidential Nature of Information. Each party agrees that it
will treat in strict confidence all documents, materials and other information
which it obtains regarding the other party during the course of the negotiations
leading to the consummation of the transactions provided for herein and the
preparation of this Agreement; and if for any reason whatsoever the transactions
contemplated by this Agreement shall not be consummated, each party shall return
to the other party all copies of non-public documents and materials which have
been furnished or acquired in connection therewith and shall not use or
disseminate such documents, materials or other information for any purpose
whatsoever.
Section 12.2 Expenses.
(a) Each of the parties hereto shall bear its own costs and expenses
(including, without limitation, fees and disbursements of its counsel,
accountants and other financial, legal, accounting or other advisors) incurred
by it in connection with the preparation, negotiation, execution and delivery of
this Agreement, each of the other documents and instruments executed in
connection with or contemplated by this Agreement, including the Proxy
Statement, and the consummation of the
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<PAGE>
transactions contemplated hereby and thereby (collectively "Acquisition
Expenses"); provided, that, if the transactions contemplated by this Agreement
are not consummated on or before June 30, 1998, the Contributors (pro rata based
on the relative amounts of Class A Shares that would have been issued to each
and the amount of cash paid to each if the transactions had been consummated)
will reimburse the Trust for all amounts the Trust pays to Houlihan, Zokey,
Howard & Zukin Financial Advisors, Inc. other than as a result of the
Independent Trustees of the Trust withdrawing their approval for the proposed
transactions.
(b) In the event of a Qualifying Termination (as defined below), then
within ten (10) business days after receipt by the Trust from Starwood Mezzanine
or SOFI IV, as the case may be, of reasonable documentation therefor, the Trust
shall reimburse Starwood Mezzanine or SOFI IV, as the case may be, for its
reasonable out-of-pocket Acquisition Expenses.
For the purposes of this Section 12.2(b), a "Qualifying Termination" shall
mean a termination of this Agreement pursuant to Section 11.1(g).
Section 12.3 Notices. All notices and other communications under this
Agreement shall be in writing and shall be deemed given when delivered by
facsimile, personally or by overnight mail, or four (4) days after being mailed
(by registered mail, return receipt requested) to a party at the following
address (or to such other address as such party may have specified by notice
given to the other parties pursuant to this provision):
If to the Trust to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza
Suite 250
Greenwich, Connecticut 06830
Attention: Jay Sugarman
Fax No.: (203) 861-2101
with copies to:
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
Attention: James B. Carlson
Fax No.: (212) 262-1910
and
Rinaldi & Associates
Three Pickwick Plaza
Suite 250
Greenwich, Connecticut 06830
Attention: Ellis Rinaldi
Fax No.: (203) 861-2122
B-30
<PAGE>
If to Starwood Mezzanine to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza
Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
with a copy to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Attention: Nina Matis
Fax No.: (312) 902-1620
If to SOFI IV to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza
Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
with copies to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Chicago, Illinois 60661
Attention: Nina Matis
Fax No.: (312) 902-1620
Section 12.4 Definitions. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person; provided, however, that the
Trust, Starwood Mezzanine and SOFI IV are not affiliates for any purpose under
this Agreement;
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Financial Advisor" means Houlihan, Zokey, Howard & Zukin.
(d) "Incentive Plans" means the Angeles Participating Mortgage Trust 1996
Share Incentive Plan and the Angeles Participating Mortgage Trust 1996 Trustee
Share Incentive Plan.
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<PAGE>
(e) "Ground Lease" means the lease agreement between Red Lion Hotels, Inc.
and RLH Partnership, L.P.
(f) "Material Adverse Effect" means any change or effect (or any
development that, insofar as can reasonably be foreseen, would result in any
change or effect) that is materially adverse to (i) in the case of the Trust and
Starwood Mezzanine, the business, properties, assets, condition (financial or
otherwise) or results of operations of the applicable person or persons, taken
as a whole and (ii) in the case of SOFI IV, the SOFI IV Interests, the Letters
of Intent and the First Mortgage Portfolio.
(g) "Mortgage" shall mean the original mortgage, deed of trust or other
instrument, as amended, restated, supplemented or otherwise modified from time
to time prior to the date hereof, securing a Mortgage Note relating to a
Mortgage Loan.
(h) "Mortgage Files" means all related notes, deeds of trust, mortgages,
security agreements, guaranties, indemnities, financing statements, assignments,
endorsements, correspondence, bonds, letters of credit, accounts, insurance
contracts and policies, credit reports, tax returns, appraisals, environmental
reports, escrow documents, participation agreements (if applicable), loan files,
servicing files and all other documents evidencing, securing or pertaining to
the Mortgage Loans.
(i) "Mortgage Loan" or "Mortgage Loans" shall mean the loan or loans
identified on Schedule 1.1(a) or (b), as the same may be amended from time to
time pursuant to the provisions of this Agreement, together with all Servicing
Rights related thereto.
(j) "Mortgage Note" means a note or other evidence of indebtedness
evidencing the indebtedness of a Mortgagor under a Mortgage Loan.
(k) "Mortgaged Property" means the property encumbered by a Mortgage.
(l) "Mortgagor" means a Person that has executed and delivered a Mortgage
encumbering Mortgaged Property owned and/or leased by such Person.
(m) "Person" means an individual, corporation, partnership, limited
liability company, association, trust, unincorporated organization or other
entity.
(n) "Servicing Files" means the documents, files and other items pertaining
to the Mortgage Loans, including without limitation the computer files, data
disks, books, records, data tapes, notes, and all additional documents generated
as a result of or utilized in originating or servicing the Mortgage Loans.
(o) "Servicing Rights" means, with respect to each Mortgage Loan, any and
all of the following: (a) all rights to service such Mortgage Loan; (b) any
payments or monies payable or received for servicing such Mortgage Loan; (c) any
late fees, assumption fees, penalties or similar payments with respect to such
Mortgage Loan; (d) all agreements or documents creating, defining or evidencing
any such Servicing Rights and all rights of the Contributor thereunder,
including without limitation any clean-up calls and termination options; (e) all
accounts and other rights to payment related to any of the property described in
this paragraph; (f) possession and use of any and all Servicing Files pertaining
to
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<PAGE>
such Mortgage Loan or pertaining to the past, present or prospective servicing
of such Mortgage Loan; and (g) all rights, powers and privileges incident to any
of the foregoing.
Section 12.5 Partial Invalidity. In case any one or more of the provisions
contained herein shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, but this Agreement
shall be construed as if such invalid, illegal or unenforceable provision or
provisions had never been contained herein unless the deletion of such provision
or provisions would result in such a material change as to cause completion of
the transactions contemplated hereby to be unreasonable.
Section 12.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective permitted
successors or assigns.
Section 12.7 Execution in Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be considered an original
counterpart, and shall become a binding agreement when each of the parties shall
have each executed one counterpart.
Section 12.8 Titles and Headings. Titles and headings to Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
Section 12.9 Schedules and Exhibits. The schedules and exhibits referred to
in this Agreement shall be construed with and as an integral part of this
Agreement to the same extent as if the same had been set forth verbatim herein.
Section 12.10 Entire Agreement; Amendments and Waivers; Assignment. This
Agreement (together with the Transaction Agreements and other documents referred
to herein) contains the entire understanding of the parties hereto with regard
to the subject matter contained herein. The parties hereto, only by mutual
agreement in writing, may amend, modify and supplement this Agreement. The
failure of any party hereto to enforce at any time any provision of this
Agreement shall not be construed to be a waiver of such provision, nor in any
way to affect the validity of this Agreement or any part hereof or the right of
such party thereafter to enforce each and every such provision. No waiver of any
breach of this Agreement shall be held to constitute a waiver of any other or
subsequent breach. Except as expressly provided herein, the rights and
obligations of the parties under this Agreement may not be assigned or
transferred by any party hereto without the prior written consent of the other
parties hereto, provided, however, that the Trust shall be permitted to assign
this agreement in connection with any merger, reorganization, consolidation,
sale of all or substantially all of its assets in which the Trust is the
surviving entity or the primary purpose of which is to change the domicile of
the Trust or to change the form of the Trust to a corporation.
Section 12.11 Governing Law. This Agreement and the application or
interpretation thereof, shall be exclusively governed by its terms and by the
internal laws of the State of New York, without regard to principles of
conflicts of laws as applied in the State of New York or any other jurisdiction
which, if applied, would result in the application of any laws other than the
internal laws of the State of New York.
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<PAGE>
Section 12.12 No Third-Party Beneficiaries. Except as specified in Article
X, nothing in this Agreement, expressed or implied, is intended or shall be
construed to confer upon any person other than the parties hereto and successors
and assigns permitted by Section 12.6 any right, remedy or claim under or by
reason of this Agreement.
Section 12.13 The Trust; Starwood General Partners. Each of the parties
hereto acknowledges and agrees that (a) the name "Angeles Participating Mortgage
Trust" is a designation of the Trust and its Trustees (as Trustees but not
personally) under a Declaration of Trust, originally made and entered into as of
April 15, 1988, as restated as of July 18, 1988, and all persons dealing with
the Trust shall look solely to Trust's assets for the enforcement of any claims
against the Trust, and the Trustees, officers, agents and security holders of
the Trust assume no personal liability for obligations entered into on behalf of
the Trust, and their respective individual assets shall not be subject to the
claims of any person relating to such obligations; (b) all persons dealing with
Starwood Mezzanine shall look solely to the assets of Starwood Mezzanine for the
enforcement of any claims against Starwood Mezzanine and the general partners of
Starwood Mezzanine, and the officers, agents and security holders of such
general partner assume no personal liability for obligations entered into on
behalf of Starwood Mezzanine, and their respective individual assets shall not
be subject to the claims of any person relating to such obligations; and (c) all
persons dealing with SOFI IV shall look solely to the assets SOFI IV for the
enforcement of any claims against SOFI IV and the general partners of SOFI IV,
and the officers, agents and security holders of such general partner assume no
personal liability for obligations entered into on behalf of SOFI IV, and their
respective individual assets shall not be subject to the claims of any person
relating to such obligations.
Section 12.14 Determinations and Interpretations by the Trust. All
determinations of the Trust (or the Board of Trustees of the Trust) provided for
in or pursuant to this Agreement shall be made by the Independent Trustees (as
defined in the Shareholders Agreement). All interpretations of the terms of this
Agreement shall be resolved on behalf of the Trust by the Independent Trustees
(as defined in the Shareholders Agreement).
Section 12.15 Submission to Jurisdiction. Each of the parties hereto
irrevocably submits and consents to the jurisdiction of the United States
District Court for the Southern District of New York in connection with any
action or proceeding arising out of or relating to this Agreement or any
Transaction Document and the transactions contemplated hereby and thereby, and
irrevocably waives any immunity from jurisdiction thereof and any claim of
improper venue, forum non conveniens or any similar basis to which it might
otherwise be entitled in any such action or proceeding.
Section 12.16 Approvals and Consents. Unless otherwise expressly set forth
herein, any agreement, approval or consent required a party hereto shall not be
unreasonably withheld or delayed.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties hereto or by their duly authorized officers, all as of the date
first above written.
ANGELES PARTICIPATING MORTGAGE TRUST, a California
business trust
By: /s/ Barry S. Sternlicht
---------------------------------
Name: Barry S. Sternlicht
Title:
STARWOOD MEZZANINE INVESTORS, L.P.
By: Starwood Capital Group, L.P.
its general partner
By: BSS Capital Partners, L.P.
its general partner
By: Sternlicht Holdings II, Inc.
its general partner
By: /s/ Jay Sugarman
---------------------------------
Name: Jay Sugarman
Title:
STARWOOD OPPORTUNITY FUND IV, L.P.
By: SOFI IV Management, L.L.C.
Its: General Partner
By: Starwood Capital Group, L.L.C.
Its General Manager
By: /s/ Jay Sugarman
---------------------------------
Name: Jay Sugarman
Title:
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<PAGE>
SCHEDULE 1.1(a)
Starwood Mezzanine Interests
<TABLE>
<CAPTION>
Outstanding Principal
Original Principal Amount to
Loan Interest Principal Balance at Anticipated Contribution Senior
Borrower Collateral Rate Maturity Balance ----- Draws Participation Value Subordination Investment
- -------- ---------- -------- --------- --------- ----------- ----------- ------------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
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<PAGE>
SCHEDULE 1.1(b)
SOFI IV Interests
<TABLE>
<CAPTION>
Outstanding Principal
Original Principal Amount to
Interest Principal Balance at Contribution Senior
Loan Lender Collateral Rate Maturity Balance ----- Participation Value Subordination Investment
- ----------- ---------- -------- -------- --------- ----------- ------------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
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<PAGE>
EXHIBIT C
FORM OF
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This Amended and Restated Registration Rights Agreement (this "Agreement")
is made and entered into this __ day of ____________, 1998, among Starwood
Financial Trust, a California business trust (the "Trust"), Starwood Mezzanine
Investors, L.P., a Delaware limited partnership ("Starwood Mezzanine"), SAHI
Partners, a Delaware general partnership ("SAHI"), and SOFI-IV SMT Holdings,
L.L.C., a Delaware limited liability company ("SOFI IV"). Unless otherwise
indicated, capitalized terms used herein are used herein as defined in Section
1.1.
RECITALS
WHEREAS, the Trust and Starwood Mezzanine are parties to the Registration
Rights Agreement, dated September 26, 1996 (the "Original Agreement"); and
WHEREAS, the Trust and Starwood Mezzanine now desire to amend and restate
the Original Agreement in its entirety; and
WHEREAS, pursuant to a Contribution Agreement, dated February ___, 1998,
among the Trust, Starwood Mezzanine and SOFI IV (the "Contribution Agreement"),
on the date hereof, Starwood Mezzanine and SOFI IV are contributing certain
assets to the Trust in return for the issuance by the Trust of Class A Shares,
$.01 par value, of the Trust (the "Class A Shares"); and
WHEREAS, SAHI owns 244,100 Class A Shares on the date hereof; and
WHEREAS, the parties hereto desire to set forth the rights of Starwood
Mezzanine, SOFI IV and SAHI and the obligations of the Trust to cause the
registration of the Registrable Securities pursuant to the Securities Act;
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Definitions and Usage.
1.1 Definitions. As used in this Agreement:
"Beneficially Owning" and "Beneficially Own" shall mean owning Class A
Shares directly, indirectly or constructively by a Person through the
application of Section 318(a) of the Code, as modified by Section 856(d)(5) of
the Code, or Section 544 of the Code, as modified by Section 856(h) of the Code.
"Class A Shares" shall have the meaning set forth in the Recitals.
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<PAGE>
"Code" shall mean the Internal Revenue Code of 1986 and the rules and
regulations thereunder.
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Contribution Agreement" shall have the meaning set forth in the Recitals.
"Exchange Act" shall mean the Securities Exchange Act of 1934 and the rules
and regulations of the Commission thereunder.
A "Holder" shall mean Starwood Mezzanine, the partners of Starwood
Mezzanine, SAHI, the partners of SAHI, SOFI IV, or the partners of SOFI IV as
long as such Person owns Registrable Securities.
"Independent Trustees", when used with respect to the Trust, has the
meaning set forth in the Amended and Restated Shareholders Agreement of the
Trust, as amended from time to time.
"Majority Selling Holders" means those Selling Holders whose Registrable
Securities included in a given registration pursuant to or in accordance with
this Agreement represent a majority of the Registrable Securities of all Selling
Holders included therein.
"Person" shall mean any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.
"Piggyback Registration" shall have the meaning set forth in Section 3.
"Register", "registered", and "registration" shall refer to a registration
effected by preparing and filing a registration statement or similar document in
compliance with the Securities Act, and the declaration or ordering by the
Commission of effectiveness of such registration statement or document.
"Registrable Securities" shall mean: (i) the Class A Shares issued to
Starwood Mezzanine pursuant to the exercise of a Class A Warrant issued by the
Trust on March 15, 1994 and held by Starwood Mezzanine; (ii) the Class A Shares
issued to Starwood Mezzanine pursuant to the Contribution Agreement or in
exchange for interests in the APMT Limited Partnership; (iii) the Class A Shares
issued to SOFI IV pursuant to the Contribution Agreement; (iv) the Class A
Shares owned by SAHI on the date hereof; (v) any Class A Shares or other
securities issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange by the Trust generally for, or in
replacement by the Trust generally of, such Class A Shares; and (vi) any
securities issued in exchange for such Class A Shares or other securities that
are Registrable Securities in any merger, reorganization, recapitalization or
combination of the Trust; provided, however, that Registrable Securities shall
not include any securities which have theretofore been sold in an offering
registered under the Securities Act or which have been sold pursuant to Rule 144
or any similar rule promulgated by the Commission pursuant to the Securities
Act, and, provided further, the Trust shall have no obligation under Sections 2
and 3 to register any Registrable Securities if the Trust shall deliver to the
Holders of such Registrable Securities an opinion of counsel to the effect that
the proposed sale or disposition of all of the Registrable Securities for which
registration was requested does not require registration under the
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Securities Act for a sale or disposition in a single public sale, and offers to
remove any and all legends restricting transfer from the certificates evidencing
such Registrable Securities and the term Registrable Securities shall not
include such securities if the Trust is willing to deliver such an opinion and
remove such legend.
"Registrable Securities then outstanding" shall mean, with respect to a
specified determination date, the Registrable Securities owned by all Holders on
such date.
"Registration Expenses" shall have the meaning set forth in Section 6.1.
"REIT Requirements" shall mean the requirements for the Trust to qualify as
a REIT under the Code.
"Securities Act" shall mean the Securities Act of 1933 and the rules and
regulations of the Commission thereunder, all as the same may be in effect at
the time.
"Selling Holders" shall mean, with respect to a specified registration
pursuant to this Agreement, Holders whose Registrable Securities are included in
such registration.
"Shelf Registration" shall have the meaning set forth in Section 2.1.
"Transfer" shall mean and include the act of selling, giving, transferring,
creating a trust (voting or otherwise), assigning or otherwise disposing of
(other than pledging, hypothecating or otherwise transferring as security) (and
correlative words shall have correlative meanings); provided however, that any
transfer or other disposition upon foreclosure or other exercise of remedies of
a secured creditor after an event of default under or with respect to a pledge,
hypothecation or other transfer as security shall constitute a "Transfer".
"Underwriters' Representative" shall mean the managing underwriter, or, in
the case of a co-managed underwriting, the managing underwriter designated as
the Underwriters' Representative by the co-managers.
"Violation" shall have the meaning set forth in Section 7.1.
1.2 Usage.
(i) References to a Person are also references to its assigns and
successors in interest (by means of merger, consolidation or sale of all or
substantially all the assets of such Person or otherwise, as the case may be).
(ii) References to Registrable Securities "owned" by a Holder shall include
Registrable Securities beneficially owned by such Person but which are held of
record in the name of a nominee, trustee, custodian, or other agent.
(iii) References to a document are to it as amended, waived and otherwise
modified from time to time and references to a statute or other governmental
rule are to it as amended and otherwise modified from time to time (and
references to any provision thereof shall include references to any successor
provision).
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(iv) References to Sections or to Schedules are to sections hereof or
schedules hereto, unless the context otherwise requires.
(v) The definitions set forth herein are equally applicable both to the
singular and plural forms and the feminine, masculine and neuter forms of the
terms defined.
(vi) The term "including" and correlative terms shall be deemed to be
followed by "without limitation" whether or not followed by such words or words
of like import.
(vii) The term "hereof" and similar terms refer to this Agreement as a
whole.
(viii) The "date of" any notice or request given pursuant to this Agreement
shall be determined in accordance with Section 12.
Section 2. Shelf Registrations.
2.1 The Trust shall use its best efforts to cause to be filed with the
Commission within 90 days from the date hereof but in no event prior to that
date which is 60 days after the date hereof, a registration statement in
accordance with the Securities Act for an offering on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act (a "Shelf Registration") and
the Trust shall include therein all Registrable Securities; provided each Holder
will provide at least 10 business days notice of its intention to effect a
resale of any Registrable Securities pursuant to the Shelf Registration to the
Trust and the Trust's transfer agent. The notice requirement set forth in the
preceding sentence will be shortened to 3 business days for any resale made
within 30 days of a distribution of Registrable Securities by Starwood Mezzanine
or SOFI IV to their limited partners. In no event will any Holder be permitted
to Transfer any Registrable Securities in violation of federal and state
securities laws, including pursuant to the Shelf Registration if the Shelf
Registration has been suspended pursuant to Section 2.2 or prior to delivery by
the Trust of the requested number of prospectuses. Any Holder may Transfer
Registrable Securities at any time including periods during which the Shelf
Registration is suspended if such transfer is otherwise in compliance with
applicable state and federal securities law. Any notice given pursuant to this
Section 2.1 shall be addressed to the attention of the Secretary of the Trust
and the Trust's transfer agent, and shall specify the maximum number of
Registrable Securities to be sold, the intended methods of disposition thereof
and the number of copies of the prospectus included in the Shelf Registration as
the Holder requests.
2.2 Subject to the provisions of this Section 2.2, the Trust shall be
entitled to postpone or suspend the filing, effectiveness, supplementing or
amending of any registration statement otherwise required to be prepared and
filed pursuant to this Section 2, if the Board of Trustees of the Trust
determines that such registration and the Transfer of Registrable Securities
contemplated thereby would interfere with, or require premature disclosure of,
any material financing, acquisition, disposition, reorganization or other
transaction involving the Trust, including the filing of a registration
statement covering primary sales of securities by the Trust, as to which, in
each instance of the Trust determining that the registration and Transfer would
require premature disclosure, the Trust has a bonafide business purpose for
preserving the confidentiality thereof and the Trust promptly gives Starwood
Mezzanine, SAHI, SOFI IV and each Holder notice of such determination. Upon
receipt of such notice, Starwood Mezzanine, SAHI, SOFI IV and the Holders agree
to cease making offers or Transfers of Registrable Securities pursuant to such
registration statement. Notwithstanding the foregoing, during any period
commencing on the date of a distribution of Class A Shares by Starwood
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Mezzanine and/or SOFI IV to their limited partners and ending on the date that
all such distributed Class A Shares have been resold by the limited partners or
are otherwise immediately eligible for resale by the limited partners (other
than limited partners that are both affiliates of the Trust and are, or whose
affiliates are, a partner or member, directly or indirectly, of SOFI IV
Management, L.L.C., Starwood Capital Group, L.P. or Starwood Mezzanine Holding,
L.P. or an officer, member or Trustee of the Trust or the Advisor) under Rule
144(k) of the Securities Act, the Trust shall not postpone or suspend the
filing, effectiveness, supplementing or amending of any registration statement
(i) during the thirty-five (35) day period following any distribution of Class A
Shares by Starwood Mezzanine or SOFI IV to their limited partners, (ii) on more
than two (2) occasions during any 12 month period or (iii) for any period longer
than ninety (90) days; provided that in the event of a distribution by Starwood
Mezzanine or SOFI IV to their partners within a thirty (30) day period of more
than twenty five percent (25%) of the Class A Shares received by such
partnership pursuant to the Contribution Agreement, the thirty-five (35) day
period referred to in clause (i) above shall be a ninety (90) day period
commencing on the date of the first distribution in such thirty (30) day period.
Each of Starwood Mezzanine, SAHI, SOFI IV and each Holder hereby acknowledges
that any notice given by the Trust pursuant to this Section 2.2 may constitute
material non-public information and that the United States securities laws
prohibit any Person who has material non-public information about a company from
purchasing or selling securities of such company or from communicating such
information to any other Person under circumstances in which it is reasonably
foreseeable that such Person is likely to purchase or sell such securities.
2.3 Within 90 days of the date hereof, the Trust shall use its best efforts
to:
(i) file the Shelf Registration with the Commission and have the
registration declared effective under the Securities Act giving due regard to
the need to prepare current financial statements, conduct due diligence and
complete other actions that are reasonably necessary to effect a registered
public offering; and
(ii) subject to Section 2.2, keep the Shelf Registration continuously
effective until the Holders no longer hold any Registrable Securities.
2.4 Notwithstanding anything in this Agreement to the contrary, no
registration shall be effected under this Agreement and no Transfer of
Registrable Securities may be effected if as a result thereof the Trust would
not satisfy the REIT Requirements in any respect or if such registration or
Transfer would result in any Person Beneficially Owning Class A Shares in excess
of the ownership limitation provisions of the REIT Requirements or the Amended
and Restated Declaration of Trust of the Trust.
2.5 A registration pursuant to this Section 2 shall be on such appropriate
registration form of the Commission as shall be selected by the Trust and shall
permit the disposition of the Registrable Securities in accordance with the
intended method or methods of disposition specified in each notice given
pursuant to Section 2.1.
2.6 If any Shelf Registration pursuant to Section 2 involves an
underwritten offering (whether on a "firm commitment", "best efforts" or "all
reasonable efforts" basis or otherwise), the Majority Selling Holders
participating therein shall select the underwriter or underwriters and manager
or managers to administer such underwritten offering; provided, however, that
each Person so selected shall be reasonably acceptable to the Trust; provided,
further, that no such underwriter shall be an
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entity 5% or more of which is owned by an employer - sponsor of any Holder that
is an "ERISA Partner" within the meaning of the Amended and Restated Agreement
of Limited Partnership of SOFI IV, as in effect on the date hereof.
2.7 During any period that a Shelf Registration remains effective, Starwood
Mezzanine and SOFI IV shall use their respective best efforts to provide the
Trust with at least 5 business days prior notice of a distribution of
Registrable Securities by such partnership to its partners and shall provide to
the Trust notice of all information reasonably necessary for purposes of Section
12.2 with respect to each partner to which Class A Shares are to be so
distributed.
Section 3. Piggyback Registration.
3.1 If at any time prior to the later to occur of (a) the first anniversary
of the date on which Starwood Mezzanine and SOFI IV have distributed all Class A
Shares that they own to their limited partners and (b) the eighth anniversary of
the date hereof, the Trust proposes to register securities under the Securities
Act in connection with the public offering solely for cash on Form S-1, S-2,
S-3, or S-11 (or any replacement or successor forms), the Trust shall promptly
give each Holder written notice of such registration. Upon the written request
of each Holder given as promptly as practicable but in any event within twenty
(20) days following the date of such notice, the Trust shall cause to be
included in such registration statement and use its reasonable efforts to be
registered under the Securities Act all the Registrable Securities that each
such Holder shall have requested to be registered; provided, however, that such
right of inclusion shall not apply to any registration statement covering an
offering of debt securities or convertible debt securities (any such
registration in which Holders participate pursuant to this Section 3.1 being
referred to as a "Piggyback Registration"). The Trust shall have the absolute
right to delay, withdraw or cease to prepare or file any registration statement
for any offering referred to in this Section 3 without any obligation or
liability to Starwood Mezzanine, SAHI, SOFI IV or any other Holder, it being
understood that any Registrable Securities previously included in any such
withdrawn Registration Statement shall not cease to be Registrable Securities by
reason of such inclusion or withdrawal.
3.2 If the Underwriters' Representative shall advise the Trust that, in its
opinion, the amount or type of Registrable Securities requested to be included
in such registration would adversely affect such offering, or the timing
thereof, then the Trust will include in such registration, to the extent of the
amount and class which the Trust is so advised can be sold without such adverse
effect in such offering: first, securities proposed to be sold by the Trust with
a value equal to 80% of the aggregate gross proceeds from the sale of all
securities included in such registration; second, Registrable Securities
requested to be included in such registration by Holders of Registrable
Securities other than SAHI and the partners of SAHI pursuant to this Section 3,
pro rata based on the number of Registrable Securities owned by all such
Holders; provided that if any such Holder does not request inclusion of all of
its pro rata share of Registrable Securities, the other Holders may include
additional Registrable Securities up to the maximum number permitted to be
included for all such Holders, allocated and reallocated pro rata based on the
aggregate amount of Registrable Securities held by such Holders until such
maximum number is reached; third, the Registrable Securities requested to be
included in such registration by SAHI or its partners pursuant to this Section
3; and fourth, all other securities requested to be included in such
registration.
Section 4. Registration Procedures. Whenever required under Section 2 or
Section 3 to effect the registration of any Registrable Securities, the Trust
shall, as promptly as practicable:
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4.1 Prepare and file with the Commission a registration statement with
respect to such Registrable Securities and in the case of a Shelf Registration,
use best efforts to cause such registration statement to become effective;
provided, however, that before filing a registration statement or prospectus or
any amendments or supplements thereto, the Trust shall furnish to one firm of
counsel for the Selling Holders, copies of all such documents in the form
substantially as proposed to be filed with the Commission and shall in good
faith consider incorporating in each such document such changes as such counsel
to the Selling Holders reasonably and in a timely manner may suggest.
4.2 Prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act and rules thereunder with respect to the disposition of all
securities covered by such registration statement. If the registration is for an
underwritten offering, the Trust shall amend the registration statement or
supplement the prospectus whenever required by the terms of the underwriting
agreement entered into pursuant to Section 5.2. If the registration statement is
for a Shelf Registration, the Trust shall amend the registration statement or
supplement the prospectus so that it will remain current and in compliance with
the requirements of the Securities Act for the period specified in Section
2.3(ii), and if during such period any event or development occurs as a result
of which the registration statement or prospectus contains a misstatement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, the Trust shall
promptly notify each Selling Holder and one counsel to the Selling Holders,
amend the registration statement or supplement the prospectus so that each will
thereafter comply with the Securities Act and furnish to each Selling Holder and
one counsel to the Selling Holders such amended or supplemented prospectus,
which each such Holder shall thereafter use in the Transfer of Registrable
Securities covered by such registration statement. Following receipt of such
notice and pending any such amendment or supplement described in this Section
4.2, each such Holder shall cease making offers or Transfers of Registrable
Securities pursuant to the prior prospectus.
4.3 Furnish to each Selling Holder of Registrable Securities, without
charge, such numbers of copies of the registration statement, any pre-effective
or post-effective amendment thereto, the prospectus, including each preliminary
prospectus and any amendments or supplements thereto, in each case in conformity
with the requirements of the Securities Act and the rules thereunder, and such
other related documents as any such Selling Holder may reasonably request in
order to facilitate the disposition of Registrable Securities owned by such
Selling Holder.
4.4 Use best efforts in the case of a Shelf Registration and reasonable
efforts in the case of a registration pursuant to Section 3 (i) to register and
qualify the securities covered by such registration statement under such other
securities or Blue Sky laws of such states where an exemption from registration
is not available and as shall be reasonably requested by the Underwriters'
Representative or the Selling Holders and (ii) to obtain the withdrawal of any
order suspending the effectiveness of a registration statement, or the lifting
of any suspension of the qualification (or exemption from qualification) of the
offer and transfer of any of the Registrable Securities in any state, at the
earliest possible moment; provided, however, that the Trust shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to consent to general service of process in any state.
4.5 In the event of any underwritten offering, use best efforts to enter
into and perform its obligations under an underwriting agreement (including
indemnification and contribution obligations of underwriters), in usual and
customary form, with the managing underwriter or underwriters of such
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offering. The Trust shall also cooperate with the Majority Selling Holders, and
the Underwriters' Representative for such offering in the marketing of the
Registrable Securities, including making available the officers, accountants,
counsel, premises, books and records of the Trust for such purpose, but the
Trust shall not be required to incur any material out-of-pocket expense pursuant
to this sentence.
4.6 Promptly notify each Selling Holder of any stop order issued or
threatened to be issued by the Commission in connection therewith and take all
reasonable actions required to prevent the entry of such stop order or to remove
it if entered.
4.7 Make available for inspection by any Selling Holder, any underwriter
participating in such offering and the representatives of such Selling Holder
and Underwriter (but not more than one firm of counsel to such Selling Holders),
all financial and other information as shall be reasonably requested by them,
and provide any Selling Holder, any underwriter participating in such offering
and the representatives of such Selling Holder and Underwriter the reasonable
opportunity to discuss the business affairs of the Trust with its principal
executives and independent public accountants who have certified the audited
financial statements included in such registration statement, in each case all
as necessary to enable them to exercise their due diligence responsibility under
the Securities Act; provided, however, that information that the Trust
determines to be confidential and which the Trust advises such Person in
writing, is confidential shall not be disclosed unless such Person signs a
confidentiality agreement reasonably satisfactory to the Trust or the related
Selling Holder of Registrable Securities agrees to be responsible for such
Person's breach of confidentiality on terms reasonably satisfactory to the
Trust.
4.8 Use reasonable efforts to obtain a so-called "comfort letter" from the
independent public accountants of the Trust, and legal opinions of counsel to
the Trust addressed to the Selling Holders, in customary form and covering such
matters of the type customarily covered by such letters, and in a form that
shall be reasonably satisfactory to Starwood Mezzanine and SOFI IV. Delivery of
any such opinion or comfort letter shall be subject to the recipient furnishing
such written representations or acknowledgments as are customarily provided by
selling shareholders who receive such comfort letters or opinions.
4.9 Use reasonable efforts to cause the Registrable Securities covered by
such registration statement (i) if the Class A Shares are then listed on a
securities exchange or included for quotation in a recognized trading market, to
continue to be so listed or included for a reasonable period of time after the
offering, and (ii) to be registered with or approved by such other United States
or state governmental agencies or authorities as may be necessary by virtue of
the business and operations of the Trust to enable the Selling Holders of
Registrable Securities to consummate the disposition of such Registrable
Securities.
4.10 Take such other actions as are reasonably required in order to
expedite or facilitate the disposition of Registrable Securities included in
each such registration.
Section 5. Holders' Obligations. It shall be a condition precedent to the
obligations of the Trust to take any action pursuant to this Agreement with
respect to the Registrable Securities of any Selling Holder of Registrable
Securities that such Selling Holder shall:
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5.1 Furnish to the Trust such information regarding such Selling Holder,
the number of the Registrable Securities owned by it, and the intended method of
disposition of such securities as shall be required to effect the registration
of such Selling Holder's Registrable Securities, and to cooperate fully with the
Trust in preparing such registration statement.
5.2 In the event of an underwritten offering agree to sell their
Registrable Securities to the underwriters at the same price and on
substantially the same terms and conditions as the Trust or the other Persons on
whose behalf the registration statement is being filed have agreed to sell their
securities, and to execute the underwriting agreement agreed to by the Majority
Selling Holders (in the case of a registration under Section 2) or the Trust (in
the case of a registration under Section 3).
Section 6. Expenses of Registration. Expenses in connection with
registrations pursuant to this Agreement shall be allocated and paid as follows:
6.1 With respect to each Shelf Registration, the Trust shall bear and pay
all expenses incurred in connection with any registration, filing, or
qualification of Registrable Securities with respect to such registration for
each Selling Holder, including all registration, filing and National Association
of Securities Dealers, Inc. fees, all fees and expenses of complying with
securities or blue sky laws, all printing expenses, messenger and delivery
expenses, the reasonable fees and disbursements of counsel for the Trust, and of
the independent public accountants for the Trust, including the expenses of
"cold comfort" letters required by or incident to such performance and
compliance (the "Registration Expenses"), but excluding underwriting discounts
and commissions relating to Registrable Securities (which shall be paid on a pro
rata basis by the Selling Holders) and all fees and expenses of the Selling
Holders including counsel for the Selling Holders.
6.2 The Trust shall bear and pay all Registration Expenses incurred in
connection with any Piggyback Registrations pursuant to Section 3 but excluding
underwriting discounts and commissions relating to Registrable Securities (which
shall be paid on a pro rata basis by the Selling Holders) and all fees and
expenses of counsel for the Selling Holders.
Section 7. Indemnification; Contribution. If any Registrable Securities are
included in a registration statement under this Agreement:
7.1 To the extent permitted by applicable law, the Trust shall indemnify
and hold harmless each Selling Holder, each Person, if any, who controls such
Selling Holder within the meaning of the Securities Act, and each officer,
director, trustee, partner and employee of such Selling Holder and such
controlling Person, against any and all losses, claims, damages, liabilities and
expenses (joint or several), including reasonable attorneys' fees and
disbursements and reasonable expenses of investigation, incurred by such party
pursuant to any actual or threatened action, suit, proceeding or investigation,
or to which any of the foregoing Persons may become subject under the Securities
Act, the Exchange Act or other federal or state laws, insofar as such losses,
claims, damages, liabilities and expenses arise out of or are based upon any of
the following statements, omissions or violations (collectively, a "Violation"):
(i) Any untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any preliminary prospectus
or final prospectus contained therein, or any amendments or supplements thereto;
or
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(ii) The omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements therein not
misleading; provided, however, that the indemnification required by this Section
7.1 shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or expense if such settlement is effected without the consent
of the Trust (which consent shall not be unreasonably withheld), nor shall the
Trust be liable in any such case for any such loss, claim, damage, liability or
expense to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with information related to the
indemnified party furnished to the Trust by the indemnified party in writing
expressly for use in connection with such registration; and provided, further,
that the indemnity agreement contained in this Section 7 shall not apply to the
extent that any such loss is based on or arises out of an untrue statement or
alleged untrue statement of a material fact, or an omission or alleged omission
to state a material fact, contained in or omitted from any preliminary
prospectus if the final prospectus shall correct such untrue statement or
alleged untrue statement, or such omission or alleged omission, and a copy of
the final prospectus has not been sent or given to such person at or prior to
the confirmation of sale to such person if an underwriter was under an
obligation to deliver such final prospectus and failed to do so.
7.2 To the extent permitted by applicable law, each Selling Holder shall
indemnify and hold harmless the Trust, and each of the officers, employees and
Trustees of the Trust who shall have signed the registration statement, each
Person, if any, who controls the Trust within the meaning of the Securities Act,
any other Selling Holder, any controlling Person of any such other Selling
Holder and each officer, director, trustee, partner and employee of such other
Selling Holder and such controlling Person, against any and all losses, claims,
damages, liabilities and expenses (joint and several), including reasonable
attorneys' fees and disbursements and reasonable expenses of investigation,
incurred by such party pursuant to any actual or threatened action, suit,
proceeding or investigation, or to which any of the foregoing Persons may
otherwise become subject under the Securities Act, the Exchange Act or other
federal or state laws, but only insofar as such losses, claims, damages,
liabilities and expenses arise out of or are based upon any Violation, in each
case to the extent that such Violation occurs in reliance upon and in conformity
with information related to the indemnified party seeking indemnification
furnished by such Selling Holder in writing expressly for use in connection with
such registration; provided, however, that (x) the indemnification required by
this Section 7.2 shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or expense if such settlement is effected without the
consent of the relevant Selling Holder (which consent shall not be unreasonably
withheld) and (y) in no event shall the amount of any indemnity under this
Section 7.2 exceed the proceeds (net of any underwriting discounts or
commissions) from the applicable offering received by such Selling Holder.
7.3 Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action, suit, proceeding, investigation or
threat thereof made in writing for which such indemnified party may make a claim
under this Section 7, such indemnified party shall deliver to the indemnifying
party a written notice thereof and the indemnifying party shall have the right
to participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided, however,
that an indemnified party shall have the right to retain its own counsel, with
the fees and disbursements and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time following the commencement of any
such action, if
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prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
7 to the extent of such prejudice but shall not relieve the indemnifying party
of any liability that it may have to any indemnified party otherwise than
pursuant to this Section 7. Any fees and expenses incurred by the indemnified
party (including any fees and expenses incurred in connection with investigating
or preparing to defend such action or proceeding) shall be paid to the
indemnified party, as incurred, within thirty (30) days of written notice
thereof to the indemnifying party (regardless of whether it is ultimately
determined that an indemnified party is not entitled to indemnification
hereunder). Any such indemnified party shall have the right to employ separate
counsel in any such action, claim or proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be the expenses
of such indemnified party unless (i) the indemnifying party has agreed to pay
such fees and expenses or (ii) the indemnifying party shall have failed to
promptly assume the defense of such action, claim or proceeding or (iii) the
named parties to any such action, claim or proceeding (including any impleaded
parties) include both such indemnified party and the indemnifying party, and
such indemnified party shall have been advised by counsel in writing that there
may be one or more legal defenses available to it which are different from or in
addition to those available to the indemnifying party and that the assertion of
such defenses would create a conflict of interest such that counsel employed by
the indemnifying party could not faithfully represent the indemnified party (in
which case, if such indemnified party notifies the indemnifying party in writing
that it elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the defense of
such action, claim or proceeding on behalf of such indemnified party, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action, claim or proceeding or separate but substantially similar
or related actions, claims or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all such indemnified parties, unless
in the reasonable judgment of such indemnified party a conflict of interest may
exist between such indemnified party and any other of such indemnified parties
with respect to such action, claim or proceeding, in which event the
indemnifying party shall be obligated to pay the fees and expenses of such
additional counsel or counsels).
7.4 If the indemnification required by this Section 7 from the indemnifying
party is unavailable to an indemnified party hereunder in respect of any losses,
claims, damages, liabilities or expenses referred to in this Section 7:
(i) The indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to, among other things,
whether any Violation has been committed by, or relates to information supplied
by, such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such Violation. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 7.1 and Section 7.2,
any legal or other fees or expenses reasonably incurred by such party in
connection with any investigation or proceeding.
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(ii) The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7.4 were determined by pro rata allocation
or by any other method of allocation which does not take into account the
equitable considerations referred to in Section 7.4(i). No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
(iii) In no event shall the amount of any contribution from the Selling
Holders under this Section 7.4 exceed the proceeds (net of any underwriting
commissions or discounts) from the applicable offering received by such Selling
Holder.
7.5 If indemnification is available under this Section 7, the indemnifying
parties shall indemnify each indemnified party to the full extent provided in
this Section 7 without regard to the relative fault of such indemnifying party
or indemnified party or any other equitable consideration referred to in Section
7.4.
7.6 The obligations of the Trust and the Selling Holders of Registrable
Securities under this Section 7 shall survive the completion of any offering of
Registrable Securities pursuant to a registration statement under this
Agreement, and otherwise.
Section 8. Determinations and Interpretation. All determinations of the
Trust (or the Board of Trustees of the Trust) provided for in or pursuant to
this Agreement shall be made by the Independent Trustees, including, without
limitation, any determination pursuant to Section 2.2. All interpretations of
the terms of this Agreement shall be resolved on behalf of the Trust by the
Independent Trustees.
Section 9. Holdback. In connection with an underwritten offering of any
securities covered by a registration statement filed by Trust, Starwood
Mezzanine, SAHI and SOFI IV, whether or not their Registrable Securities are
included in the registration statement, and each Selling Holder, if so requested
by the Underwriters' Representative shall not effect any public sale or
distribution of Class A Shares or any securities convertible into or
exchangeable or exercisable for Class A Shares, including a sale pursuant to
Rule 144 under the Securities Act (except as part of such underwritten
registration), during the 10-day period prior to, and during the 180-day period
in the case of the first registration statement declared effective after the
date hereof that registers resales of Registrable Securities pursuant to Section
3 and 90 days in the case of any subsequent registration beginning on, the date
such registration statement is declared effective under the Securities Act by
the Commission. In order to enforce the foregoing covenant, the Trust shall be
entitled to impose stop-transfer instructions with respect to the Registrable
Securities of each such Holder until the end of such period. Holders of
Registrable Securities shall have the right to participate in any such
registration on the terms provided in Section 3 hereof.
Section 10. Amendment, Modification and Waivers; Further Assurances.
(i) Subject to the partnership agreement of each of Starwood Mezzanine and
SOFI IV, this Agreement may be amended with the consent of the Trust and the
Trust may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Trust shall have obtained the
written consent of Starwood Mezzanine, SAHI and SOFI IV to such amendment,
action or omission to act and no consent or agreement of any other Holder shall
be required for such amendment, action or omission to act, provided that,
commencing on the date that Starwood Mezzanine and SOFI IV no longer own
Registrable Securities, the consent of the Holders owning a
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majority of the then outstanding Registrable Securities shall be required for
such amendment, action or omissions to act.
(ii) No waiver of any terms or conditions of this Agreement shall operate
as a waiver of any other breach of such terms and conditions or any other term
or condition, nor shall any failure to enforce any provision hereof operate as a
waiver of such provision or of any other provision hereof. No written waiver
hereunder, unless it by its own terms explicitly provides to the contrary, shall
be construed to effect a continuing waiver of the provisions being waived and no
such waiver in any instance shall constitute a waiver in any other instance or
for any other purpose or impair the right of the party against whom such waiver
is claimed in all other instances or for all other purposes to require full
compliance with such provision.
(iii) Each of the parties hereto shall execute all such further instruments
and documents and take all such further action as any other party hereto may
reasonably require in order to effectuate the terms and purposes of this
Agreement.
Section 11. Assignment; Benefit. This Agreement and all of the provisions
hereof shall be binding upon and shall inure to the benefit of the parties
hereto, each Holder, each limited partner of Starwood Mezzanine and SOFI IV and
each indemnified party under Section 7 hereof and their respective heirs,
assigns, executors, administrators or successors; provided, however, that
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned or delegated by the Trust (except in connection with a merger,
reorganization, sale of all or substantially all of the assets of the Trust, or
similar transaction if the primary purpose of such transaction is to change the
domicile of the Trust or to change the form of the Trust to a corporation)
without the consent of Starwood Mezzanine, SAHI and SOFI IV (which consent shall
not be unreasonably withheld) or, in the event of an assignment or delegation
other than in connection with a merger, sale of all or substantially all of the
assets or stock of the Trust, recapitalization or similar transaction, without
the consent of each Holder.
Section 12. Miscellaneous.
12.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving regard to the
conflict of laws principles thereof.
12.2 Notices. All notices and requests given pursuant to this Agreement
shall be in writing and shall be made by hand-delivery, first-class mail
(registered or certified, return receipt requested), confirmed facsimile or
overnight air courier guaranteeing next business day delivery to the relevant
address specified on Schedule I, as otherwise specified to the Trust in writing
or to the address set forth in the stock record books of the Trust. Except as
otherwise provided in this Agreement, the date of each such notice and request
shall be deemed to be, and the date on which each such notice and request shall
be deemed given shall be: at the time delivered, if personally delivered or
mailed; when receipt is acknowledged, if sent by facsimile; and the next
business day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next business day delivery.
12.3 Entire Agreement; Integration. This Agreement supersedes all prior
agreements between or among any of the parties hereto, including the Original
Agreement with respect to the subject matter contained herein and therein, and
such agreements embody the entire understanding among the parties relating to
such subject matter.
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12.4 Section Headings. Section headings are for convenience of reference
only and shall not affect the meaning of any provision of this Agreement.
12.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and all of which shall
together constitute one and the same instrument. All signatures need not be on
the same counterpart.
12.6 Severability. If any provision of this Agreement shall be invalid or
unenforceable, such invalidity or unenforceability shall not affect the validity
and enforceability of the remaining provisions of this Agreement, unless the
result thereof would be unreasonable, in which case the parties hereto shall
negotiate in good faith as to appropriate amendments hereto.
12.7 Termination. Subject to the terms of the Amended and Restated
Agreement of Limited Partnership of each of Starwood Mezzanine and SOFI IV, as
in effect on the date hereof, this Agreement may be terminated at any time by a
written instrument signed by the Trust and each Holder. Unless sooner terminated
in accordance with the preceding sentence, this Agreement (other than Section 7
hereof) shall terminate in its entirety on such date as there shall be no
Registrable Securities outstanding, provided that any Class A Shares previously
subject to this Agreement shall not be Registrable Securities following the date
such Class A Shares no longer meet the definition of Registrable Securities.
12.8 Submission to Jurisdiction. Each of the parties hereto and each of the
Holders irrevocably submits and consents to the jurisdiction of the United
States District Court for the Southern District of New York in connection with
any action or proceeding arising out of or relating to this Agreement, and
irrevocably waives any immunity from jurisdiction thereof and any claim of
improper venue, forum non conveniens or any similar basis to which it might
otherwise be entitled in any such action or proceeding.
12.9 References to Date Hereof. References to "the date hereof" or "the
date of this Agreement" shall be to the date of this Amended and Restated
Registration Rights Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first written above.
STARWOOD FINANCIAL TRUST
a California business trust
By:
------------------------------------
Name:
Title:
STARWOOD MEZZANINE INVESTORS, L.P.
a Delaware limited partnership
By: Starwood Capital Group, L.P.
its general partner
By: BSS Capital Partners, L.P.
its general partner
By: Sternlicht Holdings II, Inc.
its general partner
By:
---------------------------------
Name:
Title:
SAHI PARTNERS
a Delaware general partnership
By:
------------------------------------
Name:
Title:
<PAGE>
STARWOOD OPPORTUNITY FUND IV, L.P.,
a Delaware limited partnership
By: SOFI IV Management, L.L.C.
Its: General Partner
By: Starwood Capital Group, L.L.C.
Its General Manager
By:
------------------------------------
Its:
------------------------------------
<PAGE>
SCHEDULE I
Addresses for Notice
If to the Trust to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Jay Sugarman
Fax No.: (203) 861-2101
with copies to:
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
Attention: James B. Carlson
Fax No.: (212) 262-1910
and
Rinaldi & Associates
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Ellis Rinaldi
Fax No.: (203) 861-2122
If to Starwood Mezzanine to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
with a copy to:
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Attention: Nina Matis
Fax. No.: (312) 902-1061
If to SAHI Partners to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
<PAGE>
with a copy to:
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Attention: Nina Matis
Fax. No.: (312) 902-1061
If to SOFI IV to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza
Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
with a copy to:
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Attention: Nina Matis
Fax. No.: (312) 902-1061
<PAGE>
EXHIBIT D
FORM OF
SECOND AMENDED AND RESTATED
SHAREHOLDERS AGREEMENT
SECOND AMENDED AND RESTATED SHAREHOLDERS AGREEMENT dated as of ____________
___, 1998, by and among B Holdings, L.L.C., a Connecticut limited liability
company ("BLLC"), SAHI Partners, a Delaware general partnership ("SAHI
Partners"), Starwood Mezzanine Investors, L.P., a Delaware limited partnership
("Starwood Mezzanine"), SOFI-IV SMT Holdings, L.L.C. ("SOFI IV" and, together
with BLLC, SAHI Partners and Starwood Mezzanine, "SAHI") and Starwood Financial
Trust, a California business trust formerly known as Angeles Participating
Mortgage Trust (the "Company").
WHEREAS, SAHI Partners, SAHI, Inc., Starwood Mezzanine and the Company are
a party to the Restated Shareholders Agreement, dated as of March 15, 1994 and
restated as of April 27, 1994, as amended by Amendment No. 1 to the Restated
Shareholders Agreement, dated as of March 15, 1996 (the Restated Shareholder
Agreement, as amended by Amendment No. 1 thereto, the "Original Agreement");
WHEREAS, SAHI, Inc. is no longer a shareholder of the Company;
WHEREAS, SAHI Partners, Starwood Mezzanine and the Company hereby deem it
to be in their respective best interest to add BLLC and SOFI IV as parties to
the Original Agreement and to amend and restate the Original Agreement as set
forth below;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Interested Transactions. (a) SAHI Partners agrees that until the
date that a majority of members of the Board of Trustees are Independent
Trustees (the "Restricted Period"), neither it nor its Affiliates shall take any
action, directly or indirectly, which would result in the Company entering into
any Interested Transactions (as defined below) unless any such Interested
Transaction has been approved by a majority of the Independent Trustees (as
defined below) of the Company. In addition, as to all contracts or other
transactions between the Trust and any Trustee or any Affiliate of a Trustee,
such interested Trustee shall recuse himself from any vote by the Board of
Trustees on such agreement or transaction; provided that the presence of such
interested Trustee shall count for the determination of the presence of a quorum
at any meeting.
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(b) SOFI IV agrees that it will not contribute any assets to the Trust
after the date hereof without the consent of Starwood Mezzanine and SOFI IV.
Section 2. Options and Other Incentive Awards. (a) The Company agrees that
at all times prior to the date on which Class A Shares with a Fair Market Value
of at least $250,000,000 are outstanding that were issued as part of one or more
primary or secondary public offerings (with not less than $200,000,000
constituting issuances of Class A Shares which are not resales of Class A Shares
outstanding at 11:59 pm on the Contribution Date) (an "IPO Event"):
(i) Only Options, and not any other Awards, shall be granted under the
Starwood Financial Trust 1996 Long-Term Incentive Plan (the "Incentive
Plan") to any person who has an interest, directly or indirectly, in SOFI
IV or Starwood Mezzanine (a "Starwood Insider");
(ii) The initial Award to Starwood Financial Advisors, L.L.C. shall be
in the form of Options;
(iii) No Options shall be granted to Barry S. Sternlicht;
(iv) The Class A Shares underlying total Awards granted shall not
exceed 4.5%, in the aggregate, of the fully-diluted Class A Shares
outstanding from time to time and the Class A Shares underlying Awards
granted to Starwood Insiders shall not exceed 2.5% of the fully diluted
Class A Shares outstanding from time to time; and
(v) Vesting of Options granted to Starwood Insiders shall, in addition
to any service criteria imposed by the Board of Trustees, occur on a pari
passu percentage basis with the percentage of the total number of Class A
Shares held on the Contribution Date by SOFI IV and Starwood Mezzanine as
have been sold or distributed from time to time by SOFI IV or Starwood
Mezzanine; provided, however, that in no event shall such Options vest at a
rate that is faster than 33.33% per annum and provided further, however,
that, subject to the continued satisfaction of any service criteria imposed
by the Board of Trustees, any theretofore unvested options held by Starwood
Insiders shall vest in full on the earlier to occur of a Change of Control
(as defined in the Incentive Plan) or on the fifth anniversary of the date
of grant.
(b) The Company further agrees that Options will be issued at Fair Market
Value, except that on the Contribution Date, Options (or restricted stock with
equivalent value) not exceeding 4.5%, in the aggregate, of the fully-diluted
Class A Shares outstanding after giving effect to the transactions occurring on
the Contribution Date may be issued with an exercise price which is less than
the Fair Market Value of the Class A Shares but is not less than $2.50 per Class
A Share (subject to adjustment for stock splits, capitalizations and similar
events) and after the Contribution Date but prior to the date which is the
earlier of (x) six (6) months after the Contribution Date and (y) the date on
which the outstanding publicly traded Class A Shares held
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by Outside Parties shall have a Fair Market Value of more than $100 million,
Options (or restricted stock with equivalent value) may be issued based on the
fair market value of the assets of the Trust (subject to the aforesaid 4.5%
limitation). Without the prior written consent of the Advisor, the Company shall
not grant Awards directly to officers, key employees, members or principals of
the Advisor in such respective capacities.
(c) The Company agrees that it will not amend the basic terms of the
Incentive Plan without the consent of Starwood Mezzanine and SOFI IV
respectively, as long as such entity owns Class A Shares.
Section 3. Election of Trustees. During any period in which (x) the Class B
Shares remain controlled by Starwood Capital Group, L.L.C. ("SCG") or by any
entity under common control with SCG, and (y) the Advisory Agreement has not
been terminated by the Advisor or terminated for cause by the Company, the
Company shall use its best efforts to cause five nominees designated by SCG or
by the parties who control SCG to be elected to the Board of Trustees and to
cause such persons to be included as the management slate of nominees to the
Board of Trustees. Further, during such period, the Company shall use its best
efforts to cause such nominees or Trustees to be replaced from time to time,
with or without cause, with new persons designated by SCG or the parties who
control SCG at the request of SCG or persons who control SCG. SAHI agrees to
renominate and to vote the Class A and Class B Shares held by it for the
election of Robin Josephs as a Trustee at the 1998 annual meeting of the Trust's
shareholders.
Section 4. Voting. From and after the tenth anniversary of the Contribution
Date, BLLC agrees not to vote any Class B Shares in respect of any matters
related to the Advisory Agreement (including, but without limitation, to vote in
respect of any proposed termination of the Advisory Agreement) during any period
(a "Suspension Period") in which all of the following conditions shall be
satisfied:
(a) The daily average closing price of Class A Shares on the American
Stock Exchange or the national securities exchange or electronic trading
system that provides the primary market on which the Class A Shares are
then traded for the 180- consecutive-calendar-day period preceding each day
occurring during the Suspension Period shall be less than the product of
(a) the Trust's book equity value attributable to the Class A Shares and
(b) the percentage equivalent of a fraction, the numerator of which is one,
and the denominator of which is the total outstanding Class A Shares; and
(b) The partners of SOFI IV shall have received aggregate
distributions from SOFI IV that are less than the sum of (i) the total
accrued "Preferred Return" (as defined in the SOFI IV Partnership
Agreement) on the contributed and unreturned capital contributions of SOFI
IV's partners to SOFI IV plus (ii) the total capital contributed by the
partners of SOFI IV to SOFI IV; provided, however, that solely for purposes
of this subparagraph (b) (and not for purposes of determining distributions
from SOFI IV), in the event partners are distributed Class A Shares and
such Class A Shares are sold to
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unaffiliated third parties of such partners within 180 days subsequent to
such distribution, then the prices received by such partners with respect
to such shares so sold shall be deemed to have been the amounts distributed
to such partners by SOFI IV for purposes of this subparagraph (b).
Section 5. Independent Trustees. During the Restricted Period each of BLLC,
the Company, SAHI Partners, Starwood Mezzanine and SOFI IV, severally and not
jointly, shall take all actions within their powers, to cause the nomination and
election of at least three Independent Trustees to serve on the Company's Board
of Trustees; provided that in no event shall BLLC, SAHI Partners, Starwood
Mezzanine or SOFI IV be obligated to take any action which would prevent them
from electing a majority of the entire Trustees on the Company's Board of
Trustees.
Section 6. Transfers. During the term of this Agreement, BLLC, SAHI
Partners, Starwood Mezzanine and SOFI IV, severally and not jointly, shall not
transfer or undertake a series of transfers of Class A Shares or Class B Shares
which in the aggregate represent over 9% of the voting power of the Company
unless the transferees thereof agree to be bound by the terms hereof pursuant to
a written agreement in form and substance reasonably acceptable to the Company;
provided that, Starwood Mezzanine and SOFI IV shall be permitted to distribute
Class A Shares to their limited partners without compliance with the terms of
this Section and transfers that are registered under the Securities Act of 1933,
as amended shall be exempted from the terms of this Section. The limited
partners of Starwood Mezzanine and SOFI IV may transfer Class A Shares without
regard to this Section 6.
Section 7. Definitions. The following terms have the meanings set forth
below:
"Advisor" means Starwood Financial Advisors, L.L.C. and its successors
and assigns.
"Advisory Agreement" means the Advisory Agreement between the Company
and the Advisor dated as of the Contribution Date as amended from time to
time.
"Affiliate" of any entity means a person which directly or indirectly
through one or more intermediaries controls, or is controlled by, or is
under common control with, such entity.
"Award" has the meaning given in the Incentive Plan.
"Class A Shares" means the Company's Class A Shares, $1.00 par value
per share.
"Class B Shares" means the Company's Class B Shares, $.01 par value
per share.
"Contribution Date" means February 12, 1998.
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"Fair Market Value" has the meaning given in the Incentive Plan.
"Independent Trustees" shall mean a Trustee who qualifies as a "Non-
Employee Director" of the Company within the meaning of Rule 16b-3(b)(3) of
the Securities Exchange Act of 1934, as amended and who is not (i) a Person
directly or indirectly owning, controlling or holding 3% or more of the
outstanding economic or voting interest of the Advisor or SCG, (ii) a
Person directly or indirectly owning, controlling or holding 10% or more of
the economic interest of any borrower under any loan made by the Company
with an outstanding principal balance in excess of $3 million (a
"Borrower") or any Person that provides mortgage servicing, or real estate
or financial advisory or consulting services to the Company and that
received fees from the Company for such services in excess of $100,000 for
the prior fiscal year or is expected to receive in excess of $100,000 per
annum during the current fiscal year (a "Service Provider") or an Affiliate
of such Borrower or Service Provider, (iii) an officer, director, employee,
member or partner of the Advisor or SCG, (iv) a spouse, sibling, lineal
descendent, parent, grandparent, sibling of parents or first cousin,
including adoptive relationships and with respect to siblings and parents,
in-laws (a "Relative") of any Person described in clause (i), or (v) a
Relative of a Borrower or any Person described in clause (iii) residing in
the same household as such Person.
"Interested Transactions" means to:
(a) merge, consolidated with, or otherwise acquire all or any
portion of the business, assets or securities of any Affiliate of SAHI
or SCG or sell, transfer or assign any portion of the Company's
business, assets or securities to any Affiliate of SAHI or SCG;
(b) make any loans or other advances of money to, or guarantee
with or for the benefit of, any Affiliate of SAHI or SCG or any
officer, director, partner, trustee or shareholder (both direct and
indirect) of any Affiliate of SAHI or SCG;
(c) sell, lease, transfer or otherwise dispose of any property or
assets from, entertain or maintain any contract, agreement or
understanding with, or otherwise enter into, or be a party to, any
transaction with, any Affiliate of SAHI or SCG or any officer,
director, partner, trustee or shareholder (both direct and indirect)
of any Affiliate of SAHI or SCG;
(d) take any actions which would result in one or more
publicly-traded classes of the Company's equity securities no longer
having the attributes of public ownership; or
(e) take any actions beneficial to any Affiliate of SAHI or SCG
which would be detrimental to a material number of public shareholders
of the Company;
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provided, however, the actions described in (a), (b) and (c) above, shall
not constitute an Interested Transaction if (i) the action taken has been
determined by the Independent Trustees to be pursuant to the reasonable
requirements of the Company's business and upon fair and reasonable terms
which are no less favorable to the Company than would be obtained in a
comparable arms-length transaction with an independent third-party and (ii)
the transaction involves less than $500,000.
"Options" has the meaning given in the Incentive Plan.
"Outside Parties" means persons other than Starwood Mezzanine or any
of its limited partners, SOFI IV or any of its limited partners, SCG or any
entity controlled, directly or indirectly by SCG or Barry S. Sternlicht.
"Person" means an individual, a partnership, a joint venture, a
corporation, a limited liability company, a trust, an unincorporated
organization and a government or any department or agency thereof.
Section 8. Amendment and Waiver. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement will be
effective against the Company, BLLC, SAHI Partners, Starwood Mezzanine or SOFI
IV unless such modification, amendment or waiver is approved in writing by the
Company, BLLC, SAHI Partners, Starwood Mezzanine and SOFI IV.
Section 9. Successors and Assigns. This Agreement will bind and inure to
the benefit of and be enforceable by (a) the Company and its successors and
assigns and (b) BLLC, SAHI Partners, Starwood Mezzanine and SOFI IV and their
respective successors and assigns; provided that no partner of Starwood
Mezzanine or SOFI IV shall have any obligations under this Agreement unless it
specifically consents in writing to be bound by the terms hereof.
Section 10. Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be an original and all of which taken together
will constitute one and the same agreement.
Section 11. Descriptive Headings; Interpretation. The descriptive headings
in this Agreement are inserted for convenience of reference only and are not
intended to be part of or to affect the meaning or interpretation of this
Agreement. The use of the word "including" in this Agreement shall be by way of
example rather than by limitation.
Section 12. Construction. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without regard to
conflicts of law principles.
Section 13. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and will be deemed to have been duly given when delivered
personally to the recipient, sent to the recipient
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by reputable express courier (charges prepaid) or mailed by certified or
registered mail, return receipt requested and postage prepaid. Such notices,
demands and other communications will be sent to the addresses indicated on
Schedule I or such other address or to the attention of such other person as the
recipient party shall have specified by prior written notice to the sending
party.
Section 14. Preamble; Preliminary Recitals. The Preliminary Recitals set
forth in the Preamble hereto are hereby incorporated and made part of this
Agreement.
Section 15. Entire Agreement. Subject to the Amended and Restated
Declaration of Trust of the Trust, this Agreement sets forth the entire
understanding of the parties, and supersedes and preempts all prior oral or
written understandings and agreements with respect to the subject matter hereof,
including the Original Agreement; provided that this Agreement shall not
supersede or preempt any understanding or agreement between each of SAHI
Partners, Starwood Mezzanine and SOFI IV and their respective partners.
Section 16. Third Party Beneficiaries. It is specifically contemplated that
the public shareholders of the Company be third party beneficiaries of this
Agreement.
Section 17. Termination. This Agreement will terminate automatically and be
of no further force and effect on the date that neither Starwood Mezzanine nor
SOFI IV no longer own Class A Shares.
Section 18. The Trust. Each of the parties hereto acknowledges and agrees
that the name "Starwood Financial Trust" is a designation of the Trust and its
Trustees (as Trustees but not personally) under a Declaration of Trust,
originally made and entered into as of April 15, 1988, as restated as of July
18, 1988, September 26, 1996 and the date hereof, and all persons dealing with
the Trust shall look solely to Trust's assets for the enforcement of any claims
against the Trust, and the Trustees, officers, agents and security holders of
the Trust assume no personal liability for obligations entered into on behalf of
the Trust, and their respective individual assets shall not be subject to the
claims of any person relating to such obligations.
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IN WITNESS WHEREOF, the parties hereto have executed this Shareholders
Agreement as of the date set forth above.
STARWOOD FINANCIAL TRUST
By:______________________________
Name:_______________________
Title:______________________
B HOLDINGS, L.L.C.
By:______________________________
Name:_______________________
Title:______________________
SAHI PARTNERS
By: SAHI, Inc., a general partner
By:______________________________
Name:_______________________
Title:______________________
STARWOOD MEZZANINE INVESTORS, L.P.
By: STARWOOD CAPITAL GROUP I, L.P.,
General Partner
By: BSS CAPITAL PARTNERS, L.P.,
General Partner
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By: STERNLICHT HOLDINGS II, INC.,
General Partner
By:______________________________
Name:_______________________
Title:______________________
STARWOOD OPPORTUNITY FUND IV, L.P.
By: SOFI IV Management, L.L.C.,
General Partner
By: Starwood Capital Group, L.L.C.,
General Partner
By:______________________________
Name:_______________________
Title:______________________
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SCHEDULE I
Addresses for Notice
If to the Trust, to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Jay Sugarman
Fax No.: (203) 861-2101
with copies to:
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
Attention: James B. Carlson
Fax No.: (212) 262-1910
and
Rinaldi & Associates
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Ellis Rinaldi
Fax No.: (203) 861-2122
If to SAHI Partners, BLLC, Starwood Mezzanine or SOFI IV, to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
with a copy to:
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Attention: Nina Matis
Fax. No.: (312) 902-1061
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EXHIBIT E
FORM OF
INVESTMENT ADVISORY AGREEMENT
AGREEMENT dated this ____ day of ____, 1998, but effective as of the date
stated in section 10 below, by and between Starwood Financial Trust, a
California business trust (the "Company"), and Starwood Financial Advisors,
L.L.C., a Connecticut limited liability company ("Starwood Advisors" or the
"Investment Advisor").
1. Purpose of the Company.
The Company is a business trust organized under the laws of the State of
California to conduct business and to qualify under the Internal Revenue Code of
1986, as amended ("Code"), as a real estate investment trust ("REIT"). The
principal purpose of the Company is to acquire, hold, own, develop, redevelop,
construct, improve, maintain, operate, manage, sell, lease, rent, transfer,
encumber, mortgage, convey, exchange and otherwise dispose of or deal with a
diversified portfolio (the "Diversified Portfolio") of debt or debtlike
interests in real estate or real estate-related assets, including (i) mortgage
loans, as well as direct and indirect and controlling and non-controlling equity
investments in real estate and real estate-related assets including through any
entity or direct ownership; (ii) direct or indirect interests in short term,
medium and long-term real estate-related debt securities and mortgage interests,
which may include warrants, equity participations or similar rights incidental
to a debt investment; (iii) purchase money loans with respect to assets sold by
the Company; and (iv) non-performing and sub-performing debt for the purpose of
restructuring the same to performing debt or if such efforts are unsuccessful,
of shortly thereafter obtaining primary management rights over or equity
interests in the underlying assets securing such debt, in each case, subject to
the limitations set forth in the Company's Declaration of Trust, as the same may
be amended from time to time (the "Declaration"). 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 and residential improvements to land, excluding any
positions prohibited by such Declaration.
2. The Investment Advisor.
Starwood Advisors and its principals have experience in the investment
management of assets of the type owned and expected to be owned by the Company.
The Company hereby engages the services of Starwood Advisors as the Company's
investment manager.
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3. Obligations of the Investment Advisor.
As the Investment Advisor, Starwood Advisors will:
a. identify investment opportunities for and advise the Company as to
the acquisition and disposition of investments, all in accordance with the
Company's investment policies;
b. comply, in carrying out its obligations hereunder and its
activities on behalf of the Company, with all directives of the Company's
Board of Trustees or any duly constituted committee or officer of the
Company acting pursuant to authority of the Company's Board of Trustees;
c. report to the Company's Board of Trustees, or to any committee or
officer of the Company acting pursuant to the authority of the Board, at
such times and in such detail as the Board deems appropriate in order to
enable the Company to determine that the investment policies of the Company
are being observed and implemented;
d. subject to the Company's investment policies and any specific
directives concerning such policies from the Company's Board of Trustees,
and subject further to the approval of the Company's Board of Trustees with
respect to each investment or disposition of an investment with an
acquisition cost or disposition value in excess of $10 million (other than
temporary investments of cash in short term investments permitted by the
Company's investment policies or disposition of such short term
investments), effect acquisitions and dispositions for the Company's
account in the Investment Advisor's discretion and to arrange for the
documents representing investments acquired to be delivered to the
Company's custodian or other designee. Any investment or disposition of an
investment with an acquisition cost or disposition value that is $10
million or less (other than such temporary investments) shall be permitted
provided that it is in accordance with the Company's investment policies;
e. on a continuing basis and subject to the overall supervision of the
Board of Trustees, monitor, manage and, for loans which are originated by
the Investment Advisor, service the Company's Diversified Portfolio,
including, upon approval of the Board of Trustees, the enforcement of
remedies upon default. In the event the Company purchases loans subject to
existing servicing agreements or purchases multi-loan portfolios originated
by third parties which cannot reasonably be serviced by the Investment
Advisor subject to this Agreement, the Investment Advisor shall designate a
third-party servicer for such loans purchased by the Company to be engaged
by the Company and arrange for the monitoring and administering of such
servicer, including negotiating servicing agreements, collecting
information and submitting reports pertaining to such loans;
f. arrange debt financing for the Company, subject to policies adopted
by the Company's Board of Trustees and subject further to the approval of
the Company's Board of Trustees with respect to each financing in excess of
$100 million or, in the case of financings that are recourse to the
Company, each financing in excess of $25 million;
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g. upon request by and in accordance with the directions of the Board
of Trustees, invest or reinvest any cash of the Company; and
h. engage in hedging activities on behalf of the Company consistent
with the Company's qualification as a REIT and in accordance with its
investment policies.
In carrying out its obligations under this Agreement, (i) the Investment
Advisor will comply with the investment policies of the Company as from time to
time established by the Board of Trustees and furnished to the Investment
Advisor, (ii) the Investment Advisor will not act in a manner which is
inconsistent with an express direction of the Board of Trustees, provided that
such direction is not expressly contrary to the specific terms and provisions of
this Agreement, which shall be controlling, and (iii) the Investment Advisor
will not subcontract out primary responsibility for the performance of its
overall responsibilities under this Agreement.
Notwithstanding the foregoing, the Investment Advisor shall not be
responsible for the administration of the Company or for compliance by the
Company with reporting and other regulatory requirements applicable to them.
4. Bank Accounts; Release of Money or Other Property Held in Custody.
a. At the direction of the Company's Board of Trustees, the Investment
Advisor shall establish and maintain one or more bank accounts in the name
of the Company or any subsidiary of the Company, and shall collect and
deposit into any such account or accounts, and disburse funds from any such
account or accounts, under such terms and conditions as the Board of
Trustees may approve; and the Investment Advisor shall from time to time
render appropriate accountings of such collections and payments to the
Board of Trustees and, upon request by the Company, to the auditors of the
Company. In no event shall the funds in any such Company account be
commingled with the funds of the Investment Advisor or any other person.
b. The Investment Advisor agrees that any money or other property of
the Company or any subsidiary held by the Investment Advisor under this
Agreement shall be held by the Investment Advisor as custodian for the
Company or subsidiary, and the Investment Advisor's records shall be
appropriately marked clearly to reflect the ownership of such money or
other property then held by the Investment Advisor for the account of the
Company or such subsidiary. Upon the receipt by the Investment Advisor of a
written request signed by a duly authorized representative of the Company
requesting the Investment Advisor to release to the Company or any
subsidiary any money or other property then held by the Investment Advisor
for the account of the Company or any subsidiary under this Agreement, the
Investment Advisor shall promptly release such money or other property to
the Company or any subsidiary. The Investment Advisor shall not be liable
to the Company, any subsidiary, the Independent Trustees (as defined
below), or the Company's or a subsidiary's stockholders or partners for any
acts performed or omissions to act by the Company or any subsidiary in
connection with the money or other property released to the Company or any
subsidiary in accordance with this section 4(b). The Company and any
subsidiary shall indemnify the Investment Advisor, its members, managers,
officers, stockholders
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and employees against any and all expenses, losses, damages, liabilities,
demands, charges and claims of any nature whatsoever, which arise in
connection with the Investment Advisor's release of such money or other
property to the Company or any subsidiary in accordance with the terms of
this section 4(b). Indemnification pursuant to this provision shall be in
addition to any right of the Investment Advisor to indemnification under
section 9 of this Agreement. The provisions of this section regarding
indemnification shall survive termination of this Agreement.
5. Expenses to be Paid by the Investment Advisor.
The Investment Advisor will pay the salaries, wages, bonuses and other
employee benefits of the persons in its organization whom the Investment Advisor
may engage to render such services (other than fees paid and reimbursement of
expenses made to independent managers, independent contractors, professionals,
mortgage servicers, consultants, managers, local property managers or agents
employed by or on behalf of the Company including (subject to Section 6 hereof)
such persons or entities which may be affiliates of the Investment Advisor when
acting in any such capacity other than as mortgage servicers, all of which shall
be the responsibility of the Company), including without limitation persons who
may from time to time act as the Company's officers, as well as all occupancy
and equipment costs (office rent, utilities, telephone, and office overhead)
incident to such services. Notwithstanding the foregoing, the Board of Trustees
of the Company may, in its sole discretion, award to such officers or to other
principals or employees or members of the Investment Advisor directly or
indirectly (through awards made to the Investment Advisor) options to acquire
Shares of the Company and other awards, as provided in Section 26 of this
Agreement, none of which awards shall be considered part of their salaries or
other employee benefits for the purpose of this paragraph, provided, however,
that without the prior written approval of the Investment Advisor, no awards
shall be made by the Company directly to officers, principals, employees or
members of the Investment Advisor in such respective capacities.
6. Expenses to be Paid by the Company.
Subject to the annual percentage limitations on Advisory Fees set forth in
Section 4.5 of the Company's Declaration and the corresponding power of the
Independent Trustees to waive such limitations in appropriate circumstances, and
to the following provisions, the Company will pay any expenses incurred by the
Company and shall reimburse the Investment Advisor promptly, against the
Investment Advisor's voucher, for any such expenses paid by the Investment
Advisor for the Company's account. Without limitation, such expenses shall
include all expenses of the Company's organization or any reorganization, and of
any offering and sale by the Company of its shares; expenses of the Company's
operations, except as otherwise provided in paragraph 5 above, such operational
expenses to include enforcement costs and administrative costs of the Company;
the fees and disbursements of the Company's counsel, accountants, consultants,
custodian, transfer agent and registrar; fees of third party servicers retained
pursuant to Section 3.e. hereof; fees and expenses incurred in producing and
effecting filings with federal and state securities administrators or other
compliance and reporting costs (to the extent the Investment Advisor voluntarily
undertakes to assist the Company with respect thereto); costs of the Company's
periodic reports to and other communications with its shareholders (to the
extent the Investment Advisor voluntarily
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undertakes to assist the Company with respect thereto); fees and expenses of
members of the Company's Board of Trustees (excluding the fees of trustees who
are employees of the Investment Advisor or the Company or their affiliates);
premiums for any insurance or fidelity bond maintained by the Company; and all
transaction costs incident to the pursuit, acquisition, management, financing
and disposition of investment assets by the Company, including, as applicable
and without limitation, due diligence costs, legal, accounting, engineering,
travel and reasonable entertainment, and environmental assessment fees and
expenses. In addition, if the Company for its corporate purposes, uses the
services of attorneys or paraprofessionals on the staff of the Investment
Advisor or its affiliates in lieu of outside counsel, the Company will not be
required to reimburse the Investment Advisor for such services but shall pay for
incidental disbursements to third parties or for travel.
7. Receipt of Fees.
All fees that may be paid to the Investment Advisor by any person in
connection with the making, holding or disposition of any investment in which
the Company participates or proposes to participate shall be paid over or
credited to the Company pro rata to the extent of its participation in such
transaction. The Investment Advisor may, on the other hand, retain for its own
account any fees paid to it by any person for any services rendered to such
person which is not related to the making, holding or disposition of any such
investment, and nothing herein shall be construed to prevent members of the
Investment Advisor and their affiliates from continuing to be entitled to any
fee, equity participations or other benefits from any shareholder of the Company
(nor shall any such member or affiliate have any obligation to rebate any fee,
equity participations or other benefits, as applicable) in connection with
services rendered to such person, to the extent agreed to from time to time by
the Investment Advisor (or such members or affiliates) and such other person. In
addition, any fees paid by third parties for services rendered by attorneys on
the staff of the Investment Advisor in connection with any such investment
transaction shall be treated as transaction costs and shall not be deemed to be
fees paid to the Investment Advisor in connection with any investment
transaction, provided, however, that the Investment Advisor shall not negotiate
for reimbursement of such legal fees in lieu of payment of fees that would have
otherwise been payable to the Company. The Investment Advisor will report to the
Company's Board of Trustees not less often than quarterly all fees received by
the Investment Advisor from any source whatever and whether, in its opinion, any
such fee is one that the Investment Advisor is entitled to retain under the
provisions of this paragraph. In the event that any member of the Board of
Trustees should disagree, the matter shall be conclusively resolved by a
majority of the trustees who are Independent Trustees (as such term shall be
defined in the Declaration (the "Independent Trustees"); provided that for as
long as Starwood Mezzanine Investors, L.P. and Starwood Opportunity Fund IV,
L.P. hold Class "A" Shares of the Company, such term shall be as defined in the
Shareholders Agreement dated as of February __ , 1998 by and among B Holdings,
L.L.C., SAHI Partners, Starwood Mezzanine Investors, L.P., Starwood Opportunity
Fund IV, L.P. and Starwood Financial Trust.
8. Compensation of the Investment Advisor.
As the Investment Advisor's sole and exclusive compensation for its
services to be rendered pursuant to the terms hereof (other than any options or
other awards granted to individual officers, principals, members or employees of
the Investment Advisor pursuant
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to Section 5 above), the Company will, during the term of this Agreement, pay to
the Investment Advisor the following fees, beginning as of the date that is 90
days from the Contribution Date (as hereinafter defined), subject, however, to
the annual percentage limitation on Advisory Fees set forth in Section 4.5 of
the Company's Declaration and the corresponding power of the Independent
Trustees to waive such limitations in appropriate circumstances:
a. Base Management Fee. A quarterly base management fee ("Base Fee")
in an amount equal to 0.3125% (1.25% per annum), of the Book Equity Value
(as defined below) of the Company determined as of the last day of each
quarter, but estimated and paid in advance subject to recomputation as
indicated below. For these purposes, "Book Equity Value" shall mean the
excess of the book value of the assets of the Company over all liabilities
of the Company determined in accordance with generally accepted accounting
principles, consistently applied ("GAAP"), except that real estate-related
depreciation and amortization (other than amortization of financing costs
and other prepaid expenses to the extent such costs and prepaid expenses
have previously been booked as an asset of the Company) shall not operate
to reduce the book value of the Company's assets for purposes of
determining Book Equity Value.
For purposes of determining the "Book Equity Value", debt obligations
of the Company, such as convertible debt, which are exchangeable or
convertible into equity securities shall not be considered liabilities of
the Company for any applicable period in which the same are so convertible
or exchangeable and the value of the equity securities into which such debt
obligation is convertible or for which it may be exchanged equals or
exceeds, as of the last day of such period, the outstanding balance
(including accrued interest) of such debt obligation (with the value of any
such equity securities for such applicable period as are traded on an
exchange to be deemed to be the average daily closing price of such equity
securities on such exchange over such applicable period for purposes of
making the value determination contemplated by this sentence). Debt
obligations that are excluded as liabilities of the Company under the
preceding sentence in determining "Book Equity Value" shall be referred to
herein as "Deemed Equity Obligations".
In addition to the foregoing, in the event and to the extent non-cash
assets are acquired by the Company or any of its subsidiaries or affiliates
in exchange for equity securities of the Company, then under those
circumstances where "purchase accounting" principles are not applicable for
purposes of determining the Company's "Book Equity Value" following such
contributions, the book value of the assets so contributed shall be deemed
to be increased by the excess, if any, of the fair market value of the
equity securities issued in consideration of such contributions determined
at the time of such acquisitions over the GAAP book equity value allocable
to such assets by the Company immediately following such contributions. For
purposes of the foregoing determination with respect to the contribution of
assets made on the date hereof by "Starwood Mezzanine" and "SOFI IV" (as
such terms are hereinafter defined), the price per share of the Company
shall be deemed to be $2.50.
b. Incentive Fee. A quarterly incentive fee ("Incentive Fee"), in an
amount equal to five percent (5%) of the Company's "Adjusted Net Income"
(as
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defined below) during such quarter, but such fee shall be payable only
during those quarters where Adjusted Net Income for such quarter, restated
(and annualized) as an annualized rate of return on the Company's average
Book Equity Value for such quarter, equals or exceeds the Benchmark BB Rate
(as defined below). For these purposes, "Adjusted Net Income" means the
Company's gross income for the applicable quarter (determined in accordance
with GAAP, provided that any interest payment which is more than 30 days in
default shall not be included until collected) less the Company's expenses
for the applicable quarter (determined in accordance with GAAP and
including the Base Fee for such quarter but not the Incentive Fee for such
quarter). In addition, real estate-related depreciation and amortization
(other than amortization of financing costs and other prepaid expenses to
the extent such costs and prepaid expenses have previously been booked as
an asset of the Company) shall not be deducted in determining Adjusted Net
Income. For purposes of determining "Adjusted Net Income", any interest
expenses for an applicable period on Deemed Equity Obligations shall not be
included as an expense and, thus, shall not operate to reduce the Company's
gross income for such applicable period. "Benchmark BB Rate" for a given
quarter means the arithmetic average of the various weekly average
annualized rates of return to maturity on current pay "BB" rated commercial
mortgage-backed securities during such quarter by domestic U.S. issuers.
The weekly average annualized rates of return on current pay "BB" rated
commercial mortgage backed securities shall mean the sum of the rate of
return on the 10 year Treasury on the applicable date and the BB spread as
reported in the Morgan Stanley Dean Witter Weekly Mortgage Research Report.
During any quarter where such rate is not published, the Company and the
Investment Advisor shall meet in good faith to agree upon another published
report or similar source.
c. Timing of Fee Payments. The Investment Advisor shall estimate the
compensation payable under Section 8(a) of this Agreement at the beginning
of each fiscal quarter on or before the tenth day of such quarter. The
amount of any such estimated fees payable for the upcoming quarter shall be
offset, however, against any excess of the prior quarter's estimate over
fees actually earned during the previous quarter (recomputed based on
information available as of the last day of the quarter). If the amount of
such excess for the prior quarter exceeds the amount of estimated fees for
the upcoming quarter that can be offset, such remaining excess shall
promptly be returned by the Investment Advisor to the Company (as any such
remaining excess shall be considered an advance). A copy of the itemized
computations made by the Investment Advisor to calculate its estimated and
actual compensation under Section 8(a) shall promptly be delivered to the
Company's Board of Trustees and, upon such delivery, payment of the balance
shown therein shall be due and payable within 15 days after such
transmittal to the Board. The Investment Advisor shall calculate the
compensation payable under Section 8(b) of this Agreement within 45 days
after the end of each fiscal quarter. A copy of the itemized computations
shall promptly be delivered to the Board of Trustees and, upon such
delivery, payment of the compensation earned under Section 8(b) shall be
due and payable within 15 days after such transmittal to the Board. At the
Investment Advisor's option, the fee computation schedule under sections
8(a) and 8(b) can also be combined. Payments of the applicable portion of
the fees referenced above shall be pro rated based on the number of days
elapsed during any partial month.
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d. Investment Advisor Loans. If loans are made to the Company or its
affiliates by the Investment Advisor or an affiliate of the Investment
Advisor, the maximum amount of interest that may be charged by such
affiliate shall be the prime rate publicly announced by The Chase Manhattan
Bank from time to time plus 1% per year. Interest will be computed on the
basis of a 360 day year consisting of 12 months of 30 days each.
9. Standard of Care; Indemnification.
To the maximum extent permitted by law, the Investment Advisor assumes no
responsibility under this Agreement other than to render the services called for
hereunder in good faith and shall not be responsible for any action of the Board
of Trustees in following or declining to follow any advice or recommendations of
the Investment Advisor, including as set forth in Section 3(d) of this
Agreement. Neither the Investment Advisors, nor any of its members, managers,
officers, stockholders or employees shall be liable to the Company, any
subsidiary, the Independent Trustees of the Company or the Company's or any
subsidiary's stockholders or partners for any acts or omissions by such party
under or in connection with this Agreement, except for each such party by reason
of its own acts constituting bad faith, willful misconduct, gross negligence or
reckless disregard of its duties. To the extent permitted by law, the Company
shall reimburse, indemnify and hold harmless the Investment Advisor, its
members, managers, officers, stockholders and employees of and from any and all
expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever, (including attorneys' fees) in respect of or arising from any
acts or omissions of the Investment Advisor, its members, managers, officers,
stockholders and employees, made in good faith in the performance of the
Investment Advisor's duties under this Agreement and not constituting bad faith,
willful misconduct, gross negligence or reckless disregard of its duties. The
provisions of this section shall survive termination of the Agreement, and in
the event of any conflict between the provisions of this Section 9 and the
provisions of Section 5.1 of the Declaration, the provisions of this Section 9
shall control.
10. Term of the Agreement.
a. The initial term of this Agreement shall commence on the first date
that either of Starwood Mezzanine Investors, L.P. ("Starwood Mezzanine") or
Starwood Opportunity Fund IV, L.P. ("SOFI IV") contributes, either directly
or indirectly, mortgage interests (other than the Warwick Notes) to the
Company (the "Contribution Date"), and shall end on the third anniversary
of the Contribution Date. This Agreement shall automatically renew for an
additional one year term upon the expiration of the initial term and each
additional successive one year term unless (i) a Termination Event (as
defined below) has occurred and is continuing on the expiration of the then
current term or (ii) all of the Company's assets have been distributed upon
liquidation of the Company; provided, however, that if assets of the
Company are transferred to any subsidiary or subsidiaries of the Company
other than in connection with a liquidation of the Company, the terms of
this Agreement shall continue to apply with respect to such assets. The
foregoing notwithstanding, this Agreement may be terminated at any time,
without the payment of a penalty, on 60 days' notice to the Investment
Advisor, if the decision to terminate is based on the occurrence of a
Termination Event (as defined below) or has been made by two-thirds of the
votes that may be cast by all holders of shares entitled to vote, including
in the calculation for this purpose, all
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the Company's voting shares of any class and regardless of any affiliation
the holders thereof may have with the Investment Advisor. This Agreement
will terminate automatically in the event of any assignment by the
Investment Advisor that is not in accordance with section 15 below. The
Investment Advisor may also terminate this Agreement on 60 days' notice to
the Company.
b. Termination Events. At the option of the Company, this Agreement
shall be and become terminated upon 60 days' written notice of termination
from the Company's Board of Trustees to the Investment Advisor, without
payment of any termination fee, if any of the following events
("Termination Events") shall occur:
(1) if the Investment Advisor shall violate any provision of this
Agreement and after notice of such violation, shall not cure such
violation within 90 days;
(2) there is entered an order for relief or similar decree or
order with respect to the Investment Advisor by a court having
competent jurisdiction in an involuntary case under the federal
bankruptcy laws as now or hereafter constituted or under any
applicable federal or state bankruptcy, insolvency or other similar
laws; or the Investment Advisor (i) ceases, or admits in writing its
inability to pay its debts as they become due and payable, or makes a
general assignment for the benefit of, or enters into any composition
or arrangement with, creditors; (ii) applies for, or consents (by
admission of material allegations of a petition or otherwise) to the
appointment of a receiver, trustee, assignee, custodian, liquidator or
sequestrator (or other similar official) of the Investment Advisor or
of any substantial part of its properties or assets, or authorizes
such an application or consent, or proceedings seeking such
appointment are commenced without such authorization, consent or
application against the Investment Advisor and continue undismissed
for 90 days; (iii) authorizes or files a voluntary petition in
bankruptcy, or applies for or consents (by admission of material
allegations of a petition or otherwise) to the application of any
bankruptcy, reorganization, arrangement, readjustment of debt,
insolvency, dissolution, liquidation or other similar law of any
jurisdiction, or authorizes such application or consent, or
proceedings to such end are instituted against the Investment Advisor
without such authorization, application or consent and are approved as
properly instituted and remain undismissed for 90 days or result in
adjudication of bankruptcy or insolvency; or (iv) permits or suffers
all or any substantial part of its properties or assets to be
sequestered or attached by court order and the order remains
undismissed for 90 days; or
(3) unless cured by the Investment Advisor within the period set
forth in subsection 10(b)(1) above, a material expense, loss, damage
or liability is incurred by the Company resulting primarily from an
act or omission of the Investment Advisor that constituted bad faith,
willful misconduct, gross negligence or reckless disregard of its
duties.
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If any of the events specified in this Section 10(b) of this Agreement
shall occur, the Investment Advisor shall give prompt written notice
thereof to the Board of Trustees upon the happening of such event.
11. Protection of Investments
The Investment Advisor shall use its efforts, in cooperation with the legal
counsel to the Company, as deemed appropriate in the Investment Advisor's
reasonable discretion, (a) to verify title to or procure title insurance in
respect of any property in which the Company makes or proposes to make any
investment; (b) to verify that any mortgage securing any investment of the
Company shall be a valid lien upon the mortgaged property according to its
terms; and (c) to carry on the policies from time to time specified by the Board
of Trustees with regard to the protection of the Company's investments.
12. REIT Qualification
Anything else in this Agreement to the contrary notwithstanding, the
Investment Advisor shall not take any action (including, without limitation,
furnishing or rendering services to tenants of property or managing real
property), which action, in its judgment made in good faith, or in the judgment
of the Board of Trustees of the Company as transmitted to the Investment Advisor
in writing, would (a) cause personal liability to attach to the holders of the
Shares (as hereinafter defined) by reason of the ownership thereof, or (b)
adversely affect the status of the Company as a real estate investment trust as
defined in the Code or which would make the Company subject to the Investment
Company Act of 1940, as amended, if not in the best interests of the Company's
shareholders as determined by the Board of Trustees, or (c) violate any law,
rule, regulation or statement of policy of any government body or agency having
jurisdiction over the Company or over its securities, or (d) otherwise not be
permitted by the Declaration of the Company, except if such action shall be
ordered by the Board of Trustees of the Company, in which event the Investment
Advisor shall promptly notify the Board of Trustees of the Investment Advisor's
judgment that such action would adversely affect such status or violate any such
law, rule, regulation or statement or the Declaration, as amended, and shall
refrain from taking such action pending further clarification of such
instructions from the Board of Trustees. In addition, the Investment Advisor
shall take such affirmative steps which, in its good faith judgment, or in the
judgment of the Board of Trustees as transmitted to the Investment Advisor in
writing, would prevent or cure any action described in (a), (b), (c) or (d)
above.
13. Additional Activities of the Investment Advisor
a. During the term of this Agreement, the principal business purpose
of the Investment Advisor shall be to arrange for the investment by the
Company in accordance with the Company's investment policies in
high-yielding, real estate-related debt investments and to perform the
other duties and obligations of the Investment Advisor on behalf of the
Company set forth in this Agreement.
b. Members, managers, officers, employees and agents of the Investment
Advisor or affiliates of the Investment Advisor may serve as trustees,
directors, officers, employees, agents, nominees or signatories for the
Company or any subsidiary, to the extent permitted by their respective
governing instruments,
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<PAGE>
as from time to time amended, or by any resolutions duly adopted by the
Board of Trustees pursuant to the Company's Declaration. When executing
documents or otherwise acting in such capacities for the Company or a
related entity, such persons shall use their respective titles in the
Company or a related entity. Notwithstanding the foregoing, no person
serving in a dual role for the Investment Advisor and the Company may
execute consents or authorizations on behalf of the Company to or in favor
of the Investment Advisor.
c. Except as provided in the next succeeding paragraph, nothing herein
shall be construed as imposing any restrictions on the investment or other
business activities of the Investment Advisor or of any parties who may
hold direct or indirect ownership interests in the Investment Advisor from
time to time, including, but without limitation, Starwood, and, without
limitation, Starwood and such other parties may invest in any type of real
estate or other investments for their own account or for the account of
others without any obligation to present such opportunities to the
Investment Advisor or the Company. In addition, except as provided in the
next succeeding paragraph, nothing herein shall restrict any members,
managers, officers, employees or agents of the Investment Advisor from
serving as directors, trustees, officers, employees, agents, nominees or
signatories for any person.
During the "Exclusivity Period" (as hereinafter defined), neither the
Investment Advisor nor any person who is controlled by, who controls or who
is under common control with the Investment Advisor shall form, manage or
advise a new blind pool investment fund, the primary purpose of which is to
invest in debt (a) that is secured by real estate in the United States, (b)
that has current coupon rates in excess of comparable maturity Treasury
spreads plus 400 basis points, and (c) that has maturities longer than four
years, and which debt otherwise has predominantly debt investment
characteristics. As used herein, "Exclusivity Period" means the period
commencing on the date hereof and ending on the earlier of (i) February 27,
2000, or (ii) the date which is six (6) months after the date on which
aggregate proceeds of not less than $400,000,000 have been raised through
one or more public offerings of Shares (as hereinafter defined) after the
Contribution Date (with not less than $320,000,000 of such raised proceeds
constituting issuances of Shares which are not resales of Shares
outstanding at 11:59 p.m. on the Contribution Date).
14. Certain Conflicts of Interest; Enforcement of the Agreement.
a. The Company hereby acknowledges that various affiliates of the
Investment Advisor have general partner interests in and other direct or
indirect ownership of, and contractual obligations to, Starwood Mezzanine,
and SOFI IV, each of which will be a shareholder in the Company after the
Contribution Date, and to their respective investors, and that such
affiliates of the Investment Advisor have fiduciary responsibilities to
such investors.
b. Subject to the voting rights set forth in Section 10(a) hereof, the
Independent Trustees of the Company shall make all determinations on behalf
of the Company in respect of the computation of the Advisor's fees.
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<PAGE>
15. Assignment.
This Agreement shall not be assignable by either party without the consent
of the other; provided, however, that the Investment Advisor shall have the
right to assign its rights and/or obligations in their entirety to an entity
that following such assignment is controlled by, controls or is under common
control with Starwood (or its approved successors), provided that such assignee
assumes all of the duties and responsibilities of the Investment Advisor in
connection therewith.
16. Binding Nature of Agreement; Successors and Assigns.
Subject to section 15 hereof, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns (to the extent permitted) as provided
herein.
17. Entire Agreement.
This Agreement contains the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof, and supersedes all
prior and contemporaneous agreements, understanding, inducements and conditions,
express or implied, oral or written, of any nature whatsoever with respect to
the subject matter hereof. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing approved by the Company (including a majority of the
Independent Trustees acting on behalf of the Company) and by the Investment
Advisor.
18. Controlling Law.
This Agreement and all questions relating to its validity, interpretation,
performance and enforcement shall be governed by and construed, interpreted and
enforced in accordance with the laws of the State of New York, notwithstanding
any New York or other conflict of law provisions to the contrary.
19. Indulgences, Not Waivers.
Neither the failure nor any delay on the part of a party to exercise any
right, remedy, power or privilege under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, remedy, power or
privilege preclude any other or further exercise of the same or of any other
right, remedy, power or privilege, nor shall any waiver of any right, remedy,
power or privilege with respect to any occurrence be construed as a waiver of
such right, remedy, power or privilege with respect to any other occurrence. No
waiver shall be effective unless it is in writing and is signed by the party
asserted to have granted such waiver.
20. Titles Not to Affect Interpretation.
The titles of paragraphs and subparagraphs contained in this Agreement are
for convenience only, and they neither form a part of this Agreement nor are
they to be used in the construction or interpretation hereof.
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<PAGE>
21. Execution in Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original as against any party whose signature appears
thereon, and all of which shall together constitute one and the same instrument.
This Agreement shall become binding when one or more counterparts hereof,
individually or taken together, shall bear the signatures of all of the parties
reflected hereon as the signatories.
22. Use of the Angeles and Starwood Names.
The parties hereto agree that no right or license to use the name of either
party or any affiliate is granted hereby. In the event the parties or one or
more of their affiliates agree to allow the Company to use the "Starwood" name
(or any variant thereof) by separate agreement, in connection with the
activities of the Company, such use will cease immediately upon any termination
of the Investment Advisor under this Agreement and the Company shall take all
actions necessary, including the filing of name change forms in all appropriate
jurisdictions, to effect such result.
23. Provisions Separable.
The provisions of this Agreement are independent of and separable from each
other, and no provision shall be affected or rendered invalid or unenforceable
by virtue of the fact that for any reason any other or others of them may be
invalid or unenforceable in whole or in part.
24. Gender.
Words used herein regardless of the number and gender specifically used,
shall be deemed and construed to include any other number, singular or plural,
and any other gender, masculine, feminine or neuter, as the context requires.
25. No Joint Venture.
The Company and the Investment Advisor are not partners or joint venturers
with each other and nothing herein shall be construed to make them such partners
or joint venturers or impose any liability as such on either of them.
26. Investment Advisor Option Grants.
Under the Company's 1996 Long-Term Incentive Plan ("LTIP"), the Company has
granted the Investment Advisor options to purchase ___ Class "A" Shares (par
value $0.01 per share) of the Company ("Shares"), and may from time to time
grant additional options to purchase Shares to the Investment Advisor (all such
options thus granted by the Company to the Investment Advisor being hereinafter
referred to as "REIT Options") and Restricted Shares (as defined in the LTIP).
The Company agrees that the initial grant of awards to the Investment Advisor
under the terms of the LTIP shall be only in the form of REIT Options. Further,
only the initial grant of REIT Options shall vest immediately and not be subject
to any vesting periods otherwise contemplated by the LTIP. The Investment
Advisor agrees that over time it will grant options for the same total number of
Shares as are covered by REIT Options or award all Restricted Shares received by
it, as applicable, to its officers, key employees and consultants on such terms
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<PAGE>
and at such times as it deems appropriate (all such options thus granted by the
Investment Advisor being hereinafter referred to as "Advisor Options" and the
Advisor Options and Restricted Shares awarded by the Investment Advisor being
herein called the "Advisor Awards"). Advisor Options will generally have a three
(3) year vesting period (1/3 per year) from the date of issue with an exercise
horizon co-terminous with that of the REIT Options and will provide for
accelerated vesting in the event of a change in control of the Company and will
have the same option exercise price (or prices) as the related REIT Options. If
any Advisor Option is partially or wholly forfeited, a replacement Advisor
Option or Options shall be granted (for the forfeited Shares).
Additionally, the following shall be applicable:
At all times prior to the date on which Shares with a Fair Market
Value (as such term is defined in the LTIP) of at least $250,000,000 are
outstanding that were issued as part of one or more primary or secondary
public offerings (with not less than $200,000,000 constituting issuances of
Shares which are not resales of Shares outstanding at 11:59 p.m. on the
Contribution Date) (an "IPO Event"):
a. No options (including, without limitation, Advisor Options)
shall be granted to Barry S. Sternlicht;
b. Total Awards (including, without limitation, Advisor Awards)
granted under the LTIP to any person who has an interest, directly or
indirectly, in Starwood Mezzanine or SOFI IV (a "Starwood Insider") by
the Investment Advisor and the Company shall not exceed 2.5%, in the
aggregate, of the fully diluted Shares outstanding from time to time;
and
c. Vesting of Advisor Options granted to Starwood Insiders shall,
in addition to any service criteria imposed by the Board of Trustees
of the Company, occur on a pari passu percentage basis with the
percentage of the total number of Shares held on the Contribution Date
by SOFI IV and Starwood Mezzanine as have been sold or distributed
from time to time by SOFI IV or Starwood Mezzanine; provided, however,
that in no event shall such Advisor Options vest at a rate that is
faster than 33.33% per annum and provided further, however, that,
subject to the continued satisfaction of any service criteria imposed
by the Board of Trustees of the Company, any theretofore unvested
Advisor Options held by Starwood Insiders shall vest in full on the
earlier to occur of a change of control of the Company (as provided in
the LTIP) or on the fifth anniversary of the date of grant.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on and as of
the date first above written.
STARWOOD FINANCIAL ADVISORS, L.L.C.
By: Starwood Capital Group, L.L.C.
Its: Manager
By: ________________________
Its:________________________
STARWOOD MORTGAGE TRUST,
a California Business Trust
By:__________________________
Name:________________________
Its:_________________________
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<PAGE>
EXHIBIT F
AMENDED AND RESTATED DECLARATION OF TRUST
OF
STARWOOD FINANCIAL TRUST
F-1
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Section Page
- ------- ----
ARTICLE I
The Trust; Definitions
<S> <C> <C>
1.1 Name ............................................................ 6
1.2 Places of Business .............................................. 6
1.3 Nature of Trust ................................................. 6
1.4 Purposes ........................................................ 6
1.5 Definitions ..................................................... 7
ARTICLE II
Trustees
2.1 Number, Terms of Office, Qualifications of Trustees ............. 11
2.2 Compensation and Other Remuneration ............................. 11
2.3 Resignation, Removal and Death of Trustees ...................... 11
2.4 Vacancies ....................................................... 12
2.5 Successor and Additional Trustees ............................... 12
2.6 Actions by Trustees and Executive Committee; Quorum ............. 12
ARTICLE III
Trustees' Powers
3.1 Power and Authority of Trustees ................................. 13
3.2 Specific Powers and Authorities ................................. 13
3.3 Trustees' Regulations ........................................... 18
ARTICLE IV
Advisor
4.1 Employment of Advisor ........................................... 18
4.2 Term ............................................................ 18
4.3 Independence of Trustees and Members of Executive Committee ..... 18
4.4 Other Activities of Advisor ..................................... 19
4.5 Limitation on Operating Expenses ................................ 19
</TABLE>
F-2
<PAGE>
ARTICLE V
Investment Policy
<TABLE>
<S> <C> <C>
5.1 General Statement of Policy ...................................... 20
5.2 Other Permissible Investments .................................... 20
5.3 Prohibited Investments and Activities ............................ 20
5.4 Obligor's Default ................................................ 21
ARTICLE VI
The Shares and Shareholders
6.1 Shares ........................................................... 21
6.2 Voting Rights .................................................... 22
6.3 Legal Ownership of Trust Estate .................................. 23
6.4 Shares Deemed Personal Property .................................. 23
6.5 Share Record; Issuance and Transferability of Shares ............. 23
6.6 Dividends or Distributions to Shareholders ....................... 24
6.7 Transfer Agent, Dividend Disbursing Agent, and Registrar ......... 25
6.8 Shareholders' Meeting ............................................ 25
6.9 Proxies .......................................................... 26
6.10 Reports to Shareholders .......................................... 26
6.11 Fixing Record Dates .............................................. 26
6.12 Notice to Shareholders ........................................... 26
6.13 Restriction on Transfer, Acquisition and Redemption of Shares .... 26
6.14 Conversion Rights ................................................ 26
ARTICLE VII
Liability of Trustees, Shareholders, and
Officers, and Other Matters
7.1 Exculpation of Trustees and Officers ............................. 28
7.2 Express Exculpatory Clauses in Instruments ....................... 28
7.3 Liability and Indemnification of Trustees ........................ 28
7.4 Rights of Trustees and Officers to Own Shares or Other
Property and to Engage in Other Business ......................... 29
7.5 Transactions Between the Trust and Certain Affiliates ............ 30
7.6 Restriction of Duties and Liabilities ............................ 30
7.7 Persons Dealing with Trustees or Officers ........................ 30
7.8 Reliance ......................................................... 30
</TABLE>
F-3
<PAGE>
ARTICLE VIII
Duration, Termination, Amendment,
and Qualification of Trust
<TABLE>
<S> <C> <C>
8.1 Duration of Trust ................................................. 31
8.2 Termination of Trust .............................................. 31
8.3 Amendment Procedure ............................................... 32
8.4 Qualification Under the REIT Provisions of the Code ............... 32
ARTICLE IX
Miscellaneous
9.1 Applicable Law ................................................... 32
9.2 Index and Headings for Reference Only; Gender .................... 33
9.3 Successors in Interest ........................................... 33
9.4 Inspections of Records ........................................... 33
9.5 Counterparts ..................................................... 33
9.6 Correction of Provisions of Declaration .......................... 33
9.7 Certifications ................................................... 33
9.8 Recording and Filing ............................................. 34
Restriction on Transfer, Acquisition
and Redemption of Shares
10.1 Definitions ...................................................... 34
10.2 Ownership Limitation ............................................. 36
10.3 Excess Shares .................................................... 37
10.4 Prevention of Transfer ........................................... 37
10.5 Notice to Trust .................................................. 38
10.6 Information for Trust ............................................ 38
10.7 Other Action by Board of Trustees ................................ 38
10.8 Ambiguities ...................................................... 38
10.9 Modification of Existing Holder Limits ........................... 38
10.10 Increase or Decrease in Ownership Limit .......................... 39
10.11 Limitations on Changes in Existing Holder and Ownership Limits ... 39
10.12 Waivers by Board of Trustees ..................................... 39
10.13 Legend ........................................................... 40
10.14 Severability ..................................................... 40
10.15 Trust for Excess Shares .......................................... 40
10.16 Distributions on Excess Shares ................................... 41
10.17 Voting of Excess Shares .......................................... 41
</TABLE>
F-4
<PAGE>
<TABLE>
<S> <C> <C>
10.18 Non-Transferability of Excess Shares ............................. 41
10.19 Call by Trust on Excess Shares ................................... 41
10.20 Underwritten Offerings ........................................... 42
</TABLE>
F-5
<PAGE>
AMENDED AND RESTATED DECLARATION OF TRUST
STARWOOD FINANCIAL TRUST
This AMENDED AND RESTATED DECLARATION OF TRUST originally made and entered
into as of the 15th day of April, 1988, as restated as of the 18th day of July,
1988, as further restated as of the 26th day of September 1996 and as further
amended and restated as of the ___ day of ____________ 1998, by the Persons
whose names appear at the end of this Declaration of Trust, as Trustees of
Starwood Financial Trust (formerly known as Angeles Participating Financial
Trust).
The Trustees do hereby form a trust and do hereby agree to hold in trust as
Trustees any and all property, real, personal, or otherwise, tangible and
intangible, which is transferred, conveyed, or paid to the Trust or to them as
Trustees and all rents, income, profits, and gains therefrom for the benefit of
the Shareholders hereunder subject to the terms and conditions and for the uses
and purposes hereinafter set forth.
ARTICLE I
The Trust; Definitions
1.1 Name. The name of the Trust shall be "Starwood Financial Trust." As far
as is practicable and subject to the requirements of a license agreement between
Angeles Participating Mortgage Trust and Starwood Capital Group, L.L.C. and
except as is otherwise provided in this Declaration, the Trustees shall conduct
the Trust's activities, execute all documents, sue or be sued, and take all
actions they deem appropriate in the name of Starwood Financial Trust.
1.2 Places of Business. The principal office of the Trust shall be at Three
Pickwick Plaza, Suite 250, Greenwich, Connecticut, 06830. The Trustees, however,
may from time to time change such location and maintain other offices or places
of business.
1.3 Nature of Trust. The Trust is a business trust organized under the laws
of the State of California, and it is intended that the Trust shall qualify as a
real estate investment trust within the meaning of the Code. The Trust is not
intended to be, shall not be deemed to be, and shall not be treated as a general
partnership, limited partnership, joint stock company, or association (but
nothing herein shall preclude the Trust from being taxable as an association
under the REIT Provisions of the Code), nor shall the Trustees or Shareholders
or any of them for any purpose be, or be deemed to be treated in any way
whatsoever to be, liable or responsible hereunder as partners or joint
venturers. The relationship of the Shareholders to the Trust shall be solely
that of beneficiaries of the Trust and their rights shall be limited to those
expressly conferred upon them by this Declaration.
1.4 Purposes. The primary purposes of the Trust are to acquire a
diversified portfolio of debt or debt like interests in real estate or real
estate related assets, including (i) originating mortgage loans and/or acquiring
mortgage loans or acquiring securities collateralized, in whole or in part, by
such mortgage loans, as well as making equity investments in real estate and
real estate-related assets, (ii) acquiring direct or indirect interests in short
term, medium and long-term real estate-related debt securities and mortgage
interests, which may include warrants, equity participations or similar rights
incidental to a debt investment
F-6
<PAGE>
by the Trust, (iii) making, holding and disposing of purchase money loans with
respect to assets sold by the Trust, and (iv) acquiring positions in
non-performing and sub-performing debt for the purpose of either restructuring
it as performing debt or if such efforts are unsuccessful, of obtaining shortly
thereafter primary management rights over or equity interests in the underlying
assets securing such debt (the "Diversified Portfolio"). The Trust's authority
with respect to the Diversified Portfolio includes the power to acquire, hold,
own, develop, redevelop, construct, improve, maintain, operate, manage, sell,
lease, rent, transfer, encumber, mortgage, convey, exchange and otherwise
dispose of all or part of the Diversified Portfolio and the Diversified
Portfolio may be held by the Trust directly or indirectly.
Without the amendment, termination or waiver of provisions of certain
non-competition agreements between Starwood Capital Group, L.P. and Starwood
Hotels & Resorts Trust, a publicly traded hotel real estate investment trust the
shares of which are paired and trade with those of Starwood Hotels & Resorts
Worldwide, Inc., Corporation, the Trust is 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 (1) 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 the Trust or that are acquired as a result of
the exercise of remedies in respect of a loan in which the Trust 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
the Trust under, pursuant to or by reason of the holding of debt positions.
1.5 Definitions. The following terms shall, whenever used in this
Declaration, unless the context otherwise requires, have the meanings specified
in this Section 1.5. The singular shall refer to the plural, and the masculine
gender shall be deemed to refer to the feminine and neuter, and vice versa, as
the context requires.
(a) "Advisor" means the Person to whom, pursuant to the Advisory Agreement,
the Trustees delegate certain control and management of the Trust and its assets
as provided in Section 4.1.
(b) "Advisory Agreement" means the advisory agreement between the Trust and
the Advisor as described in Section 4.2.
(c) "Affiliate" means with respect to the Advisor, a Shareholder, or
Trustee (i) any Person directly or indirectly owning, controlling, or holding,
with power to vote, 5% or more of the outstanding voting securities of the
Advisor or such Shareholder, (ii) any Person 5% or more of whose outstanding
voting securities are directly or indirectly owned, controlled, or held, with
power to vote, by the Advisor, such Trustee, or such Shareholder, and (iii) any
officer, director, or partner of the Advisor or such Shareholder.
(d) "Borrower" means those affiliated or unaffiliated Persons which are the
recipients of Trust Loans, guarantees, letters of credit, or other financing
arrangements.
(e) "Capital Contributions" means the gross amount invested in the Trust by
the Shareholder. Reference to a "Capital Contribution" means the gross amount
contributed by a respective Shareholder.
F-7
<PAGE>
(f) "Class A Shareholders" means, at any particular time, those Persons who
are shown as the holders of record of all Class A Shares on the records of the
Trust at such time.
(g) "Class B Shareholders" means, at any particular time, those Persons who
are shown as the holders of record of all Class B Shares on the records of the
Trust at such time.
(h) "Class A Shares" means the designated shares of beneficial interest of
the Trust as described in Section 6.1.
(i) "Class B Shares" means the designated shares of beneficial interest of
the Trust as described in Section 6.1.
(j) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, including successor statutes thereto.
(k) "Declaration" means this Declaration of Trust and all amendments and
modifications thereof. References in this Declaration to "herein" and
"hereunder" shall be deemed to refer to this Declaration and shall not be
limited to the particular text, article, or section in which such words appear.
(l) "Disposition" means any Trust transaction not in the ordinary course of
its business, including, without limitation, principal repayments, all
participation in the cash flow, income, or appreciation in value of property
securing Trust Loan payments, prepayments, sales, or other dispositions of any
Trust Loans held by the Trust and analogous transactions involving any other
assets held by the Trust.
(m) "Distributable Net Proceeds" means the portion of the proceeds from a
Disposition so defined in Section 6.6.
(n) "Gross Proceeds" means the aggregate total of the original Capital
Contribution of all of the Shareholders.
(o) "Mortgages" means mortgages, deeds of trust, or other security
instruments on real property or rights or interests in real property or entities
owning or controlling real property.
(p) "Net Cash" means, for a period, the interest earned on investments and
deposits made by the Trust and operating revenues of the Trust received during
such period, plus cash proceeds from Dispositions, plus reserves set aside
during prior periods pursuant to clause (iii) below which are no longer
necessary as reserves, less (i) all Operating Expenses (other than any expenses
previously reserved against pursuant to (iii) below) of the Trust paid during
such period, plus all fees and reimbursements payable to the Trustees, the
Advisor, including all incentive fees and compensation, and their Affiliates,
(ii) all payments made during such period to discharge Trust indebtedness, (iii)
all amounts established as reserves during such period, (iv) all amounts
expended during such period for the replacement or preservation of Trust assets,
or any part thereof, to the extent not previously reserved, and (v) all amounts
reinvested in new Trust Loans and other investments.
(q) "Non-Distributable Net Proceeds" means the portion of the proceeds from
a Disposition so defined in Section 6.6.
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<PAGE>
(r) "Offering" means the initial public offering of 5,000,000 Class A
Shares.
(s) "Operating Expenses" means the aggregate annual expenses of the Trust
of every character regarded as operating expenses in accordance with generally
accepted accounting principles, as determined by independent accountants
selected by the Trustees, exclusive of: Organization and Offering Expenses;
interest and discounts and other costs of borrowed money; taxes on income and
real property and all other taxes and assessments applicable to the Trust and
its operations; legal, auditing, underwriting, brokerage, transfer agent's,
registrar's, and indenture trustee's fees and other such fees, whether paid to
Affiliates of the Advisor or independent Persons; fees and expenses paid to
independent contractors, independent advisors, mortgage bankers, brokers, and
services, real property managers, leasing agents, consultants, on-site managers,
real estate brokers, insurance agents and brokers, other brokers and agents, and
all personnel employed by the Trust or on its behalf (including all compensation
and reimbursements of expenses, payable to the Advisor by the Trust under any
Advisory Agreement with the Trust referred to in Article IV hereof and
compensation payable to Affiliates of the Advisor) employed by or on behalf of
the Trust; costs of insurance (including Trustee's liability insurance), whether
paid to Affiliates of the Advisor or independent Persons; expenses of organizing
and terminating the Trust; all expenses connected with distributions and
communications to holders of Securities of the Trust and the other bookkeeping
and clerical work necessary in maintaining relations with holder of Securities,
including the cost of printing and mailing checks, certificates for Securities,
proxy solicitation materials, and reports to such holders; all expenses
connected with the acquisition, disposition, and ownership of Trust Loans, and
all other investments by the Trust, including the costs of appraisal, legal
services, brokerage and sales commissions, processing and foreclosure expenses,
expenses for the maintenance, repair, and improvements of Trust assets, property
management fees and expenses for day-to-day management of Trust assets, whether
paid to Affiliates of the Advisor or other Persons; realized losses (exceeding
provisions therefor) on Dispositions; and all provisions for depletion,
depreciation, amortization, and losses.
(t) "Organization and Offering Expenses" means those expenses incurred in
connection with the formation and registration of the Trust and in qualifying
and marketing the Shares or other Securities under applicable federal and state
law, and any other expenses actually incurred and directly related to the
qualification, registration, offer, and sale of the Shares or other Securities,
including such expenses as: (i) selling commissions; (ii) all marketing expenses
and payment made to broker-dealers as compensation or reimbursement for all
costs of reviewing the offerings, including due diligence investigations and
fees or expenses of their attorneys, accountants, and other experts; (iii)
registration fees, filing fees, and taxes; (iv) the costs of printing, amending,
supplementing, and distributing the registration statements and Prospectuses;
(v) the costs of obtaining regulatory clearances of, printing, and distributing
sales materials used in connection with the offer and sale of the Shares or
other Securities; (vi) compensation of officers and employees of the Advisor and
its Affiliates while directly engaged in organizing and forming the Trust and in
qualifying, registering, and marketing the Shares or other Securities under
applicable federal and state law; (vii) reimbursements to the Selling Agent,
selected broker-dealers, the Advisor, and its Affiliates for special marketing
and incentive programs sponsored by those entities; (viii) the costs related to
investor and broker-dealer sales meetings; (ix) accounting and legal fees
incurred in connection with any of the foregoing; and (x) a non-accountable
expense allowance equal to 1% of the Gross Proceeds payable to the Selling
Agent.
(u) "Person" means any individual, partnership, corporation, association,
trust, or other entity.
F-9
<PAGE>
(v) "Prospectus" means the final prospectus, as filed with the Securities
and Exchange Commission, relating to the offering of up to 5,000,000 Class A
Shares by the Trust, including all supplements and amendments thereto, and any
subsequent prospectus, including all supplements and amendments thereto,
relating to subsequent securities offering by the Trust.
(w) "REIT Provisions of the Code" means Part II, Subchapter M of Chapter 1
of Subtitle A of the Code, as now enacted or hereafter amended, including
successor statutes and regulations promulgated thereunder.
(x) "Securities" means common and preferred stock in a corporation, shares
of beneficial interest in a trust or other unincorporated association, general
partner interests in a general partnership, interests in a joint venture,
general or limited partnership interests in a limited partnership, membership
interests or non-member manager interests in a limited liability company, notes,
debentures, bonds, and other evidences of indebtedness, including Mortgages,
whether secured or unsecured, and includes any options, warrants, and rights to
subscribe to or convert into any of the foregoing.
(y) "Selling Agent" means Angeles Securities Corporation.
(z) "Shareholders" means, at any particular time, the Class A Shareholders,
the Class B Shareholders, and all other holders of record of outstanding Shares
on the records of the Trust at such time.
(aa) "Shares" means the Class A Shares, the Class B Shares, and all other
shares of beneficial interest of the Trust issued as provided herein.
(bb) "Trust" means the trust created by this Declaration.
(cc) "Trustees" means, as of any particular time, the Persons holding such
office under this Declaration at such time, whether they be the Trustees named
herein or additional or successor Trustees, but shall not include the officers,
representatives, or agents of the Trust or the Shareholders, although nothing
herein shall be deemed to preclude the Trustees from also serving as officers,
representatives, or agents of the Trust or from owning Shares.
(dd) "Trustees' Regulations" means the regulations provided for in Section
3.3.
(ee) "Trust Estate" means, as of any particular time, any and all property,
real, personal, or otherwise, tangible or intangible, which is held,
transferred, conveyed, or paid to the Trust or the Trustees on behalf of the
Trust and all rents, income, profits, and gains therefrom.
(ff) "Trust Loans" means the notes, debentures, bonds, and other evidences
of indebtedness or obligations acquired or entered into by the Trust which are
secured or collateralized by personal property or fee or leasehold interests in
real estate or other assets, including, but not limited to, first mortgage
loans, junior mortgage loans, construction loans, development loans, equipment
loans, loans secured by general or limited partnership interests, capital stock,
or any other assets or form of equity interest or guarantee of the Borrower, and
any other type of loan or financial arrangement, such as providing or arranging
for letters of credit, providing guarantees of obligations to third parties, or
providing commitments for Trust Loans.
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ARTICLE II
Trustees
2.1 Number, Terms of Office, Qualifications of Trustees. The initial number
of Trustees shall be seven, but such number may be changed from time to time by
a vote of the majority of Trustees then in office or by Shareholders voting in
the manner set forth in Section 6.2(e), provided that the number of Trustees so
fixed shall not be less than seven nor more than 15. The initial Trustees shall
be the signatories hereto. Subject to the provisions of Section 2.3, each
Trustee shall hold office until the expiration of his term and until the
election and qualification of his successor. The Trustees shall be divided into
two classes of approximate equal size, which classes are hereby designated Class
I and Class II. The term of office of the initial Class I Trustees shall expire
at the 1998 Annual Meeting of Shareholders; and the term of office of the
initial Class II Trustees shall expire at the 1999 Annual Meeting of
Shareholders. For the purposes hereof, the initial Class I and Class II Trustees
shall be those Trustees so designated and elected at the 1997 Annual Meeting of
Shareholders scheduled to be held in March 1998.
At each Annual Meeting of Shareholders after the 1997 Annual Meeting of
Shareholders, Trustees to replace those of the class whose terms expire at such
Annual Meeting of Shareholders shall be elected to hold office until the second
succeeding annual meeting and until their respective successors shall have been
duly elected and qualified.
Trustees may be re-elected indefinitely. A Trustee shall be an individual
at least 21 years of age who is not under legal disability. Such individual
shall qualify as a Trustee when he has either signed this Declaration or agreed
in writing to be bound by it. Unless otherwise required by law, no Trustee shall
be required to give bond, surety, or security in any jurisdiction for the
performance of any duties or obligations hereunder. The Trustees in their
capacity as trustees shall not be required to devote their entire time to the
business and affairs of the Trust, and it is understood that all or some of the
Trustees may be involved in, and/or shareholders, officers, directors,
representatives, agents, partners, or beneficiaries of, businesses and ventures
which may be in direct competition with the Trust.
2.2 Compensation and Other Remuneration. The Trustees shall be entitled to
receive such reasonable compensation for their services as Trustees as they may
determine from time to time. The Trustees, either directly or indirectly, shall
also be entitled to receive remuneration for services rendered to the Trust in
any other capacity. Such services may include, without limitation, services as
an officer of the Trust, legal, accounting, or other professional services, or
services as a broker, transfer agent, or underwriter, whether performed by a
Trustee or an Affiliate of a Trustee.
2.3 Resignation, Removal and Death of Trustees. A Trustee may resign at any
time by giving written notice in recordable form to the remaining Trustees at
the principal office of the Trust. Such resignation shall take effect on the
date such notice is given or at any later time specified in the notice without
need for prior accounting. A Trustee may be removed for cause at a special
meeting of the Shareholders voting in the manner set forth in Section 6.2, or
with cause by all remaining Trustees. "Cause" for purposes of this Section 2.3
shall mean a Trustee's willful violations of this Declaration or the Trustees'
Regulations which violations are materially against the interests of the
Shareholders or gross negligence in the performance of his duties.
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Upon the resignation or removal of any Trustee, or his otherwise ceasing to
be a Trustee, he shall execute and deliver such documents as the remaining
Trustees shall require for the conveyance of any Trust property held in his
name, shall account to the remaining Trustee or Trustees as they require for all
property which he holds as Trustee, and shall thereupon be discharged as
Trustee. Upon the incapacity or death of any Trustee, his legal representative
shall perform the acts set forth in the preceding sentence, and the discharge
mentioned therein shall run to such legal representative and to the
incapacitated Trustee or the estate of the deceased Trustee as the case may be.
2.4 Vacancies. If any or all of the Trustees ceased to be Trustees
hereunder, whether by reason of resignation, removal, incapacity, death, or
otherwise, such event shall not terminate the Trust or affect its continuity.
Until vacancies are filled, the remaining Trustee or Trustees (even though less
than seven) may exercise the powers of the Trustees hereunder. Vacancies
(including vacancies created by increases in number) may be filled by the
remaining Trustee or by vote of a majority of the remaining Trustees or by the
Shareholders voting in the manner set forth in Section 6.2(a). Any Trustee so
elected by the remaining Trustees or the Shareholders shall hold office until
his successor is elected and qualified or until his earlier death, resignation,
retirement, disqualification or removal from office. Newly created trusteeships
or decrease in trusteeships shall be so apportioned among the classes so as to
make all classes as nearly equal in number as is practicable. Any additional
Trustee of any class elected to fill a vacancy resulting from any increase in
such class shall hold office for a term that shall coincide with the remaining
term of that class, but in no case will a decrease in the number of Trustees
shorten the term of any incumbent Trustee. If at any time there shall be no
Trustees in office, successor Trustees shall be elected by the Shareholders as
provided in Section 6.2(a).
2.5 Successor and Additional Trustees. The right, title, and interest of
the Trustees in and to the Trust Estate shall also vest in successor and
additional Trustees upon their acceptance of the office, and they shall
thereupon have all the rights and obligations of Trustees hereunder. Such right,
title, and interest shall vest in the Trustees whether or not conveyancing
documents have been executed and delivered pursuant to Section 2.3 or otherwise.
2.6 Actions by Trustees and Executive Committee; Quorum. A quorum for all
meetings of the Trustees shall be a majority of the Trustees. Unless
specifically provided otherwise in this Declaration, any action of the Trustees
may be taken at a meeting by a vote of a majority of the Trustees. Any
agreement, deed, mortgage, lease, or other instrument or writing executed by one
or more of the Trustees or by any authorized Person shall be valid and binding
upon the Trustees and upon the Trust; provided that such action is pursuant to
authorization of a majority of the Trustees given either at a meeting or in
writing or as provided in the Trustees' Regulations.
The Trustees may appoint a committee (the "Executive Committee") with
authority to exercise the powers of the Trustees and consisting of five or more
of the Trustees. Unless specifically provided otherwise in this Declaration, any
action of the Executive Committee may be taken at a meeting by vote of a
majority of the members of the Committee. A quorum for all meetings of the
Executive Committee shall be a majority of the members thereof. With respect to
the actions of the Trustees and the Executive Committee, Trustees who are
Affiliates of the Advisor may be counted for all quorum purposes.
Unless otherwise specifically provided in this Declaration, any action
required or permitted to be taken at any meeting of the Trustees or of the
Executive Committee may be taken without a meeting if all of the Trustees or
members of the Executive Committee, as the case may be, consent thereto in
writing.
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Trustees or members of the Executive Committee may participate in a meeting of
the Trustees or the Executive Committee, as the case may be, by means of
conference telephone or similar communications equipment by which all
individuals participating in the meeting can hear each other, and participation
in such meeting pursuant to this paragraph shall constitute presence in person
at such meeting for all purposes of this Declaration.
ARTICLE III
Trustees' Powers
3.1 Power and Authority of Trustees. The Trustees, subject only to the
specific limitations contained in this Declaration, shall have, without further
or other authorization, and free from any power or control on the part of the
Shareholders, full, absolute, and exclusive power, control, and authority (a)
over the Trust Estate and over the business and affairs of the Trust to the same
extent as if the Trustees were the sole owners thereof in their own right, and
(b) to do all such acts and things as in their sole judgment and discretion are
necessary or incidental to, or desirable for the carrying out of, any of the
purposes of the Trust or conducting the business of the Trust. Notwithstanding
anything to the contrary in this Declaration, the Trustees shall have continuing
exclusive authority over the management of the Trust, the conduct of its affairs
and the management and disposition of Trust property, all in accordance with the
REIT Provisions of the Code. Any determination made in good faith by the
Trustees of the purposes of the Trust or the existence of any power or authority
hereunder shall be conclusive as to the Trust and its Shareholders. In
construing the provisions of this Declaration, presumption shall be in favor of
the grant of powers and authority to the Trustees. The enumeration of any
specific power or authority herein shall not be construed as limiting the
general powers or authority or any other specified power or authority conferred
herein upon the Trustees.
3.2 Specific Powers and Authorities. Subject only to the express
limitations contained in this Declaration and in addition to any powers and
authorities conferred by this Declaration or which the Trustees may have by
virtue of any present or future statute or rule or law, the Trustees without any
action or consent by the Shareholders shall have and may exercise at any time
and from time to time the following powers and authorities which may be
exercised by them in their sole judgment and discretion and in such manner and
upon such terms and conditions as they may from time to time deem appropriate:
(a) To retain, invest, and reinvest the capital or other funds of the Trust
in Trust Loans and real or personal property investments of any kind, and to
purchase, invest in, or otherwise acquire for cash or other property or through
the issuance of Shares or other Securities Trust Loans and fee, leasehold, or
other participating interests in property, real, personal, or mixed, tangible or
intangible, including notes, bonds, or other obligations, all for such
consideration as they deem appropriate and without regard to whether any such
property is authorized by law for the investment of trust funds. In connection
with any such investment, purchase, or acquisition, the Trustees shall have the
power to acquire a share of rents, lease payments, or other gross income from,
or a share of the profits from, or a share in the equity or ownership of the
security for such Trust Loans; to invest in Trust Loans secured by the pledge or
transfer of Mortgages, other assets, and/or contractual obligations; to develop,
operate, pool, unitize, grant production payments out of or lease or otherwise
dispose of mineral, oil and gas properties, and rights.
(b) To possess and exercise all the rights, powers, and privileges
appertaining to the ownership of the Trust Estate and to increase the capital of
the Trust at any time by the issuance of
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additional Shares or other Securities, in all cases for such consideration and
upon such terms as they deem appropriate.
(c) To sell, rent, lease, hire, exchange, release, partition, assign,
mortgage, pledge, hypothecate, grant security interests in, encumber, negotiate,
convey, transfer, or otherwise dispose of any and all of the Trust Estate by
deeds, trust deeds, assignments, bills of sale, transfers, leases, Mortgages,
financing statements, security agreements, and other instruments for any of such
purposes executed and delivered for and on behalf of the Trust or the Trustees
by one or more of the Trustees or by a duly authorized officer, employee, agent,
or any nominee of the Trust.
(d) To issue Shares or other Securities which may be subordinated to any
indebtedness of the Trust and may be convertible into Shares, including
Preferred Shares in series, and by amending this Declaration of Trust, which
amendment shall not require the vote of shareholders to the extent such
amendment establishes a class or series of Shares or Securities and/or the terms
and preferences thereof, to establish from time to time the number of Shares to
be included in each such series, and to fix the designation, powers, preferences
and rights of the Shares of each such series and the qualifications, limitations
or restrictions thereof, all without vote of or other action by the Shareholders
to such Persons for such cash, property, or other consideration (including
securities issued or created by, or interests in any Person) at such time or
times and on such terms as the Trustees may deem advisable and to list any of
the Securities issued by the Trust on any securities exchange and to purchase or
otherwise acquire, hold, cancel, reissue, sell, and transfer any of the
Securities. The authority of the Board of Trustees with respect to any new
Shares or Securities shall include, but not be limited to, determination of the
following:
(i) The number of Shares or Securities constituting that series and
the distinctive designation of that series;
(ii) The rate of dividend, and whether (and if so, on what terms and
conditions) dividends shall be cumulative (and if so, whether unpaid
dividends shall compound or accrue interest) or shall be payable in
preference or in any other relation to the dividends payable on any other
class or classes of Shares or any other series of Shares or Securities;
(iii) Whether that series shall have voting rights in addition to the
voting rights provided by law and, if so, the terms and extent of such
voting rights;
(iv) Whether the Shares or Securities must or may be redeemed and, if
so, the terms and conditions of such redemption (including, without
limitation, the dates upon or after which they must or may be redeemed and
the price or prices at which they must or may be redeemed, which price or
prices may be different in different circumstances or at different
redemption dates);
(v) Whether the Shares shall be issued with the privilege of
conversion or exchange and, if so, the terms and conditions of such
conversion or exchange (including without limitation the price or prices or
the rate or rates of conversion or exchange or any terms for adjustment
thereof);
(vi) The amounts, if any, payable upon the Shares in the event of
voluntary liquidation, dissolution or winding up of the Trust in preference
of Shares of any other class or series and whether the Shares shall be
entitled to participate generally in distributions under such
circumstances;
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(vii) The amounts, if any, payable under the Shares thereof in the
event of involuntary liquidation, dissolution or winding up of the Trust in
preference of shares of any other class or series and whether the Shares
shall be entitled to participate generally in distributions under such
circumstances;
(viii) Sinking fund provisions, if any, for the redemption or purchase
of the Shares (the term "sinking fund" being understood to include any
similar fund, however designated); and
(ix) Any other relative rights, preferences, limitations and powers of
that series.
(e) To enter into leases, contracts, obligations, easement agreements,
party wall agreements, boundary line agreements, loan commitments of every kind,
nature, and description, guarantees, financing arrangements and participations,
and other agreements, any one of which may be for a term extending beyond the
term of office of the Trustees and beyond the possible termination of the Trust
or for a lesser term.
(f) To borrow money and give negotiable or non-negotiable instruments
therefor; to guarantee, indemnify, or act as surety with respect to payment or
performance of obligations of third parties; to enter into other obligations on
behalf of the Trust and to assign, convey, transfer, mortgage, subordinate,
pledge, grant security interests in, encumber, or hypothecate the Trust Estate
to secure any of the foregoing.
(g) To lend money, whether secured or unsecured, pursuant to Trust Loans or
otherwise.
(h) To create reserve funds for any purpose.
(i) To incur and pay out of the Trust Estate any charges or expenses, and
disburse any funds of the Trust, which charges, expenses, or disbursements are,
in the opinion of the Trustees, necessary or incidental to or desirable for the
carrying out of any of the purposes of the Trust or conducting the business of
the Trust, including, without limitation, all Organization and Offering
Expenses, Operating Expenses, payments, reimbursements, and compensation to the
Trustees, the Advisor, and their Affiliates, taxes and other governmental
levies, charges, and assessments, of whatever kind or nature, imposed upon or
against the Trustees in connection with the Trust or the Trust Estate or upon or
against the Trust Estate or any part thereof, and for any of the purposes
herein.
(j) To deposit funds of the Trust in banks, trust companies, savings and
loan associations, and other depositories, whether or not such deposits will
draw interest, the same to be subject to withdrawal on such terms, in such
manner, and by such Person or Persons (including any one or more Trustees,
officers, agents, representatives, or the Advisor) as the Trustees may
determine.
(k) To posses and exercise all the rights, powers, and privileges
appertaining to the ownership of all or any Mortgages or Securities, issued or
created by, or interests in, any Person, forming part of the Trust Estate, to
the extent that an individual might, and, without limiting the generality of the
foregoing, to vote or give any consent, request, or notice, or waive any notice,
either in person or by proxy or power of attorney, with or without power of
substitution, to one or more Persons, which proxies and powers of attorney may
be for meetings or action generally or for any particular meeting or action and
may include the exercise of discretionary powers.
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(l) To cause to be organized or assist in organizing any Person under the
laws of any jurisdiction to acquire the Trust Estate or any part or parts
thereof or to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, rent, lease, hire, convey, negotiate,
assign, exchange, or transfer the Trust Estate or any part or parts thereof to
or with any such Person in exchange for the Securities thereof or otherwise, and
to lend money to, subscribe for the Securities of, and enter into any contracts
with, any such Person the Securities or any other interest of which the Trust
holds or is about to acquire.
(m) To enter into joint ventures, general or limited partnerships, and any
other lawful combinations or associations.
(n) To elect one of themselves as Managing Trustee or Chairman of the Board
of Trustees and to elect, appoint, engage, or employ other officers for the
Trust (including a Secretary, Treasurer, and such Vice Presidents and other
officers as the Trustees may determine), who may be removed or discharged at the
discretion of the Trustees, such officers to have such powers and duties, and to
serve such terms, as may be prescribed by the Trustees or by the Trustees'
Regulations; to engage or employ any Persons (including, subject to the
provisions of Sections 7.4 and 7.5, any Trustee, officer, or employee of the
Trust or any Affiliate of any of such Trustee, officer, or employee of the
Trust) as agents, representatives, or employees (including, without limitation,
real estate advisors, investment advisors, transfer agents, registrars,
underwriters, accountants, attorneys at law, real estate agents, managers,
appraisers, brokers, architects, engineers, construction managers, general
contractors, or otherwise) in one or more capacities, and to pay compensation
from the Trust for services in as many capacities as such Persons may be so
engaged or employed; and, except as prohibited by law, to delegate any of the
powers and duties of the Trustees to any one or more Trustees, agents,
representatives, officers, employees, independent contractors, the Advisor, or
other Persons.
(o) To determine whether monies, Securities, or other assets received by
the Trust shall be charged or credited to income or capital or allocated between
income and capital, including the power to amortize or fail to amortize any part
or all of any premium or discount, to treat any part or all of the profit
resulting from the maturity or sale of any asset whether purchased at a premium
or at a discount, as income or capital, or apportion the same between income and
capital, to apportion the sales price of any asset between income and capital,
and to determine in what manner any expenses or disbursements are to be borne as
between income and capital, whether or not in the absence of the power and
authority conferred by this subsection such moneys, Securities, or other assets
would be regarded as income or as capital or such expense or disbursement would
be charged to income or to capital; to treat any dividend or other distribution
on any investment as income or capital or apportion the same between income and
capital; to provide or fail to provide reserves for depreciation, amortization,
or obsolescence in respect of all or any part of the Trust Estate subject to
depreciation, depletion, amortization, or obsolescence in such amounts and by
such methods as they shall determine; and to determine the method or form in
which the accounts and records of the Trust shall be kept and to change from
time to time such method or form.
(p) To determine from time to time, the value of all or any part of the
Trust Estate and of any services, Securities, Trust Loans, property, or other
consideration to be furnished to or acquired by the Trust, and from time to time
to revalue all or any part of the Trust Estate in accordance with such
appraisals or other information as are, in the Trustees' sole judgment,
necessary and/or satisfactory.
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(q) To collect, sue for, and receive all sums of money coming due to the
Trust, and to engage in, intervene in, prosecute, join, defend, compound,
compromise, abandon, or adjust, by arbitration or otherwise, any actions, suits,
proceedings, disputes, claims, controversies, demands, or other litigation
relating to the Trust, the Trust Estate, or the Trust's affairs, to enter into
agreements therefor, whether or not any suit is commenced or claim accrued or
asserted and, in advance of any controversy, to enter into agreements regarding
arbitration, adjudication, or settlement thereof.
(r) To renew, modify, release, compromise, extend, consolidate, or cancel,
in whole or in part, any obligation to or of the Trust.
(s) To purchase and pay for out of the Trust Estate insurance contracts and
policies insuring the Trust Estate against any and all risks and insuring the
Trust and/or any or all of the Trustees, the Shareholders, or officers against
any and all claims and liabilities of every nature asserted by any Person
arising by reason of any action alleged to have been taken or omitted by the
Trust or by the Trustees, Shareholders, or officers, regardless of whether such
insurance contracts and policies are provided by Persons affiliated with the
Advisor or the Trustees.
(t) To cause legal title to any of the Trust Estate to be held by and/or in
the name of the Trustees, and/or, except as prohibited by law, in the name of
the Trust or one or more of the Trustees or any other Person, on such terms, in
such manner, and with such powers in such Person as the Trustees may determine,
and with or without disclosure that the Trust or Trustees are interested
therein.
(u) To adopt a fiscal year for the Trust, and from time to time change such
fiscal year.
(v) To adopt and use a seal (but, the use of a seal shall not be required
for the execution of instruments or obligations of the Trust).
(w) To help ensure that (i) the objectives of the Trust (including the
objectives of providing Shareholders with a pass-through investment vehicle, as
well as minimizing unrelated business taxable income for tax-exempt
Shareholders) will not be defeated by future legislation or other action, (ii)
the Trust will not be deemed to hold assets of an employee benefit plan ("Plan
Assets") for purposes of the Employee Retirement Income Security Act of 1974
("ERISA"), and (iii) the transactions contemplated hereunder will not constitute
prohibited transactions under ERISA or the Code. In order to accomplish the
foregoing, the Trustees and the Advisor have the right (upon notice to all
Shareholders but without the need to obtain the consent of any Shareholder) to
take any actions including (1) restructuring the Trust's activities and, if
deemed necessary by the Trustees and the Advisor, converting the Trust to
another type of entity (including a partnership), (2) restructuring the Trust's
activities to the extent necessary to comply with any exemption in Plan Asset
legislation or the Plan Asset regulations adopted by the Department of Labor
from time to time, including establishing a fixed percentage of Shares permitted
to be held by employee benefit plans or other tax-exempt entities, or
discontinuing sales of Securities to such investors after a given date as
necessary to obtain a prohibited transaction exemption from the Department of
Labor to comply with any exemption in the Plan Asset legislation or Plan Asset
regulations, and/or (3) terminating the Offering or any subsequent offering, or
compelling a dissolution and termination of the Trust.
(x) To do all other such acts and things as are incident to the foregoing
and to exercise all powers which are necessary or useful to carry on the
business of the Trust, to promote any of the purposes for which the Trust is
formed, and to carry out the provisions of this Declaration.
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3.3 Trustees' Regulations. The Trustees may make, adopt, amend, or repeal
regulations (the "Trustees' Regulations") containing provisions relating to the
business of the Trust, the conduct of its affairs, its rights or powers, and the
rights or powers of its Shareholders, Trustees, or officers not inconsistent
with law or with this Declaration.
ARTICLE IV
Advisor
4.1 Employment of Advisor. The Trustees are responsible for the general
policies of the Trust and for such general supervision of the business of the
Trust conducted by all officers, agents, employees, advisors, managers, or
independent contractors of the Trust as may be necessary to insure that such
business conforms to the provisions of this Declaration. However, the Trustees
are not and shall not be required personally to conduct the business of the
Trust and, consistent with their ultimate responsibility as stated above, the
Trustees shall have the power to appoint, employ, or contract with any Person
(including one or more of themselves, or any Affiliate of any of them) as the
Trustees may deem necessary or proper for the transaction of the business of the
Trust. The Trustees may therefore employ or contract with such Person (herein
referred to as the "Advisor"), and the Trustees may grant or delegate such
authority to the Advisor as the Trustees may in their sole discretion deem
necessary or desirable, without regard to whether such authority is normally
granted or delegated by Trustees.
The Trustees shall have the power to determine the terms and compensation
of the Advisor or any other Person whom they may employ or with whom they may
contract. The Trustees may exercise broad or other discretion in allowing the
Advisor to administer and regulate the operations of the Trust, to act as agent
for the Trust, to execute documents on behalf of the Trustees, and to make
executive decisions which conform to general policies and general principles
previously established by the Trustees.
4.2 Term. The Trustees shall enter into a contract with the Advisor
("Advisory Agreement") which shall provide for an initial term of three years
and for the automatic annual extension thereafter. The Advisory Agreement may be
terminated, without penalty upon no less than 60 days' written notice of the
Advisor or by vote of a majority of the Trustees upon a Termination Event (as
defined in the Advisory Agreement) or by Shareholders voting as set forth in
Section 6.2.
4.3 Independence of Trustees and Members of Executive Committee. A minimum
of the greater of (i) 33 1/3% of the total number of Trustees and (ii) three (3)
members of the Executive Committee and the Board of Trustees shall be Persons
who are not Affiliates of the Advisor or Starwood Capital Group, L.L.C.;
provided, however, that if at any time the number of Trustees or members of the
Executive Committee who are not Affiliates of such Person becomes less than the
minimum number set forth above, whether because of the death, resignation,
removal, or change in affiliation of one or more Trustees or members of the
Executive Committee or otherwise, then such requirement shall not be applicable
for a period of 90 days of such event occurring, during which period the
continuing Trustees or Trustee then in office shall appoint, pursuant to Section
2.4, a sufficient number of other individuals as Trustees or as members of the
Executive Committee so that again a minimum of the greater of (i) 33 1/3% of the
total number of Trustees and (ii) three (3) members of the Board of Trustees and
the Executive Committee then in office are not Affiliates of such Person. The
Trustees shall at all times endeavor to comply with the requirement of this
Section 4.3 as to independence, but failure so to comply with such requirement
shall not affect the validity or effectiveness of any action of the Trustees or
of the Executive Committee.
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4.4 Other Activities of Advisor. The Advisor shall not be required to
administer the Trust as its sole and exclusive function and may have other
business interests and may engage in other activities in addition to those
relating to the Trust which may be in direct competition with the Trust,
including acting as a real estate or loan broker, acting as a general partner or
manager, and rendering of advice or services of any kind to any other Person
(including, but not limited to, Affiliates of the Advisor). The Trustees may
request the Advisor and/or its Affiliates to engage in certain other activities
relating to the Trust's investments, including property management, contracting
for the construction of improvements, and the placement or brokerage of real
property, equity investments in real property, Mortgages, or other financing
arrangements; and the Advisor and/or its Affiliates may act as broker or provide
services requested by sellers, mortgagors, prospective sellers, or prospective
mortgagors to the Trust and may receive brokerage commissions and other
compensation from such sellers, mortgagors, prospective sellers, and prospective
mortgagors in addition to compensation paid to the Advisor by the Trust.
The Advisor shall be required to use its best efforts to present a
continuing and suitable investment program to the Trust which is consistent with
the investment policies and objectives of the Trust, but neither the Advisor nor
any Affiliate of the Advisor shall be obligated to present any particular
investment opportunity to the Trust even if such opportunity is of a character
which, if presented to the Trust, could be taken by the Trust, and subject to
the foregoing, each of them shall have the right to take for its own account or
to recommend to others any such particular investment opportunity. The Advisor
shall act on a basis which is fair and reasonable to the Trust and the
Shareholders in selecting from among the various investment opportunities that
come to the Advisor those investment opportunities which it presents to and
approves on behalf of the Trust. So long as there is an Advisor or other Person
performing similar functions, the Trustees shall have no responsibility to
originate investment opportunities for the Trust.
4.5 Limitation on Operating Expenses. The Operating Expenses of the Trust
for any full fiscal year shall not (except as set forth herein) exceed an amount
equal to the greater of (a) 2% of the average net assets of the Trust Estate for
such year or (b) 25% of the Trust's net income for such year, determined in
accordance with generally accepted accounting principles, before deducting any
non-accountable expense allowances, regular and incentive advisory fees,
administrative fees and expenses, and depreciation, depletion, and amortization.
The Trustees shall limit such expenses to amounts that do not exceed such
limitations unless a majority of the Trustees who are not Affiliates of the
Advisor determine that based upon such factors as they deem sufficient, a higher
level of expenses is justified. Each contract made with the Advisor under this
Article IV shall specifically provide that in the event such Trustees determine
that such excess expenses are not justified, the Advisor shall refund to the
Trust promptly after the end of any such year the amount, if any, by which the
Operating Expenses so exceed said amount; provided, that (i) the maximum
liability of the Advisor for such excess in any year shall be limited to the
amount of the Non- Accountable Expense Allowance and the Administration Fee
received by the Advisor during such year as defined and provided for in the
Advisory Agreement and (ii) to the extent that the Operating Expenses for any
subsequent fiscal year are less than the greater of clauses (a) or (b) above,
the Trust shall reimburse the Advisor the amount(s) it previously refunded to
the Trust pursuant to this Section 4.5.
ARTICLE V
Investment Policy
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5.1 General Statement of Policy. While the Trustees are authorized,
pursuant to Article III, to invest the Trust Estate in a wide variety of
investments, it is the present intention of the Trust that it shall be the
principal investment objective and policy of the Trust for the Trustees to
invest the Trust Estate in the Diversified Portfolio.
Investments of the Trust may be made in various combinations and may
involve participations with other Persons, including Affiliates of the Advisor
and/or Trustees. Such investments may incorporate a variety of real property
equity and financing techniques, including, without limitation, partnerships,
joint ventures, purchase and leasebacks, land purchase-leases, net lease
financings, purchase and installment salebacks, and Mortgages.
The general purpose of the Trust is to seek real estate investment trust
income as defined in the REIT Provisions of the Code consistent with the
investment objective and policy of the Trust as set forth above. The Trustees
intend to make investments in such a manner as to comply with the requirements
of the REIT Provisions of the Code with respect to the composition of the
Trust's investments and the derivation of its income; provided, however, that no
Trustee, director, officer, employee, or agent of the Trust or the Advisor shall
be liable to any Person, including any Shareholder, for any act or omission
resulting in the loss of tax benefits, or in the incurrence of tax detriments,
under the Code or for the Trust not being treated for tax purposes as a "real
estate investment trust" under the REIT Provisions of the Code. Subject to
Section 5.3 hereof and subject to such restrictions as may be necessary to
qualify the Trust as a "real estate investment trust" as defined in the REIT
Provisions of the Code, the Trustees may alter the above-declared investment
policy in light of changes in economic circumstances and other relevant factors,
and the methods of implementing the Trust's investment policies may change, in
the discretion of the Trustees as economic and other conditions change.
5.2 Other Permissible Investments. To the extent that the Trust has assets
not invested in accordance with Section 5.1, the Trustees may employ such assets
by investing them in:
(a) Obligations of, or guaranteed or insured by, the United States
Government or any agency or political subdivision thereof;
(b) Obligations of, or guarantees by, any state, territory, or
possession of the United States of America or any agency or political
subdivision thereof;
(c) Evidences of deposits in, or obligations of, banking institutions,
state and federal savings and loan associations, and savings institutions;
(d) Real and personal property and interests therein; and
(e) Other Securities, liquid short-term investments, and property.
5.3 Prohibited Investments and Activities. The Trustees shall not engage in
any of the following investment practices or activities:
(a) Invest in commodities, foreign currencies, or bullion except in
connection with investments in other property;
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(b) Engage in any material trading activities with respect to any of
the assets of the Trust Estate;
(c) Issue "redeemable securities" as defined in Section 2(a)(32) of
the Investment Company Act of 1940, as amended;
(d) Engage in the underwriting or public distribution of Securities
issued by others; and
(e) Purchase any property from or sell any property to the Advisor,
nor shall the Trust lend any funds to the Advisor.
5.4 Obligor's Default. Notwithstanding any provision in any Article of this
Declaration, when an obligor to the Trust is in default under the terms of any
obligation (including a Trust Loan) to the Trust, the Trustees or the Advisor
shall have the power to pursue any remedies permitted by law which in their sole
judgment are in the interest of the Trust, and the Trustees or the Advisor shall
have the power to receive and hold any investment and to enter into any
commitment or obligation on behalf of the Trust in connection with or in pursuit
of such remedies which, in the judgment of the Trustees or the Advisor, is
necessary or desirable for the purpose of acquiring property, disposing of
property acquired in the pursuit of such remedies or the preservation of its
investment.
ARTICLE VI
The Shares and Shareholders
6.1 Shares. The units into which the beneficial interest in the Trust will
be divided shall be designated as Shares, which Shares shall initially be of two
classes, Class A Shares and Class B Shares. The Class A Shares shall have a par
value of $1.00 per Share, and the Class B Shares shall have a par value of $.01
per Share. The certificates evidencing the Shares shall be in such form and
signed (manually or by facsimile) on behalf of the Trust in such manner as the
Trustees may from time to time prescribe or as may be prescribed in the
Trustees' Regulations. The certificates shall be negotiable and title thereto
and to the Shares represented thereby shall be transferred by assignment and
delivery thereof to the same extent and in all respects as a share certificate
of a California corporation. There shall be no limit upon the number or classes
of Shares to be issued. The Shares may be issued for such consideration as the
Trustees shall determine or by way of share dividend or share split in the
discretion of the Trustees. Shares reacquired by the Trust shall no longer be
deemed outstanding and shall have no voting or other rights unless and until
reissued. Shares acquired by the Trust may be canceled and restored to the
status of authorized and unissued Shares by action of the Trustees. All Shares
shall be fully paid and non-assessable by or on behalf of the Trust upon receipt
of full consideration for which they have been issued or without additional
consideration if issued by way of share dividend or share split. The Shares
shall not entitle the holder to preference, pre-emptive, appraisal, conversion,
or exchange rights of any kind, except as provided in Section 6.14.
Upon termination of the Offering, the Trustees shall issue for par a
sufficient number of Class B Shares to the Advisor and/or its nominee(s) such
that the total number of outstanding Class B Shares shall equal one-half of the
total number of outstanding Class A Shares. In order to maintain such proportion
between Class A Shares and Class B Shares, the Trustees are hereby required to
issue additional Class B Shares for par in like proportion on a pro rata basis
to all holders of Class B Shares based on the number of Class B Shares held by
such holder on the date of issuance of the Class A Shares requiring the issuance
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of the Class B Shares to the extent that (a) additional Class A Shares are
issued by the Trust (provided that if and to the extent such issuance is subject
to the approval of the American Stock Exchange, Inc. or such other exchange or
market on which the Class A Shares or other securities of the Trust are traded,
then such approval shall be obtained), and (b) the Class A Shares are subject to
any stock dividend, stock split, or other recapitalization affecting the number
of Class A Shares outstanding. The additional Class B Shares shall be issued
within 60 days of the issuance of the Class A Shares and the purchase price may
be paid in cash or by delivery of a promissory note. For the purposes of
determining the total number of Class B Shares issued and outstanding following
the termination of the Offering and issuance of Class B Shares pursuant to this
Section 6.1 as required in Sections 6.6(a) and 6.14, all additional Class B
Shares issued pursuant to this paragraph of Section 6.1 shall be deemed to be
issued and outstanding following termination of the Offering.
6.2 Voting Rights. The Shareholders shall be entitled to vote only upon the
following matters:
(a) Election of Trustees. Trustees shall be elected in accordance with
Section 2.1 at the annual meeting of the Shareholders to be held at such
time and place as the Trustees' Regulations shall prescribe. In any
election of Trustees, the Class A Shareholders and the Class B Shareholders
shall vote together as a single class with each Class A Share and Class B
Share held of record entitled to one vote in person or by proxy.
Any vacancy in the office of Trustees may be filled by a vote of the
Class A Shareholders and the Class B Shareholders voting together as a
single class with each Share held of record entitled to one vote in person
or by proxy, or, in the absence of any such Shareholder vote, such vacancy
may be filled by the vote of the remaining Trustees. If the number of
Trustees is increased in accordance with this Declaration, the Trustees'
Regulations, or otherwise, any vacancy so created may be filled by the
existing Trustees.
(b) Removal of Trustees. A Trustee may be removed for cause (defined
as willful violations of this Declaration or the Trustees' Regulations
which violations are materially against the interests of the Shareholders
or gross negligence in the performance of his duties) by majority vote or
written consent of the Shareholders with the Class A Shareholders and the
Class B Shareholders voting together as a single class with each Share held
of record entitled to one vote in person or by proxy. Any vacancy created
by the removal of a Trustee shall be filled as provided in Section 6.2(a).
(c) Termination of Advisory Agreement. The Advisory Agreement may be
terminated to the extent provided in Section 4.2 upon approval by vote or
written consent of Shareholders holding two-thirds of the Class A Shares
and the Class B Shares voting together as a single class with each Share
held of record entitled to one vote in person or by proxy.
(d) Termination of the Trust. The Trust may be terminated at a meeting
of the Shareholders, specially called for such purpose, upon a vote by the
Shareholders holding 66-2/3% of the Class A Shares and the Class B Shares
voting together as a single class with each Share of record entitled to one
vote in person or by proxy. A merger of the Trust with and into another
entity is not a termination of the Trust if the Trust is the surviving
entity or if the purpose of the merger is primarily to change the domicile
of the Trust. Further, a change of the Trust's form from a business trust
to a corporation is not a termination of the Trust.
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(e) Amendments to the Declaration of Trust. Except as set forth in the
next sentence or Section 3.2(d) or 8.3, this Declaration of Trust can be
amended upon approval of a majority vote of the Shareholders with the Class
A Shareholders and the Class B Shareholders voting together as a single
class with each Share held of record entitled to cast one vote in person or
by proxy. Notwithstanding anything in this Declaration of Trust to the
contrary, wherever any provision of this Declaration sets forth a specific
percentage of the Shares outstanding and entitled to vote which is required
for approval or ratification of any action upon which the vote of the
Shareholders is required or may be obtained, such provision can only be
amended with the approval of Shareholders holding the specific percentage
of Shares outstanding and entitled to vote which is set forth in such
provision.
(f) Sales of Assets. The Trust may sell, transfer or otherwise dispose
of all or substantially all of its assets, upon a vote by the Shareholders
holding two-thirds of the Class A Shares and the Class B Shares voting
together as a single class with each Share of record entitled to one vote
in person or by proxy.
(g) Other Matters. All other matters to be voted on, consented to, or
ratified by the Shareholders shall be passed, consented to, or ratified by
a majority vote of the Shareholders with the Class A Shareholders and the
Class B Shareholders voting together as a single class with each Share held
of record entitled to cast one vote in person or by proxy.
Notwithstanding anything in this Article VI to the contrary, at all times
that there are no Class A Shares outstanding, the Class B Shareholders shall
have exclusive voting power on all matters upon which Shareholders are entitled
to vote pursuant to this Declaration. Wherever any provision of this Declaration
sets forth a specific percentage of the Shares outstanding and entitled to vote
which is required for approval or ratification of any action upon which the vote
of the Shareholders is required or may be obtained, such provision shall mean
such specified percentage of the votes entitled to be cast by holders of all
Shares then outstanding and entitled to vote on such action.
6.3 Legal Ownership of Trust Estate. The legal ownership of the Trust
Estate and the right to conduct the business of the Trust are vested exclusively
in the Trustees, and the Shareholders shall have no interest therein other than
beneficial interest in the Trust conferred by their Shares issued hereunder, and
they shall have no right to compel any partition, division, dividend, or
distribution of the Trust or any of the Trust Estate.
6.4 Shares Deemed Personal Property. The Shares shall be personal property
and shall confer upon the holders thereof only the interest and rights
specifically set forth in this Declaration. The death, insolvency, or incapacity
of a Shareholder shall not dissolve or terminate the Trust or affect its
continuity nor give his legal representative any rights whatsoever, whether
against or in respect of other Shareholders, the Trustees, or the Trust Estate
or otherwise, except the sole right to demand and, subject to the provisions of
this Declaration, the Trustees' Regulations, and any requirements of law, to
receive a new certificate for Shares registered in the name of such legal
representative, in exchange for, and upon delivery pursuant to Section 6.5 of,
the certificate held by such Shareholder.
6.5 Share Record; Issuance and Transferability of Shares. Records shall be
kept by or on behalf of and under the direction of the Trustees, which shall
contain the names and addresses of the Shareholders, the number of Shares held
by them respectively, and the numbers of the certificates representing the
Shares, and in which there shall be recorded all transfers of Shares.
Certificates shall be issued, listed, and
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transferred in accordance with the Trustees' Regulations. The Persons in whose
names certificates are registered on the records of the Trust shall be deemed
the absolute owners of the Shares represented thereby for all purposes of this
Trust; but nothing herein shall be deemed to preclude the Trustees or officers,
or their agents or representatives, from inquiring as to the actual ownership of
Shares. Until a transfer is duly effected on the records of the Trust, the
Trustees shall not be affected by any notice of such transfer, either actual or
constructive. The receipt by the Person in whose name any Shares are registered
on the records of the Trust or of the duly authorized agent of such Person, or
if such Shares are so registered in the names of more than one Person, the
receipt of any one of such Persons, or of the duly authorized agent of any of
such Persons, shall be a sufficient discharge for all dividends or distributions
payable or deliverable in respect of such Shares and from all liability to see
to the application thereof.
Subject to the provisions of Section 6.13, Shares shall be transferable on
the records of the Trust only by the record holder thereof or by his agent
thereunto duly authorized in writing upon delivery to the Trustees or a transfer
agent of the certificate or certificates therefor, properly endorsed or
accompanied by duly executed instruments of transfer and accompanied by all
necessary documentary stamps, together with such evidence of the genuineness of
each such endorsement, execution, or authorization and of other matters as may
reasonably be required by the Trustees or such transfer agent. Upon such
delivery, the transfer shall be recorded in the records of the Trust and a new
certificate for the Shares so transferred shall be issued to the transferee and
in case of transfer of only a part of the Shares represented by an certificate,
a new certificate for the balance shall be issued to the transferor. Any Person
becoming entitled to any Shares in consequences of the death of a Shareholder or
otherwise by operation of law shall be recorded as the holder of such Shares and
shall receive a new certificate therefor, but only upon delivery to the Trustees
or a transfer agent of instruments and other evidence required by the Trustees
or the transfer agent to demonstrate such entitlement, the existing certificate
for such Shares, and such necessary releases from applicable governmental
authorities. In case of the loss, mutilation, or destruction of any certificate
for Shares, the Trustees may issue or cause to be issued a replacement
certificate on such terms and subject to such rules and regulations as the
Trustees may from time to time prescribe. Nothing in this Declaration shall
impose upon the Trustees or a transfer agent a duty, or limit their rights, to
inquire into adverse claims.
6.6 Dividends or Distributions to Shareholders. The Trustees may from time
to time declare and pay to Shareholders such dividends or distributions in cash
or other form, out of current or accumulated income, capital, capital gains,
principal, surplus, proceeds from the increase of refinancing of Trust
obligations, or from the Disposition of portions of the Trust Estate or from any
other source as the Trustees in their discretion shall determine. The Trustees
may declare dividends or distributions as far in advance as they shall determine
in their discretion, including the advance declaration of dividends or
distributions with respect to more than one month or other period. Shareholders
shall have no right to any dividend or distribution unless and until the record
date therefor as declared by the Trustees.
(a) Distributions of Net Cash. The Trustees shall endeavor to declare
distributions of Net Cash, which shall be distributed 99% to the Class A
Shareholders and 1% to the Class B Shareholders, in amounts such that the Trust
shall maintain its status as "real estate investment trust" under the Code. To
the extent that Class B Shareholders convert their Class B Shares into Class A
Shares as provided in Section 6.14, the percentage of distributions of Net Cash
to be distributed to the Class B Shareholders, as well as the other
distributions provided for in this Section 6.6, shall be reduced by multiplying
such 1% by a fraction, the numerator of which is the aggregate number of Class B
Shares outstanding as of the record date for any such distribution and the
denominator of which is the aggregate number of Class B Shares issued and
outstanding prior to any such conversion.
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(b) Distributions of Proceeds. Upon any Disposition, the proceeds of
Disposition shall be applied first, to the payment of any selling or refinancing
expenses, fees and commissions, including mortgage brokerage fees, and all other
fees and costs incurred in connection with the Disposition; and second, to the
payment of principal and interest owed in connection with the asset disposed of
immediately prior to the Disposition which is to be repaid in connection with
the Disposition. All proceeds remaining thereafter shall be segregated and not
commingled with the other assets of the Trust except for any amounts thereof
which the Trustees, in their absolute discretion, determine are required for
support of the operations of Trust, or for investment in additional Trust
assets. Any portion of such remaining segregated proceeds in the form of assets
which the Trustees, in their absolute discretion, determine cannot reasonably be
distributed to the Shareholders (including any net interest earned thereon) is
herein called "Non- Distributable Net Proceeds," and any other portion of such
segregated proceeds is herein called "Distributable Net Proceeds."
The Distributable Net Proceeds of any Disposition shall be distributed to
the Shareholders in the same manner as distributions of Net Cash by the Trust.
The Non-Distributable Net Proceeds of any Disposition shall be considered
Distributable Net Proceeds at such time as the Trustees, in their absolute
discretion, determine that the assets comprising such Non-Distributable Net
Proceeds can reasonably be distributed or such assets are transformed into
Distributable Net Proceeds. They shall be distributed to the Shareholders in the
same manner as distributions of Net Cash by the Trust after any such
determination in the same manner as other Distributable Net Proceeds.
(c) Other Distributions. All distributions other than those specifically
provided for in Sections 6.6(a) and (b) may be declared by the Trustees at such
time that they, in their absolute discretion, determine that the Trust has
sufficient cash or other property which is not needed in the operation of the
Trust, and shall be distributed in accordance with the first sentence of Section
6.6(a).
6.7 Transfer Agent, Dividend Disbursing Agent, and Registrar. The Trustees
shall have power to employ one or more transfer agents, dividend disbursing
agents, and registrars and to authorize them on behalf of the Trust to keep
records, to hold and disburse any dividends and distributions, and to have and
to perform in respect of all original issues and transfers of Shares, dividends
and distributions, and reports and communications to Shareholders, the powers
and duties usually had and performed by transfer agents, dividend disbursing
agents, and registrars of a California corporation.
6.8 Shareholders' Meeting. There shall be an annual meeting of the
Shareholders at such time and place as the Trustees' Regulations shall prescribe
at which the Trustees shall be elected and any other proper business may be
conducted. The annual meeting of Shareholders shall be held after delivery to
the Shareholders of the Annual Report (set forth in Section 6. 10) and within
six months after the end of each fiscal year commencing with the fiscal year
starting in 1989. Special meetings of Shareholders may be called by the Managing
Trustee, if any, the Chairman of the Board of Trustees, or at least two of the
other Trustees and shall be called upon the written request of Shareholders
holding not less than 20% of the outstanding Class A Shares or 20% of the
outstanding Class B Shares, entitled to vote in the manner provided in the
Trustees' Regulations. If there shall be no Trustees, the officers of the Trust
shall promptly call a special meeting of the Shareholders for the election of
successor Trustees. Notice of any special meeting shall state the purposes of
the meeting. A majority of the outstanding Class A Shares and a majority of the
outstanding Class B Shares entitled to vote at any meeting represented in person
or by proxy shall constitute a quorum at any such meeting. Whenever Shareholders
are required or permitted to take any action, such action may be taken without a
meeting on written consent setting forth the action so taken,
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signed by a sufficient proportion of the Class A Shareholders and Class B
Shareholders as would be required for a vote at meeting as provided in Section
6.2; provided that solicitation of such consents complies with Rule 706 of the
American Stock Exchange, Inc. as such Rule or its successor is then in effect.
The vote or consent of Shareholders shall not be required for the pledging,
hypothecating, granting security interests in, mortgaging, or encumbering of all
or any of the Trust Estate.
6.9 Proxies. Whenever the vote or consent of Shareholders is required or
permitted under this Declaration, such vote or consent may be given either
directly by the Shareholders or by a proxy in the form prescribed in the
Trustees' Regulations. The Trustees may solicit such proxies from the
Shareholders or any of them in any matter requiring or permitting the
Shareholders' vote or consent.
6.10 Reports to Shareholders. Not later than 120 days after the close of
each full fiscal year of the Trust, the Trustees shall mail a report of the
business and operation of the Trust during such fiscal year to the Shareholders,
which report shall constitute the accounting of the Trustees for such fiscal
year. The report (herein "Annual Report") shall be in such form and have such
content as the Trustees deem proper. The Annual Report shall include a balance
sheet and a statement of income and surplus of the Trust. Such financial
statement shall be accompanied by the report of an independent public accountant
thereon. A manually signed copy of the accountant's report shall be filed with
the Trustees.
6.11 Fixing Record Dates. The Trustees' Regulations may provide for fixing
or, in the absence of such provision, the Trustees may fix, in advance, a date
as the record date for determining the Shareholders entitled to notice of or to
vote at any meeting of the Shareholders or to express consent to any proposal
without a meeting, or for the purpose of determining Shareholders entitled to
receive payment of any dividend or distribution (whether before or after
termination of the Trust) or any Annual Report or other communication from the
Trustees, or for any other purpose. The record date so fixed shall be not less
than ten days nor more than 90 days prior to the date of the meeting or event
for the purpose of which it is fixed.
6.12 Notice to Shareholders. Any notice of meeting or other notice,
communication, or report to any Shareholder shall be deemed duly delivered to
such Shareholder when such notice, communication, or report is deposited, with
postage thereon prepaid, in the United States mail, addressed to such
Shareholder at his address as it appears on the records of the Trust or is
delivered in person to such Shareholder.
6.13 Restriction on Transfer, Acquisition and Redemption of Shares. Article
X contains restrictions on transfer, acquisition and redemptions of Shares.
6.14 Conversion Rights. Subject to the terms and conditions of this Section
6.14, the Class B Shareholders as a group shall at their option be entitled to
convert up to 20% of the total of the Class B Shares, issued and outstanding
following the termination of the Offering and issuance of the Class B Shares
pursuant to Section 6.1, each year commencing with 1990 into fully paid and
non-assessable Class A Shares on the basis of one Class A Share for 49 Class B
Shares. Such conversion rights may be exercised at any time after December 31,
1989, and such rights shall be cumulative for each year thereafter, so that to
the extent that less than 20% of the Class B Shares held of record by a Class B
Shareholder are converted in any year, the percentage of Class B Shares
convertible in the succeeding years shall be increased accordingly. For example,
if only 10% of the total outstanding Class B Shares were converted into Class A
Shares in 1990, up to 30% of such total number of Class B Shares shall be
convertible in 1991, and to the extent that no Class B Shares are converted from
1990 through 1993, 100% of the total outstanding Class B Shares will be
convertible into Class A Shares in 1994 and each year thereafter. After
conversion of the
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Class B Shares into Class A Shares, the rights of the remaining Class B
Shareholders with respect to distributions of Net Cash shall be adjusted as
provided in Section 6.6.
In order to exercise such conversion rights, the Class B Shareholder shall
surrender the certificate or certificates for such Class B Shares at the office
of said transfer agent (or other place as provided by the Trustees), which
certificate or certificates, if the Trustees shall so request, shall be duly
endorsed to the Trust or in blank or accompanied by proper instruments of
transfer to the Trust (such endorsements or instruments of transfer to be in
form satisfactory to the Trust), and shall give written notice to the Trust at
said office that he elects so to convert said Class B Shares in accordance with
the terms of this Section 6.14, and shall state in writing therein the name or
names in which he wishes the certificate or certificates for Class A Shares to
be registered. Every such notice of election to convert shall constitute a
binding contract between the holder of such Class B Shares and the Trust,
whereby the Class B Shareholder shall be deemed to subscribe for the amount of
Class A Shares which he shall be entitled to receive upon such conversion, and,
in satisfaction of such subscription, to deposit the Class B Shares to be
converted and to release the Trust for all liability thereunder, and thereby the
Trust shall be deemed to agree that the surrender of the certificate or
certificates therefor and the extinguishment of liability thereon shall
constitute full payment of such subscription for Class A Shares to be issued
upon such conversion.
The Trust will, as soon as practicable after such deposit of a certificate
or certificates for Class B Shares accompanied by the written notice and the
statement above prescribed, issue and deliver at the office of said transfer
agent (or other place as provided above) to the Person for whose account such
Class B Shares were so surrendered, or to his nominee or nominees, a certificate
or certificates for the number of Class A Shares to which he shall be entitled
as aforesaid. Subject to the provisions of this Section 6.14, such conversion
shall be deemed to have been made as of the date of such surrender of the Class
B Shares to be converted; and the Person or Persons entitled to receive the
Class A Shares issuable upon conversion of such Class B Shares shall be treated
for all purposes as the record holder or holders of such Class A Shares on such
date. Upon conversion of Class B Shares, the Class B Shares so converted shall
be canceled and retired by the Trust.
The issuance of certificates for Class A Shares upon conversion of Class B
Shares shall be made without charge for any stamp or other similar tax in
respect of such issuance; provided, however, that if any such certificate is to
be issued in a name other than that of the holder of the Class B Shares
converted, the Person or Persons requesting the issuance thereof shall pay to
the Trust the amount of any tax which may be payable in respect of any transfer
involved in such issuance or shall establish to the satisfaction of the Trust
that such tax has been paid or that no such tax is due.
The Trust will at all times reserve and keep available, solely for the
purpose of issuance upon conversion of the outstanding shares of Class B Shares,
such number of Class A Shares as shall be issuable upon the conversion of all
such outstanding Class B Shares; provided that nothing contained herein shall be
construed to preclude the Trust from satisfying its obligations in respect of
the conversion of the outstanding Class B Shares by delivery of Class A Shares
which are held in the treasury of the Trust. The Trust covenants that if any
Class A Shares, required to be reserved for purposes of conversion hereunder,
require registration with or approval of any governmental authority under any
federal or state law before such Class A Shares may be issued upon conversion,
the Trust will use its best efforts at its expense to cause such Class A Shares
to be duly registered or approved, as the case may be. The Trust will also at
its expense endeavor to list the Class A Shares required to be delivered upon
conversion prior to such delivery upon each national securities exchange, if
any, upon which the outstanding Class A Shares are listed at the time
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of such delivery. The Trust covenants that all Class A Shares which shall be
issued upon conversion of the Class B Shares, will, upon issue, be fully paid
and non-assessable and not entitled to any preemptive rights.
ARTICLE VII
Liability of Trustees, Shareholders, and
Officers, and Other Matters
7.1 Exculpation of Shareholders, Trustees and Officers. No Shareholder
shall be subject to any personal liability whatsoever to any Person in
connection with Trust Estate or the acts, obligations or affairs of the Trust.
No Trustee or officer of the Trust shall be liable to the Trust or to any
Trustee for any act or omission of any other Trustee, Shareholder, officer, or
agent of the Trust, including the Advisor, or be held to any personal liability
whatsoever in tort, contract, or otherwise in connection with the affairs of
this Trust except only that arising from his own willful violation of the
provisions of this Declaration or of the Trustees' Regulations which violation
is materially against the interests of the Shareholders and results in material
harm to such interests, or gross negligence in the performance of his duties. If
any Shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is
made a party to any suit or proceeding to enforce any such liability of the
Trust, he shall not, on account thereof, be held to any personal liability. The
Trust shall indemnify and hold each Shareholder harmless from and against all
claims and liabilities, to which such Shareholder may become subject by reason
of his being or having been a Shareholder, and shall reimburse such Shareholder
for all legal and other expenses reasonably incurred by him in connection with
any such claim or liability. The rights accruing to a Shareholder under this
Section 7.1 shall not impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained restrict the right of the
Trust to indemnify or reimburse a Shareholder in any appropriate situation even
though not specifically provided herein.
7.2 Express Exculpatory Clauses in Instruments. The Trustees shall cause
any written instrument creating an obligation of the Trust to include a
reference to this Declaration to provide that neither the Shareholders nor the
Trustees nor officers shall be liable thereunder and that the other parties to
such instrument shall look solely to the Trust Estate for the payment of any
claim thereunder or for the performance thereof. However, the omission of such
provision from any such instrument shall not render the Shareholders or any
Trustee or officer liable thereunder.
7.3 Liability and Indemnification of Trustees. The Trustees, officers,
employees, and agents of the Trust, including the Advisor, and their affiliates,
shall not be liable to the Trust or the Shareholders, and the Trust shall
indemnify the Trustees, officers, employees, and agents of the Trust, including
the Advisor, and their Affiliates, against any claim or liability by or to any
Person other than the Trust, in respect of any act or any failure to act so long
as such act or failure to act was performed in a manner determined in good faith
to be within the scope of the Trustees' authority and to be in the best interest
of the Trust, and so long as he, she, or it was not guilty of negligence,
misconduct, or a breach of his fiduciary obligations in such act or failure to
act.
The indemnification authorized by this Section 7.3 shall include payment of
(i) reasonable attorneys' fees or other expenses incurred in settling any such
claim or liability or incurred in any finally adjudicated legal proceeding and
(ii) expenses incurred by the removal of any liens affecting any property of the
Person to be indemnified. Indemnification shall be made from assets of the
Trust, and no Shareholder shall be
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personally liable to any Person to be indemnified. This Section 7.3 shall inure
to the benefit of the Trustees and their Affiliates.
For the purposes of this Section 7.3 only, the term "Affiliates" shall mean
any Person performing services on behalf of the Trust who: (i) directly or
indirectly controls, is controlled by, or is under common control with the
Trustees; or (ii) owns or controls 10% or more of the outstanding voting
securities of the Trustees; or (iii) is an officer, director, partner, or
trustee of the Trustees; or (iv) is any company for which the Trustees act as an
officer, director, partner, or trustee.
7.4 Rights of Trustees and Officers to Own Shares or Other Property and to
Engage in Other Business.
(a) Any Trustee, officer, agent, or employee of the Trust and the Advisor
may acquire, own, hold, and dispose of Securities of the Trust, for his
individual account, and may exercise all rights of a holder of such Securities
to the same extent and in the same manner as if he were not a Trustee, officer,
employee, agent, or the Advisor; have personal business interests and engage in
personal business activities, which interests and activities may include the
acquisition, syndication, holding, management, operation, or disposition, for
his own account or for the account of others, of interests in Mortgages, real
property, or other assets, even if the same compete directly with the actual
business being conducted by the Trust; subject to the provisions of Article IV,
be interested as trustee, officer, director, stockholder, partner, member,
advisor, or employee, or otherwise have a direct or indirect interest in a
Person who may be engaged to render advice or services to the Trust (as the
Advisor or otherwise) and receive compensation from such Person and any
Affiliate of such Person as well as compensation as Trustee, officer, agent, or
employee of the Trust; and, in a capacity of trustee, officer, director,
stockholder, partner, member, advisor, or employee of any Person, have business
interests and engage in business activities in addition to those relating to the
Trust, which interests and activities may include the acquisition, syndication,
holding, management, operation, or disposition, for his own account or for the
account of others, of interests in Mortgages, real property, or other assets, or
interests in Persons engaged in the mortgage or real estate business, which
interests or activities may be in direct competition with the Trust; and each
Trustee, officer, employee, and agent of the Trust shall be free of any
obligation to present to the Trust any investment opportunity which comes to him
in any capacity other than solely as Trustee, officer, employee, or agent of the
Trust, even if such opportunity is of a character which, if presented to the
Trust, could be taken by the Trust; and none of the foregoing interests or
activities (singly, or in combination) shall be deemed to conflict with or be
inconsistent with his powers, duties, and responsibilities as Trustee, officer,
agent or employee of the Trust.
(b) Nothing in this Declaration shall be deemed to;
(i) Prohibit a Trustee, officer, employee, or agent of the Trust from
acquiring or owning any amount or percentage of any class of outstanding
Securities of any publicly-owned Person whose shares are listed or traded
on a national securities exchange or in the over-the-counter market;
(ii) Prohibit a Trustee, officer, employee, or agent of the Trust who
is also engaged in rendering legal, accounting, financial advisory, or
other services from rendering such services to any Person or from acting as
trustee, director, member, advisor, officer, or representative of any such
Person to whom he renders or has rendered such services;
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(iii) Require a Trustee, officer, employee, or agent of the Trust to
dispose of a personal business interest acquired, or to discontinue
personal business activities begun, whether acquired or begun before or
when he was a Trustee, officer, employee, or agent, regardless of whether
such interests or activities compete with the business of the Trust; or
(iv) Prohibit a Trustee, officer, employee, or agent of the Trust from
having personal business interests or engaging in personal business
activities regardless of whether;
(A) The Trustees (by vote or consent sufficient for such purpose
including the vote of the interested Trustee(s)) have decided that
such interests or activities should or should not be acquired or
engaged in by the Trust; or
(B) The Trust could have acquired such interests or engaged in
such activities without endangering the qualification of the Trust as
a real estate investment trust under the REIT Provisions of the Code
or without violating any provision of this Declaration or applicable
law, even though any such Person, interests, or activities are or
could be in competition, in any way, with the Trust, or any such
Person is in the same or similar business as the Trust.
7.5 Transactions Between the Trust and Certain Affiliates. Except as
prohibited by this Declaration and in the absence of fraud, a contract, act, or
other transaction between the Trust and any other Person, or in which the Trust
is interested, shall be valid even though (i) one or more of the Trustees,
officers of the Trust, or the Advisor are Affiliates of such other Person, or
(ii) one or more of the Trustees, officers, or the Advisor, individually or
jointly with others, is a party or are parties to or directly or indirectly
interested in, or connected with, such contract, act, or transaction. Neither
any such Trustee, officer, nor the Advisor shall be under any disability from or
have any liability as a result of entering into any such contract, act, or
transaction, provided that (a) such interest or connection is disclosed or known
to the Trustees and the Trustees authorized such contract, act, or other
transaction by vote sufficient for such purpose including the vote of the
interested Trustee(s), or (b) such interest or connection is disclosed or known
to the Shareholders, and such contract, act, or transaction is approved or
subsequently ratified by the Shareholders, or (c) such contract, act, or
transaction is fair and reasonable as to the Trust at the time it is authorized
by the Trustees or by the Shareholders.
Notwithstanding any other provision of this Declaration of Trust,
Affiliates of the Advisor may receive compensation from, and/or a share of the
proceeds received by, borrowers in connection with Trust Loans.
7.6 Restriction of Duties and Liabilities. To the extent that the nature of
this Trust (that is, a business trust) will permit, the duties and liabilities
of Shareholders, Trustees, and officers shall in no event be greater than the
duties and liabilities of shareholders, directors, and officers of a California
corporation. The Shareholders, Trustees, and officers shall in no event have any
greater duties or liabilities than those imposed by applicable law as shall be
in effect from time to time.
7.7 Persons Dealing with Trustees or Officers. Any act of the Trustees or
officers purporting to be done in their capacity as such, shall, as to any
Persons dealing with such Trustees or officers, be conclusively deemed to be
within the purpose of this Trust and within the powers of the Trustees and
officers. No Person dealing with the Trustees or any of them, or with the
authorized officers, agents, or representatives of the Trust, shall be bound to
see to the application of any funds or property passing into
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their hands or control. The receipt of the Trustees or any of them, or of
authorized officers, agents, or representatives of the Trust, for moneys or
other consideration, shall be binding upon the Trust.
7.8 Reliance. The Trustees and officers may consult with counsel (which may
be a firm in which one or more of the Trustees or officers is or are members)
and the advice or opinion of such counsel shall be full and complete personal
protection to all of the Trustees and officers in respect of any action taken or
suffered by them in good faith and in reliance on or in accordance with such
advice or opinion. In discharging their duties, Trustees and officers, when
acting in good faith, may rely upon financial statements of the Trust
represented to them to be correct by the Managing Trustee or the Chairman of the
Board of Trustees, if any, or the officer of the Trust having charge of its
books of account, or stated in a written report by an independent public
accountant fairly to present the financial position of the Trust. The Trustees
may rely, and shall be personally protected in acting, upon any instrument or
other document believed by them to be genuine.
7.9 Trust Only. It is the intention of the Trustees to create only the
relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration of Trust shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or members of
a joint stock association.
ARTICLE VIII
Duration, Termination, Amendment,
and Qualification of Trust
8.1 Duration of Trust. The Trust's existence shall be perpetual. In the
event that it shall be finally determined by a court of competent jurisdiction
in any state in which the Trust shall own property that the holding of such
property is or shall be in contravention of a law, whether statutory or
otherwise, similar to the common law "rule against perpetuities," then with
respect to the property affected thereby, unless this Trust shall be earlier
terminated as provided in this Section 8, the Trust shall continue only until
the expiration of 20 years after the death of the last survivor of the following
named persons:
<TABLE>
<CAPTION>
Name Date of Birth Parents Residence
- ---- ------------- ------- ---------
<S> <C> <C> <C>
Adam G. September 10, 1985 Mr. and Mrs. 348 South Citrus
Edwards Steven Edwards Los Angeles, CA 90036
Lindsey M. September 27, 1986 Mr. and Mrs. 5701 West 76th Street
Nicholls Donald G. Nicholls Los Angeles, CA 91316
Daniel L. December 11, 1987 Mr. and Mrs. 4745 Yarmouth Avenue
Reuben Timothy D. Reuben Encino, CA 91316
Lucas J. July 15, 1986 Mr. and Mrs. 9914 Garden Grove
Sexton Phillip J. Sexton Northridge, CA 91325
Taylor C. January 13, 1987 Mr. and Mrs. 2816 Hilary Court
Smith Michael F. Smith Thousand Oaks, CA 91362
</TABLE>
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<PAGE>
8.2 Termination of Trust.
(a) Upon termination of the Trust:
(i) The Trust shall carry on no business except for the purpose
of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust and all of the powers of the Trustees under this Declaration
shall continue until the affairs of the Trust shall have been wound
up, including the power to fulfill or discharge the contracts of the
Trust, collect its assets, sell, convey, assign, exchange, transfer,
or otherwise dispose of all or any part of the remaining Trust Estate
to one or more Persons at a public or private sale for consideration
which may consist in whole or in part of cash, securities, or other
property of any kind, discharge or pay its liabilities, and do all
other acts appropriate to liquidate its business.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities, and
refunding agreements, as they deem necessary for their protection, the
Trustees may distribute the remaining Trust Estate, in cash or in kind
or partly each, among the Shareholders according to their respective
rights and the Advisor pursuant to the Advisory Agreement.
(b) After termination of the Trust and distribution to the
Shareholders as herein provided, the Trustees shall execute and lodge among
the records of the Trust an instrument in writing setting forth the fact of
such termination, and the Trustees shall thereupon be discharged from all
further liabilities and duties hereunder, and the rights and interests of
all Shareholders shall thereupon cease.
8.3 Amendment Procedure.
(a) Prior to the issuance of any Shares, this Declaration may be amended by
a majority of the Trustees. Hereafter, this Declaration may be amended by
Shareholders voting as provided in Section 6.2. The Trustees may also amend this
Declaration without the vote or consent of Shareholders if they deem it
necessary to (i) conform this Declaration to the requirements of the REIT
Provisions of the Code or to other applicable federal laws or regulations, but
the Trustees shall not be liable for failing so to do, (ii) clarify, supplement,
correct, or otherwise revise any provision of this Declaration as provided in
Section 9.6(a) or (iii) effect a change in the domicile of the Trust or to
change the form of the Trust to a corporation through a merger, incorporation,
sale of assets or similar transaction; provided that the Trustees have
determined in the case of subclause (iii) that such amendment does not
materially and adversely affect the Shareholders.
(b) No amendment may be made, under Section 8.3(a) above, which would
change any rights with respect to any outstanding Shares of the Trust by
diminishing or eliminating any voting rights pertaining thereto, except with the
vote or consent of the holders of two-thirds of the outstanding class of Shares
affected and entitled to vote thereon.
(c) A certification in recordable form signed by a majority of the Trustees
setting forth an amendment and reciting that it was duly adopted by the
Shareholders or by the Trustees as aforesaid or
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a copy of the Declaration, as amended, in recordable form, and executed by a
majority of the Trustees, shall be conclusive evidence of such amendment when
lodged among the records of the Trust.
8.4 Qualification Under the REIT Provisions of the Code. It is intended
that the Trust shall qualify as a "real estate investment trust" under the REIT
Provisions of the Code during such period as the Trustees shall deem it
advisable to so qualify the Trust.
ARTICLE IX
Miscellaneous
9.1 Applicable Law. This Declaration is executed and acknowledged by the
Trustees in the State of California and with reference to the statutes and laws
thereof, and the rights of all parties and the construction and effect of every
provision hereof shall be subject to and construed according to statutes and
laws of said State.
9.2 Index and Headings for Reference Only; Gender. The table of contents
and heading preceding the text, articles, and sections hereof have been inserted
for convenience and reference only and shall not be construed to affect the
meaning, construction, or effect of this Declaration. Whenever the context so
requires references to the masculine gender shall include the female and neuter
genders and vice versa, and singular references shall include the plural form.
9.3 Successors in Interest. This Declaration and the Trustees' Regulations
shall be binding upon and inure to the benefit of the undersigned Trustees and
their successors, assigns, heirs, distributees, and legal representatives, and
every Shareholder and his successors, assigns, heirs, distributees, and legal
representatives.
9.4 Inspections of Records. Trust records shall be available for inspection
by Shareholders at the same time and in the same manner and to the extent that
comparable records of a California corporation would be available for inspection
by stockholders under the laws of the State of California. Except as
specifically provided for in this Declaration, Shareholders shall have no
greater right than stockholders of a California corporation to require financial
or other information from the Trust, Trustees, or officers.
9.5 Counterparts. This Declaration may be simultaneously executed in
several counterparts, each of which when so executed shall be deemed to be an
original, and such counterparts together shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
9.6 Correction of Provisions of Declaration.
(a) The provisions of this Declaration are severable, and if the Trustees
shall determine, with the advice of counsel, that any one or more of such
provisions are in conflict with the REIT Provisions of the Code, or with other
applicable federal or state laws and regulations, or that any provision of this
Declaration should be clarified or supplemented, or contains a mistake,
ambiguity, or inconsistency with any other provision of this Declaration, or
should otherwise be revised, they shall, without the consent or vote of the
Shareholders, immediately amend this Declaration to delete such inconsistency,
clarify or supplement such provision, and/or correct such mistake or ambiguity;
provided, however, that such determination by the Trustees shall not affect or
impair any of the remaining provisions of this Declaration
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<PAGE>
or render invalid or improper any action taken or omitted (including, but not
limited to, the election of Trustees) prior to such determination. A
certification in recordable form signed by a majority of the Trustees setting
forth any such determination and reciting that it was duly adopted by the
Trustees, or a copy of this Declaration, with the conflicting provisions amended
or removed pursuant to such a determination, in recordable form, signed by a
majority of the Trustees, shall be conclusive evidence of such determination
when lodged in the records of the Trust. The Trustees shall not be liable for
failure to make any determination under this Section 9.6(a). Nothing in this
Section 9.6(a) shall in any way limit or affect the right of the Trustees to
amend this Declaration as provided in Section 8.3(a).
(b) If any provisions of this Declaration shall be held invalid or
unenforceable, such invalidity or unenforceability shall attach only to such
provisions and shall not in any manner affect or render invalid or unenforceable
any other provision of this Declaration, and this Declaration shall be carried
out as if any such invalid or unenforceable provision were not contained herein.
9.7 Certifications. The following certifications shall be final and
conclusive as to any Person dealing with the Trust when made in writing by the
Secretary of the Trust or by any Trustee:
(a) A certification as to the number and identity of Persons holding
office as Trustees or officers at any particular time;
(b) A certification that a copy of this Declaration or of the
Trustees' Regulations is a true and correct copy thereof as then in force;
and
(c) A certification as to any actions by Trustees, officers, or the
Advisor, other than the above.
9.8 Recording and Filing. A copy of this Declaration and any amendments
shall be recorded in the office of the County Recorder of Los Angeles County,
California, and in the office of the County Recorder or its equivalent in every
county where the Trust is or Trustees are the record owner of real property,
provided that provision is made in such county for such recording and further
provided that this Declaration is accepted for recording. This Declaration and
any amendments may also be filed or recorded as in such other places the
Trustees deem appropriate.
ARTICLE X
Restriction on Transfer, Acquisition
and Redemption of Shares
10.1 Definitions. For purposes of this Article X, the following terms shall
have the following meanings:
(a) "Beneficial Ownership" shall mean ownership of Shares by a Person
who would be treated as an owner of such Shares either directly or
constructively through the application of Section 544 of the Code, as
modified by Section 856(h) of the Code. The terms "Beneficial Owner,"
"Beneficially Owns," "Beneficially Own" and "Beneficially Owned" shall have
correlative meanings.
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(b) "Charitable Beneficiary" shall mean an organization or
organizations described in Sections 170(b)(1)(A) and 170(c) of the Code and
identified by the Board of Trustees as the beneficiary or beneficiaries of
the Excess Share Trust.
(c) "Debt" shall mean indebtedness of the Trust.
(d) "Excess Shares" shall have the meaning given to it in paragraph
(a) of Section 10.3.
(e) "Excess Share Trust" shall mean the trust created pursuant to
Section 10.15.
(f) "Excess Share Trustee" shall mean a person, who shall be
unaffiliated with the Trust, any Purported Beneficial Transferee and any
Purported Record Transferee, identified by the Board of Trustees as the
trustee of the Excess Share Trust.
(g) "Existing Holder" shall mean (i) any Person who is, or would be
upon the exchange of Debt or any security of the Trust, the Beneficial
Owner of Shares in excess of the Ownership Limit both upon and immediately
after ____________ ___, 1998 (the "Restriction Commencement Date"), so long
as, but only so long as, such Person Beneficially Owns or would, upon
exchange of Debt or any security of the Trust, Beneficially Own Shares in
excess of the Ownership Limit and (ii) any Person to whom an Existing
Holder Transfers, subject to the limitations provided in this Article X,
Beneficial Ownership of Shares causing such transferee to Beneficially Own
Shares in excess of the Ownership Limit.
(h) "Existing Holder Limit" (i) for any Existing Holder who is an
Existing Holder by virtue of clause (i) of the definition thereof, shall
mean, initially, the percentage of the outstanding Class A or Class B
Shares Beneficially Owned (with such percentage for each class determined
separately) or which would be Beneficially Owned upon the exchange of Debt
or any security of the Trust, by such Existing Holder upon and immediately
after the Restriction Commencement Date, and, after any adjustment pursuant
to Section 10.9, shall mean such percentage of the outstanding Shares as so
adjusted, and (ii) for any Existing Holder who becomes an Existing Holder
by virtue of clause (ii) of the definition thereof, shall mean, initially,
the percentage of the outstanding Class A or Class B Shares Beneficially
Owned (with such percentage for each class determined separately) by such
Existing Holder at the time that such Existing Holder becomes an Existing
Holder, but in no event shall such percentage be greater than the lesser of
(i) the Existing Holder Limit for the Existing Holder who Transferred
Beneficial Ownership of such Shares or, in the case of more than one
transferor, in no event shall such percentage be greater than the smallest
Existing Holder Limit of any transferring Existing Holder, or (ii) the
Ownership Limit if the Existing Holder is a person other than a trust
qualified under Section 401(a) of the Code and exempt from tax under
Section 501(a) of the Code, and, after any adjustment pursuant to Section
10.9, shall mean such percentage of the outstanding Shares as so adjusted.
From the Restriction Commencement Date until the Restriction Termination
Date, the Trust shall maintain and, upon request, make available to each
Existing Holder, a schedule which sets forth the then current Existing
Holder Limit for each Existing Holder.
(i) "Market Price" shall mean the last reported sales price reported
on the American Stock Exchange for a particular class of Shares on the
trading day immediately preceding the relevant date, or if not then traded
on the American Stock Exchange, the last reported sales price for such
class of Shares on the trading day immediately preceding the relevant date
as reported on any exchange or quotation system over or through which such
class of Shares may be traded, or if not then traded over or through any
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<PAGE>
exchange or quotation system, then the market price of such class of Shares
on the relevant date as determined in good faith by the Board of Trustees.
(j) "Ownership Limit" shall initially mean 9.8%, in number of Class A
Shares, or value of the aggregate outstanding Shares of the Trust, and
after any adjustment as set forth in Section 10.10, shall mean such
percentage in number of Class A Shares, or value of the aggregate
outstanding Shares, as so adjusted. Such number and/or value shall be
determined by the Board of Trustees in good faith, which determination
shall be conclusive for all purposes hereof. For purposes of this Article
X, the value of the Class B shares shall be determined by the Board of
Trustees in good faith at least quarterly at the beginning of each calendar
quarter and such determination shall be conclusive for all purposes hereof
until the earlier of (i) the beginning of the next calendar quarter or (ii)
the next determination of the value of Class B shares by the Board of
Trustees.
(k) "Person" shall mean an individual, corporation, partnership,
estate, trust (including a trust qualified under Section 401(a) or
501(c)(17) of the Code), portion of a trust permanently set aside for or to
be used exclusively for the purposes described in Section 642(c) of the
Code, association, private foundation within the meaning of Section 509(a)
of the Code, joint stock company or other entity.
(l) "Purported Beneficial Transferee" shall mean, with respect to any
purported Transfer which results in Excess Shares, as defined below in
Section 10.3, the beneficial holder of the Shares, if such Transfer had
been valid under Section 10.2.
(m) "Purported Record Transferee" shall mean, with respect to any
purported Transfer which results in Excess Shares, as defined below in
Section 10.3, the record holder of the Shares, if such Transfer had been
valid under Section 10.2.
(n) "Restriction Termination Date" shall mean the first day after the
Restriction Commencement Date on which the Board of Trustees determines
that it is no longer in the best interests of the Trust to attempt to, or
continue to, qualify as a real estate investment trust.
(o) "Transfer" shall mean any sale, transfer, gift, assignment, devise
or other disposition of Shares (including (a) the granting of any option or
entering into any agreement for the sale, transfer or other disposition of
Shares, (b) the sale, transfer, assignment or other disposition of any
securities or rights convertible into or exchangeable for Shares, but
excluding the exchange of Debt or any security of the Trust for Shares and
(c) any transfer or other disposition of any interest in Shares as a result
of a change in the marital status of the holder thereof), whether voluntary
or involuntary, whether of record, constructively or beneficially and
whether by operation of law or otherwise. The terms "Transfers" and
"Transferred" shall have correlative meanings.
10.2 Ownership Limitation.
(a) Except as provided in Sections 10.12 and 10.20, and subject to
paragraph (f) of this Section 10.2, from the Restriction Commencement Date until
the Restriction Termination Date, no Person (other than an Existing Holder)
shall Beneficially Own Shares in excess of the Ownership Limit and no Existing
Holder shall Beneficially Own Shares in excess of the Existing Holder Limit for
such Existing Holder.
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(b) Except as provided in Sections 10.12 and 10.20, and subject to
paragraph (f) of this Section 10.2, from the Restriction Commencement Date until
the Restriction Termination Date, any Transfer that, if effective, would result
in any Person (other than an Existing Holder) Beneficially Owning Shares in
excess of the Ownership Limit shall be void ab initio as to the Transfer of the
Shares which would be otherwise Beneficially Owned by such Person in excess of
the Ownership Limit; and the intended transferee shall acquire no rights in such
Shares.
(c) Except as provided in Sections 10.9 and 10.12, and subject to paragraph
(f) of this Section 10.2, from the Restriction Commencement Date until the
Restriction Termination Date, any Transfer that, if effective, would result in
any Existing Holder Beneficially Owning Shares in excess of the applicable
Existing Holder Limit shall be void ab initio as to the Transfer of the Shares
which would be otherwise Beneficially Owned by such Existing Holder in excess of
the applicable Existing Holder Limit; and such Existing Holder shall acquire no
rights in such Shares.
(d) Subject to paragraph (f) of this Section 10.2, from the Restriction
Commencement Date until the Restriction Termination Date, any Transfer that, if
effective, would result in the Shares being beneficially owned (as provided in
Section 856(a) of the Code) by less than 100 Persons (determined without
reference to any rules of attribution) shall be void ab initio as to the
Transfer of Shares which would be otherwise beneficially owned (as provided in
Section 856(a) of the Code) by the transferee; and the intended transferee shall
acquire no rights in such Shares.
(e) Subject to paragraph (f) of this Section 10.2, from the Restriction
Commencement Date until the Restriction Termination Date, any Transfer that, if
effective, would result in the Trust being "closely held" within the meaning of
Section 856(h) of the Code shall be void ab initio as to the Transfer of the
Shares which would cause the Trust to be "closely held" within the meaning of
Section 856(h) of the Code; and the intended transferee shall acquire no rights
in such Shares.
(f) Nothing contained in this Article X shall preclude the settlement of
any transaction entered into through the facilities of the American Stock
Exchange. The fact that the settlement of any transaction is permitted shall not
negate the effect of any other provision of this Article X and any transferee in
such a transaction shall be subject to all of the provisions and limitations set
forth in this Article X.
10.3 Excess Shares.
(a) If, notwithstanding the other provisions contained in this Article X,
at any time from the Restriction Commencement Date until the Restriction
Termination Date, there is a purported Transfer or other change in the capital
structure of the Trust such that any Person would Beneficially Own Shares in
excess of the applicable Ownership Limit or Existing Holder Limit (as
applicable), then, except as otherwise provided in Sections 10.9 and 10.12, and
subject to paragraph (f) of Section 10.2, the Shares Beneficially Owned in
excess of such Ownership Limit or Existing Holder Limit (rounded up to the
nearest whole Share) shall constitute "Excess Shares" and be treated as provided
in this Article X. Such designation and treatment shall be effective as of the
close of business on the business day prior to the date of the purported
Transfer or change in capital structure.
(b) If, notwithstanding the other provisions contained in this Article X,
at any time after the Restriction Commencement Date until the Restriction
Termination Date, there is a purported Transfer or other change in the capital
structure of the Trust which, if effective, would cause the Trust to become
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"closely held" within the meaning of Section 856(h) of the Code, then the Shares
being Transferred which would cause the Trust to be "closely held" within the
meaning of Section 856(h) of the Code (rounded up to the nearest whole Share)
shall constitute "Excess Shares" and be treated as provided in this Article X.
Such designation and treatment shall be effective as of the close of business on
the business day prior to the date of the purported Transfer or change in
capital structure (except for a change resulting from the exchange of Units for
Shares).
10.4 Prevention of Transfer. If the Board of Trustees or its designee shall
at any time determine in good faith that a Transfer has taken place in violation
of Section 10.2 or that a Person intends to acquire or has attempted to acquire
beneficial ownership (determined without reference to any rules of attribution)
or Beneficial Ownership of any Shares in violation of Section 10.2, the Board of
Trustees or its designee shall take such action as it deems advisable to refuse
to give effect to or to prevent such transfer, including, but not limited to,
refusing to give effect to such Transfer on the books of the Trust or
instituting proceedings to enjoin such Transfer; provided, however, that any
Transfers or attempted Transfers in violation of paragraph (b), (c), (d) or (e)
of Section 10.2 shall automatically result in the designation and treatment
described in Section 10.3, irrespective of any action (or non-action) by the
Board of Trustees.
10.5 Notice to Trust. Any Person who acquires or attempts to acquire Shares
in violation of Section 10.2, or any Person who is a transferee such that Excess
Shares result under Section 10.3, shall immediately give written notice or, in
the event of a proposed or attempted Transfer, shall give at least 15 days prior
written notice to the Trust of such event and shall provide to the Trust such
other information as the Trust may request in order to determine the effect, if
any, of such Transfer or attempted Transfer on the Trust's status as a REIT.
10.6 Information for Trust. From the Restriction Commencement Date and
until the Restriction Termination Date:
(a) every Beneficial Owner of more than 5% (or such other percentage,
between 1/2 of 1% and 5%, as provided under the REIT Provisions of the
Code) of the number or value of outstanding Shares of the Trust shall upon
the Trust's written request, within 30 days after January 1 of each year,
give written notice to the Trust stating the name and address of such
Beneficial Owner, the number of Shares Beneficially Owned, and a
description of how such Shares are held. Each such Beneficial Owner shall
provide to the Trust such additional information as the Trust may
reasonably request in order to determine the effect, if any, of such
Beneficial Ownership on the Trust's status as a REIT.
(b) each Person who is a Beneficial Owner of Shares and each Person
(including the shareholder of record) who is holding Shares for a
Beneficial Owner shall provide to the Trust in writing such information
with respect to direct, indirect and constructive ownership of Shares as
the Board of Trustees deems reasonably necessary to comply with the
provisions of the Code applicable to a REIT, to determine the Trust's
status as a REIT, to comply with the requirements of any taxing authority
or governmental agency or to determine any such compliance.
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10.7 Other Action by Board of Trustees. Subject to paragraph (f) of Section
10.2, nothing contained in this Article X shall limit the authority of the Board
of Trustees to take such other action as it deems necessary or advisable to
protect the Trust and the interests of its shareholders by preservation of the
Trust's status as a REIT; provided, however, that no provision of this Section
10.7 shall preclude the settlement of any transaction entered into through the
facilities of the American Stock Exchange.
10.8 Ambiguities. In the case of an ambiguity in the application of any of
the provisions of this Article X, including any definition contained in Section
10.1, the Board of Trustees shall have the power to determine the application of
the provisions of this Article X with respect to any situation based on the
facts known to it and the Board of Trustees' determination shall be conclusive
for all purposes of this Declaration..
10.9 Modification of Existing Holder Limits. The Existing Holder Limits may
be modified as follows:
(a) Subject to the limitations provided in Section 10.11, the Board of
Trustees may grant options which result in Beneficial Ownership of Shares
by an Existing Holder pursuant to an option plan approved by the Board of
Trustees and/or the shareholders. Any such grant shall increase the
Existing Holder Limit for the affected Existing Holder to the maximum
extent possible under Section 10.11 to permit the Beneficial Ownership of
the Shares issuable upon the exercise of such option.
(b) Subject to the limitations provided in Section 10.11, an Existing
Holder may elect to participate in a dividend reinvestment plan approved by
the Board of Trustees which results in Beneficial Ownership of Shares by
such participating Existing Holder. Any such participation shall increase
the Existing Holder Limit for the affected Existing Holder to the maximum
extent possible under Section 10.11 to permit Beneficial Ownership of the
Shares acquired as a result of such participation.
(c) The Board of Trustees shall reduce the Existing Holder Limit for
any Existing Holder after any Transfer permitted in this Article X by such
Existing Holder by the percentage of the outstanding Shares so Transferred
or after the lapse (without exercise) of an option described in paragraph
(a) of this Section 10.9 by the percentage of the Shares that the option,
if exercised, would have represented, but in either case no Existing Holder
Limit shall be reduced to a percentage which is less than the Ownership
Limit.
10.10 Increase or Decrease in Ownership Limit. Subject to the limitations
provided in Section 10.11 and Section 5.1, the Board of Trustees may from time
to time increase or decrease the Ownership Limit; provided, however, that any
decrease may only be made prospectively as to subsequent holders (other than a
decrease as a result of a retroactive change in existing law that would require
a decrease to retain REIT status, in which case such decrease shall be effective
immediately).
10.11 Limitations on Changes in Existing Holder and Ownership Limits.
(a) Neither the Ownership Limit nor any Existing Holder Limit may be
increased (nor may any additional Existing Holder Limit be created) if, after
giving effect to such increase (or
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creation), five Beneficial Owners of Shares (including all of the then Existing
Holders) could Beneficially Own, in the aggregate, more than 49.9% in number or
value of the outstanding Shares.
(b) Prior to the modification of any Existing Holder Limit or Ownership
Limit pursuant to Section 10.9 or 10.10, the Board of Trustees may require such
opinions of counsel, affidavits, undertakings or agreements as it may deem
necessary or advisable in order to determine or ensure the Trust's status as a
REIT.
(c) No Existing Holder Limit shall be reduced to a percentage which is less
than the Ownership Limit.
10.12 Waivers by Board of Trustees.
(a) The Board of Trustees, upon receipt of a ruling from the Internal
Revenue Service or an opinion of counsel or other evidence satisfactory to the
Board of Trustees and upon at least 15 days written notice from a transferee
prior to the proposed Transfer which, if consummated, would result in the
intended transferee owning Shares in excess of the Ownership Limit or the
Existing Holder Limit, as the case may be, and upon such other conditions as the
Board of Trustees may direct, may waive the Ownership Limit or the Existing
Holder Limit, as the case may be, with respect to such transferee.
(b) In addition to waivers permitted under paragraph (a) above, the Board
of Trustees shall waive the Ownership Limit with respect to a Person if: (i)
such Person submits to the Board of Trustees information satisfactory to the
Board of Trustees, in its reasonable discretion, demonstrating that such Person
is not an individual for purposes of Section 542(a)(2) of the Code (determined
taking into account Section 856(h)(3)(A) of the Code); (ii) such Person submits
to the Board of Trustees information satisfactory to the Board of Trustees, in
its reasonable discretion, demonstrating that no Person who is an individual for
purposes of Section 542(a)(2) of the Code (determined taking into account
Section 856(h)(3)(A) of the Code) would be considered to Beneficially Own Shares
in excess of the Ownership Limit by reason of the ownership of Shares in excess
of the Ownership Limit by the Person receiving the waiver granted under this
paragraph (b); (iii) such Person submits to the Board of Trustees information
satisfactory to the Board of Trustees, in its reasonable discretion,
demonstrating that the ownership of Shares in excess of the Ownership Limit by
the Person receiving the waiver granted under this paragraph (b) will not result
in the Trust failing to qualify as a REIT; and (iv) such Person provides to the
Board of Trustees such representations and undertakings, if any, as the Board of
Trustees may, in its reasonable discretion, require to ensure that the
conditions in clauses (i), (ii) and (iii) above are satisfied and will continue
to be satisfied throughout the period during which such Person owns Shares in
excess of the Ownership Limit pursuant to any waiver granted under this
paragraph (b), and such Person agrees that any violation of such representations
and undertakings or any attempted violation thereof will result in the
application of the remedies set forth in Section 10.3 with respect to Shares
held in excess of the Ownership Limit by such Person (determined without regard
to the waiver granted such Person under this paragraph (b)).
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10.13 Legend. Each certificate for Shares shall bear substantially the
following legend:
The securities represented by this certificate are subject to restrictions
on transfer for the purpose of the Trust's maintenance of its status as a
REIT under the Internal Revenue Code of 1986, as amended. Except as
otherwise provided pursuant to the Declaration of Trust of the Trust, no
Person may Beneficially Own Shares in excess of 9.8% (or such greater
percentage as may be determined by the Board of Trustees of the Trust) of
the number or value of the outstanding Shares of the Trust (unless such
Person is an Existing Holder). Any Person who attempts or proposes to
Beneficially Own Shares in excess of the above limitations must notify the
Trust in writing at least 15 days prior to such proposed or attempted
Transfer. All capitalized terms in this legend have the meanings defined in
the Declaration of Trust of the Trust, a copy of which, including the
restrictions on transfer, will be sent without charge to each shareholder
who so requests. If the restrictions on transfer are violated, the
securities represented hereby shall be designated and treated as Excess
Shares which shall be held in trust by the Excess Share Trustee for the
benefit of the Charitable Beneficiary.
10.14 Severability. If any provision of this Article X or any application
of any such provision is determined to be void, invalid or unenforceable by any
court having jurisdiction over the issue, the validity and enforceability of the
remaining provisions shall be affected only to the extent necessary to comply
with the determination of such court.
10.15 Trust for Excess Shares. Upon any purported Transfer that results in
Excess Shares pursuant to Section 10.3, such Excess Shares shall be deemed to
have been transferred to the Excess Share Trustee, as trustee of the Excess
Share Trust for the exclusive benefit of the Charitable Beneficiary. Excess
Shares so held in trust shall be issued and outstanding Shares of the Trust. The
Purported Beneficial Transferee shall have no rights in such Excess Shares
except as provided in Section 10.18.
10.16 Distributions on Excess Shares. Any distributions (whether as
dividends, distributions upon liquidation, dissolution or winding up or
otherwise) on Excess Shares shall be paid to the Excess Share Trust for the
benefit of the Charitable Beneficiary. Upon liquidation, dissolution or winding
up, the Purported Record Transferee shall receive the lesser of (a) the amount
of any distribution made upon liquidation, dissolution or winding up or (b) the
price paid by the Purported Record Transferee for the Shares, or if the
Purported Record Transferee did not give value for the Shares, the Market Price
of the Shares on the day of the event causing the Shares to be held in trust.
Any such dividend paid or distribution paid to the Purported Record Transferee
in excess of the amount provided in the preceding sentence prior to the
discovery by the Trust that the Shares with respect to which the dividend or
distribution was made had been exchanged for Excess Shares shall be repaid to
the Excess Share Trust for the benefit of the Charitable Beneficiary.
10.17 Voting of Excess Shares. The Excess Share Trustee shall be entitled
to vote the Excess Shares for the benefit of the Charitable Beneficiary on any
matter. Any vote taken by a Purported Record Transferee prior to the discovery
by the Trust that the Excess Shares were held in trust shall be rescinded ab
initio. The owner of the Excess Shares shall be deemed to have given an
irrevocable
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proxy to the Excess Share Trustee to vote the Excess Shares for the benefit of
the Charitable Beneficiary.
10.18 Non-Transferability of Excess Shares. Excess Shares shall be
transferable only as provided in this Section 10.18. At the direction of the
Trust, the Excess Share Trustee shall transfer the Shares held in the Excess
Share Trust to a person whose ownership of the Shares will not violate the
Ownership Limit or Existing Holder Limit. Such transfer shall be made within 60
days after the latest of (x) the date of the Transfer which resulted in such
Excess Shares and (y) the date the Board of Trustees determines in good faith
that a Transfer resulting in Excess Shares has occurred, if the Trust does not
receive a notice of such Transfer pursuant to Section 10.5. If such a transfer
is made, the interest of the Charitable Beneficiary shall terminate and proceeds
of the sale shall be payable to the Purported Record Transferee and to the
Charitable Beneficiary. The Purported Record Transferee shall receive the lesser
of (a) the price paid by the Purported Record Transferee for the Shares or, if
the Purported Record Transferee did not give value for the Shares, the Market
Price of the Shares on the day of the event causing the Shares to be held in
trust, and (b) the price received by the Excess Share Trust from the sale or
other disposition of the Shares. Any proceeds in excess of the amount payable to
the Purported Record Transferee shall be paid to the Charitable Beneficiary.
Prior to any transfer of any Excess Shares by the Excess Share Trustee, the
Trust must have waived in writing its purchase rights under Section 10.19. It is
expressly understood that the Purported Record Transferee may enforce the
provisions of this Section 10.18 against the Charitable Beneficiary.
If any of the foregoing restrictions on transfer of Excess Shares is
determined to be void, invalid or unenforceable by any court of competent
jurisdiction, then the Purported Record Transferee may be deemed, at the option
of the Trust, to have acted as an agent of the Trust in acquiring such Excess
Shares and to hold such Excess Shares on behalf of the Trust.
10.19 Call by Trust on Excess Shares. Excess Shares shall be deemed to have
been offered for sale to the Trust, or its designee, at a price per Share equal
to the lesser of (a) the price per Share in the transaction that created such
Excess Shares (or, in the case of a devise, gift or other transaction in which
no value was given for such Excess Shares, the Market Price at the time of such
devise, gift or other transaction) and (b) the Market Price of the common Shares
and/or preferred Shares to which such Excess Shares relates on the date the
Trust, or its designee, accepts such offer (the "Redemption Price"). The Trust
shall have the right to accept such offer for a period of 90 days after the
later of (x) the date of the Transfer which resulted in such Excess Shares and
(y) the date the Board of Trustees determines in good faith that a Transfer
resulting in Excess Shares has occurred, if the Trust does not receive a notice
of such Transfer pursuant to Section 10.5 but in no event later than a permitted
Transfer pursuant to and in compliance with the terms of Section 10.18. Unless
the Board of Trustees determines that it is in the interests of the Trust to
make earlier payments of all of the amount determined as the Redemption Price
per Share in accordance with the preceding sentence, the Redemption Price may be
payable at the option of the Board of Trustees at any time up to but not later
than one year after the date the Trust accepts the offer to purchase the Excess
Shares. In no event shall the Trust have an obligation to pay interest to the
Purported Record Transferee.
10.20 Underwritten Offerings. The Ownership Limit shall not apply to the
acquisition of Shares or rights, options or warrants for, or securities
convertible into, Shares by an underwriter in a public offering, provided that
the underwriter makes a timely distribution of such Shares or rights, options or
warrants for, or securities convertible into, Shares.
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IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Declaration of Trust as of the date first hereinabove set forth.
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EXHIBIT G
STARWOOD FINANCIAL TRUST
1996 LONG-TERM INCENTIVE PLAN
(AMENDED AND RESTATED AS OF [March _____, 1998])
I. INTRODUCTION
1.1 PURPOSES AND GENERAL. Effective as of September 26, 1996, Starwood
Financial Trust (formerly known as Angeles Participating Mortgage Trust) (the
"Trust") established the Angeles Participating Mortgage Trust 1996 Share
Incentive Plan and the Angeles Participating Mortgage Trust 1996 Trustees' Share
Incentive Plan. The following provisions constitute an amendment, restatement,
merger and continuation of the Angeles Participating Mortgage Trust 1996 Share
Incentive Plan and the Angeles Participating Mortgage Trust 1996 Trustees' Share
Incentive Plan into one plan effective as of March _____, 1998 (the "Effective
Date"), which on and after the Effective Date shall be known as the Starwood
Financial Trust 1996 Long-Term Incentive Plan (the "Plan"). The purposes of the
Plan are to align the interests of the Trust's shareholders and the recipients
of awards under this Plan by increasing the proprietary interest of such
recipients in the Trust's growth and success and to advance the interests of the
Trust by attracting and retaining officers, key employees, consultants and
advisers, as well as qualified persons for service as trustees of the Trust
("Trustees"). For purposes of this Plan, references to employment by or service
as an officer, employee, consultant, adviser or Trustee of the Trust shall also
mean employment by or service as an officer, employee, consultant, adviser,
trustee or director of a subsidiary or affiliate of the Trust. In addition,
references to Trustees include persons elected as Trustees who will begin to
serve as Trustee at a future date.
The Plan seeks to accomplish the foregoing purposes by providing a means
whereby (i) options ("Options") to purchase from the Trust Class A Shares of
beneficial interest, par value $.01 per share ("Shares") may be granted in
accordance with Section II to Eligible Persons and shall be granted, in
accordance with Section V, to Trustees, (ii) Shares may be granted in accordance
with Section III to Eligible Persons, and (iii) Performance Awards may be
granted in accordance with Section IV to Eligible Persons.
The Administrator (as defined in Section 1.3) may designate an Option as an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or any successor provision (an
"incentive share option").
1.2 CERTAIN DEFINITIONS. As used herein, the words set forth in the
Glossary contained in Section 6.12 shall have the meanings therein indicated.
1.3 ADMINISTRATION. This Plan shall be administered by the Board or the
Committee (the "Administrator"). Any one or a combination of the following
Awards may be made under this Plan to Eligible Persons: (i) Options; (ii)
Restricted Share Awards; (iii)
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Performance Awards. The Administrator may, subject to the terms of this Plan,
select Eligible Persons for participation in the Plan and shall determine the
form, amount and timing of each Award and, if applicable, the number of Options,
Shares or Performance Awards subject to such an Award, the exercise price or
base price associated with the Award, the time and conditions of exercise or
settlement of the Award and all other terms and conditions of the Award,
including without limitation the form of the Agreement relating to the Award.
The Administrator may, in its sole discretion and for any reason at any time,
subject to the requirements imposed by Section 162(m) of the Code and
regulations promulgated thereunder in the case of an Award intended to be
qualified performance-based compensation, take action such that (i) any or all
outstanding Options shall become exercisable in part or in full, (ii) all or a
portion of the Restriction Period applicable to any outstanding Restricted Share
Award shall lapse, (iii) all or a portion of the Performance Period applicable
to any outstanding Performance Award shall lapse, (iv) the Performance Measures
applicable to any outstanding Option or Restricted Share Award and to any
outstanding Performance Award shall be deemed to be satisfied in whole or in
part.
The Administrator shall, subject to the terms of this Plan, interpret this
Plan and the application thereof, establish rules and regulations it deems
necessary or desirable for the administration of this Plan and may impose,
incidental to the grant of an Award, conditions with respect to the Award, such
as limiting competitive employment or other activities. All such
interpretations, rules, regulations and conditions shall be conclusive and
binding on all parties. Each Award shall be evidenced by a written Agreement
between the Trust and the holder setting forth the terms and conditions
applicable to such Award.
Subject to the express provisions of this Plan, the Administrator shall
have the authority:
(1) to determine from among those persons eligible to receive an Award
the particular Eligible Persons who will receive any Awards;
(2) to grant Awards to Eligible Persons, determine the price at which
Awards will be offered or awarded and the amount of Awards to any of such
Persons, and determine the other specific terms and conditions of such
Awards consistent with the express limits of this Plan, and establish the
installments (if any) in which such Awards shall become exercisable or
shall vest, or determine that no delayed exercisability or vesting is
required, and establish the events of termination or reversion (if any) of
such Awards;
(3) to approve the forms and terms of Agreements, which need not be
identical either as to type of Award or among Eligible Persons;
(4) to construe and interpret this Plan and any Agreements, further
define the terms used in this Plan and prescribe, amend and rescind rules
and regulations relating to the administration of this Plan;
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<PAGE>
(5) to cancel, modify or waive the Trust's rights with respect to, any
or all outstanding Awards;
(6) to accelerate the exercisability or vesting or extend the term of
any or all such outstanding Awards within the maximum term permitted under
this Plan; and
(7) to make all other determinations and take such other action as
contemplated by this Plan or as may be necessary or advisable for the
administration of this Plan and the effectuation of its purposes.
Any action taken by, or inaction of, the Trust, the Board or the Committee
relating or pursuant to this Plan shall be within the absolute discretion of
that entity or body and shall be conclusive and binding upon all persons. No
member of the Board or Committee, or officer of the Trust or any subsidiary,
shall be liable for any such action or inaction of the entity or body, of
another person or, except in circumstances involving bad faith, of himself or
herself. Subject only to compliance with the express provisions hereof, each of
the Board and the Committee may act in its absolute discretion in matters within
its authority related to this Plan.
In making any determination or in taking or not taking any action under
this Plan, the Committee or the Board, as the case may be, may obtain and rely
upon the advice of experts, including professional advisors to the Trust. No
Trustee, officer or Agent of the Trust shall be liable for any such action or
determination taken or made or omitted in good faith.
The Administrator may delegate ministerial, non-discretionary functions to
individuals who are officers or employees of the Trust.
The Administrator may delegate in writing signed by the Chairman of the
Administrator some or all of its power and authority hereunder to the Chief
Executive Officer or Chief Operating Officer or other executive officer of the
Trust as the Administrator deems appropriate; provided, however, that the
Administrator may not delegate its power and authority with regard to (i) the
grant of an Award to any person who is a "covered employee" within the meaning
of Section 162(m) of the Code or who, in the Administrator's judgment, is likely
to be a covered employee at any time during the period an Award hereunder to
such employee would be outstanding, if the Administrator intends that
compensation payable pursuant to such an Award be qualified performance-based
compensation, or (ii) the selection for participation in this Plan of an officer
or other person subject to Section 16 of the Exchange Act or decisions
concerning the timing, pricing or amount of an Award to such an officer or other
person.
A majority of the Administrator shall constitute a quorum. The acts of the
Administrator shall be either (i) acts of a majority of the members of the
Administrator present at any meeting at which a quorum is present or (ii) acts
approved in writing by all of the members of the Administrator without a
meeting.
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1.4 ELIGIBILITY. Participants in this Plan shall consist of such officers,
key employees, consultants, advisers and Trustees of the Trust and its
subsidiaries as the Administrator in its sole discretion may select from time to
time ("Eligible Persons"), provided that only employees of the Trust (or a
subsidiary of the Trust) will be Eligible Persons to whom may be granted an
Option which designated as an incentive share option. The Administrator's
selection of a person to participate in this Plan at any time shall not require
the Administrator to select such person to participate in this Plan at any other
time. Trustees shall also participate in this Plan in accordance with Section V.
1.5 SHARES AVAILABLE. Subject to adjustment as provided in Section 6.6, the
aggregate number of Shares available from time to time for all Awards of Options
or Share Awards under this Plan shall be 29,926,114 Shares, reduced by the
aggregate number of Shares subject to outstanding Options and outstanding Share
Awards under the Plan. In the event the number of outstanding Shares increases
after the Effective Date, the maximum number of Shares reserved for Awards will
be adjusted automatically so that the maximum number equals 9% of the
outstanding Shares on a fully diluted basis, provided that the number of Shares
reserved for grants of Options designated as incentive share options will not be
so increased over the number of such Shares as of the date shareholders approve
the restatement of the Plan. Subject to adjustment as provided in Section 6.6,
the number of Shares available for grants of Options designated as incentive
share options shall be 29,926,114.
To the extent that Shares subject to (i) an outstanding Option or (ii) a
Share Award, are not issued or delivered or are canceled or forfeited by reason
of the expiration, termination, cancellation or forfeiture of any such Award,
then such Shares shall again be available under this Plan.
Shares to be delivered under this Plan shall be made available (i) by the
Trust from authorized and unissued Shares issued by the Trust directly to the
holder, (ii) from authorized and issued Shares acquired and held by the Trust or
(iii) a combination thereof.
The maximum number of Shares with respect to which Options or Share Awards
or a combination thereof may be granted to any person other than an advisor to
the Trust during any calendar year shall be 8,000,000 subject to adjustment as
provided in Section 6.6.
II. OPTIONS
2.1 AWARDS OF OPTIONS. The Administrator may, in its discretion, grant
Options to such Eligible Persons as may be selected by the Administrator. The
Administrator may designate that an Option is intended to be an incentive share
option. Each Option that is not designated an incentive share option shall be a
non-qualified share option. Each Option that is designated as an incentive share
option shall be granted within ten years of the Effective Date of this Plan. To
the extent that the aggregate Fair Market Value (determined as of the date of
grant) of Shares with respect to which Options designated as incentive share
options are exercisable for the first time by a holder during any calendar year
(under this Plan or any other plan of the Trust
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<PAGE>
or any parent or subsidiary) exceeds the amount (currently $100,000) established
by the Code, such Options shall constitute non-qualified share options.
2.2 TERMS OF OPTIONS. Options shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as the Administrator shall deem
advisable:
(a) Number of Shares and Purchase Price. The number of Shares subject
to an Option and the purchase price per Share purchasable upon exercise of
the Option shall be determined by the Administrator; provided, however,
that the purchase price per Share under an Option that is designated as an
incentive share option shall not be less than 100% of the Fair Market Value
of a Share on the date of grant of such Option; provided further, that if
an Option designated as an incentive share option is granted to an Eligible
Person who owns shares of beneficial interest possessing more than ten
percent (10%) of the total combined voting power of all classes of shares
of beneficial interest of the Trust (or of any parent or subsidiary) (a
"Ten Percent Holder"), the purchase price per Share shall be the price
(currently 110% of Fair Market Value of a Share) required by the Code in
order to constitute an incentive share option.
(b) Option Period and Exercisability. The period during which an
Option may be exercised shall be determined by the Administrator; provided,
however, that no Option designated as an incentive share option shall be
exercised later than ten years after its date of grant; provided further,
that if an Option designated as an incentive share option shall be granted
to a Ten Percent Holder, such Option shall not be exercised later than five
years after its date of grant. The Administrator shall determine whether an
Option shall become exercisable in cumulative or non-cumulative
installments and in part or in full at any time. An exercisable Option, or
portion thereof, may be exercised only with respect to whole Shares. Except
to the extent otherwise specified in the Agreement relating to an Option,
in the event of a Change of Control, such Option shall become immediately
exercisable for the full amount of Shares subject thereto and shall be
exercisable until expiration of the term of such Option.
(c) Method of Exercise. An Option may be exercised (i) by giving
written notice to the Trust specifying the number of whole Shares to be
purchased and accompanied by payment thereof in full (or arrangement made
for such payment to the Trust's satisfaction) either (A) in cash, (B) by
delivery of previously-owned whole Shares (which the holder has held for at
least six months prior to the delivery of such Shares or which the holder
purchased on the open market and for which the holder has good title, free
and clear of all liens and encumbrances) having a Fair Market Value,
determined as of the date of exercise, equal to the aggregate purchase
price payable by reason of such exercise, (C) in cash by a broker-dealer
acceptable to the Trust to whom the holder has submitted an irrevocable
notice of exercise or (D) a combination of (A) and (B), in each case to the
extent set forth in the Agreement relating to the Option and (ii) by
executing such documents as the Trust may reasonably request. The
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Administrator shall have sole discretion to disapprove of an election
pursuant to either clause (B) or (C). Any fraction of a Share which would
be required to pay such purchase price shall be disregarded and the
remaining amount due shall be paid in cash by the holder. No certificate
representing a Share shall be delivered until the full purchase price
therefor has been paid.
2.3 TERMINATION OF EMPLOYMENT OR SERVICE.
(a) Disability or Death. Subject to paragraph (e) below and unless
otherwise specified in the Agreement relating to an Option, if the
optionee's employment with the Trust or service as an officer or
consultant, adviser or Trustee terminates by reason of Disability or death,
each Option held by such optionee shall be fully exercisable and may
thereafter be exercised by such optionee (or such optionee's executor,
administrator, legal representative, beneficiary or similar person, as the
case may be) until and including the earlier to occur of (i) the date which
is one year (or such other period as set forth in the Agreement relating to
such Option) after the effective date of such optionee's termination of
employment or service or date of death, as the case may be, and (ii) the
expiration date of the term of such Option.
(b) Termination for Cause. Subject to paragraph (e) below and unless
otherwise specified in the Agreement relating to an Option, if the
optionee's employment with the Trust or service as an officer or
consultant, adviser or Trustee terminates for Cause, each Option held by
such optionee, whether or not then exercisable, shall terminate
automatically on the effective date of such optionee's termination of
employment or service.
(c) Other Termination. Subject to paragraph (e) below and unless
otherwise specified in the Agreement relating to an Option, if the
optionee's employment with the Trust or service as an officer or
consultant, adviser or Trustee terminates for any reason other than
Disability, death or termination by the Trust for Cause, each Option held
by such optionee shall be exercisable only to the extent that such Option
is exercisable on the effective date of such optionee's termination of
employment or service and may thereafter be exercised by such optionee (or
such optionee's legal representative or similar person) until and including
the earlier to occur of (i) the date which is three months (or such other
period as set forth in the Agreement relating to such Option) after the
effective date of such optionee's termination of employment or service and
(ii) the expiration date of the term of such Option.
(d) Death Following Termination of Employment or Service. Subject to
paragraph (e) below and unless otherwise specified in the Agreement
relating to an Option, if an optionee dies during the one-year period
following termination of employment or service by reason of Disability or
if an optionee dies during the three-month period following termination of
employment or service for any reason other than
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Disability or Cause (or, in each case, such other period as the
Administrator may specify in the Agreement relating to an Option), each
Option held by such optionee may thereafter be exercised by such optionee's
executor, administrator, legal representative, beneficiary or similar
person, as the case may be, until and including the earlier to occur of (i)
the date which is three months (or such other period as set forth in the
Agreement relating to such Option) after the date of death (but in the case
of death following termination of employment or service by reason of
Disability, the date which is one year (or such other period as set forth
in the Agreement relating to such Option) after the date of death), and
(ii) the expiration date of the term of such Option.
(e) Termination of Employment -- Incentive Share Options. Unless
otherwise specified in the Agreement relating to an Option designated as an
incentive share option, if the employment with the Trust of an optionee of
such an Option terminates by reason of Permanent and Total Disability (as
defined in Section 22(e) (3) of the Code) or death, each such Option shall
be fully exercisable and may thereafter be exercised by such optionee (or
such optionee's executor, administrator, legal representative, beneficiary
or similar person, as the case may be) until and including the earlier to
occur of (i) the date which is one year (or such shorter period as set
forth in the Agreement relating to such Option) after the effective date of
such optionee's termination of employment by reason of Permanent and Total
Disability or date of death, as the case may be, and (ii) the expiration
date of the term of such Option.
Unless otherwise specified in the Agreement relating to an Option
designated as an incentive share option, if the employment with the Trust
of an optionee of such an Option terminates for Cause, each such Option,
whether or not then exercisable, shall terminate automatically on the
effective date of such optionee's termination of employment.
Unless otherwise specified in the Agreement relating to an Option
designated as an incentive share option, if the employment with the Trust
of an optionee of such an Option terminates for any reason other than
Permanent and Total Disability, death or Cause, each such Option shall be
exercisable only to the extent such Option is exercisable on the effective
date of such optionee's termination of employment and may thereafter be
exercised by such optionee (or such optionee's legal representative or
similar person) until and including the earlier to occur of (i) the date
which is three months after the effective date of such optionee's
termination of employment and (ii) the expiration date of the term of such
Option.
If the optionee of an Option designated as an incentive share option
dies during the one-year period following termination of employment by
reason of Permanent and Total Disability (or such shorter period as set
forth in the Agreement relating to such Option), or if the optionee of such
an Option dies during the three-month period following termination of
employment for any other reason (other than for Cause), each such Option
held by such optionee may thereafter be exercised by the optionee's
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executor, administrator, legal representative, beneficiary or similar
person until and including the earliest to occur of (i) the date which is
three months after the date of death and (ii) the expiration date of the
term of such Option.
III. SHARE AWARDS
3.1 SHARE AWARDS. The Administrator may, in its discretion, grant
Restricted Share Awards to such Eligible Persons as may be selected by the
Administrator.
3.2 TERMS OF SHARE AWARDS. Restricted Share Awards shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions not inconsistent with the terms of this Plan, as the Administrator in
its discretion shall deem advisable.
(a) Number of Shares and Other Terms. The number of Shares subject to
a Restricted Share Award and the Performance Measures (if any) and
Restriction Period applicable to a Restricted Share Award shall be
determined by the Administrator.
(b) Vesting and Forfeiture. The Agreement relating to a Restricted
Share Award shall provide, in the manner determined by the Administrator in
its discretion and subject to the provisions of this Plan, for the vesting
of the Shares subject to such Award either (i) in accordance with the
attainment or satisfaction of specified Performance Measures during the
specified Restriction Period or (ii) over a period of years of employment
by, service to or compliance with agreements with the Trust during the
specified Restriction Period (or both), and for the forfeiture of the
Shares subject to such Award (x) if specified Performance Measures are not
satisfied or met during the specified Restriction Period or (y) if the
holder of such Award does not remain in the employment of or service to the
Trust or in compliance with such agreements with the Trust during the
specified Restriction Period. Except to the extent otherwise specified in
the Agreement relating to a Restricted Share Award, all Shares subject to
such an Award shall immediately vest in full in the event of a Change of
Control.
(c) Share Certificates. During the Restriction Period, a certificate
or certificates evidencing Shares issued as a Restricted Share Award may be
registered in the holder's name and may bear a legend, in addition to any
legend which may be required pursuant to Section 6.6, indicating that the
ownership of the Shares represented by such certificate is subject to the
restrictions, terms and conditions of this Plan and the Agreement relating
to the Restricted Share Award. All such certificates shall be deposited
with the Trust, together with stock powers or other instruments of
assignment (including a power of attorney), each endorsed in blank with a
guarantee of signature if deemed necessary or appropriate by the Trust,
which would permit transfer to the Trust of all or a portion of the Shares
subject to the Restricted Share Award in the event such award is forfeited
in whole or in part. Upon termination of any applicable Restriction Period
(and the satisfaction or attainment of any applicable Performance
Measures),
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subject to the Trust's right to require payment of any taxes in accordance
with Section 6.5, a certificate or certificates evidencing ownership of the
requisite number of Shares shall be delivered to the holder of such award.
(d) Rights with Respect to Restricted Share Awards. Unless otherwise
set forth in the Agreement relating to a Restricted Share Award, and
subject to the terms and conditions of a Restricted Share Award, the holder
of such award shall have all rights as a shareholder of the Trust,
including, but not limited to, voting rights, the right to receive
dividends and the right to participate in any capital adjustment applicable
to all holders of Shares.
3.3 TERMINATION OF EMPLOYMENT OR SERVICE.
(a) Disability or Death. Unless otherwise set forth in the Agreement
relating to a Restricted Share Award, if the holder's employment with the
Trust or service as an officer or consultant, adviser or Trustee terminates
by reason of Disability or death, the Restriction Period shall terminate as
of the effective date of such holder's termination of employment or
service, and any applicable Performance Measures shall be computed through
such date.
(b) Other Termination. Unless otherwise set forth in the Agreement
relating to a Restricted Share Award, if the holder's employment with the
Trust or service as an officer or consultant, adviser or Trustee terminates
for any reason other than Disability or death, the portion of such Award
which is subject to a Restriction Period or any Performance Measure on the
effective date of such holder's termination of employment or service shall
be forfeited by such holder and such portion shall be canceled by the
Trust.
IV. PERFORMANCE AWARDS
4.1 PERFORMANCE AWARDS. The Administrator may, in its discretion, grant
Performance Awards to such Eligible Persons as may be selected by the
Administrator.
4.2 TERMS OF PERFORMANCE AWARDS. Performance Awards shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of this Plan, as the Administrator
shall in its discretion deem advisable.
(a) Grant of Performance Awards. A Performance Award may be granted
only in tandem with an Option which is being or was granted under Section
II and shall apply to all or such portion of the Shares subject to such
Option as the Administrator may designate. The Performance Period and
Performance Measure of a Performance Award shall be as designated by the
Administrator.
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(b) Vesting and Forfeiture. The Agreement relating to a Performance
Award shall provide, in the manner determined by the Administrator in its
discretion and subject to the provisions of this Plan, for the vesting of
such award if specified Performance Measure(s) are satisfied or met during
the specified Performance Period, and for the forfeiture of such award if
specified Performance Measure(s) are not satisfied or met during the
specified Performance Period. To the extent not otherwise provided in such
Agreement, such vesting and forfeiture provisions shall be as provided in
this Plan.
(c) Settlement of Vested Performance Awards. Vested Performance Awards
shall be settled in cash to the extent that both (i) the applicable Option
has been exercised (whether before or after expiration of the Performance
Period) with respect to Shares subject to the Performance Award and (ii)
the Performance Period has expired. The amount shall be the sum (without
interest or compounding) of all dividends and distributions per Share
(subject to adjustment as provided in Section 6.7) during the Performance
Period and thereafter through any subsequent exercise of Options,
multiplied by the number of such Shares purchased upon such exercise.
Except to the extent otherwise provided in the Agreement relating to a
Performance Award, in the event of a Change of Control the Performance
Period shall expire and the Performance Measure shall be computed through
such date and the applicable Performance Award shall forthwith be settled
on the date of such Change of Control or if later upon exercise of the
applicable Options. Notwithstanding the foregoing, if the Administrator in
good faith determines that a payment in settlement of a Performance Award
will or is likely to render the Trust insolvent, the Administrator may
elect to defer such payment for a reasonable period of time and to pay at a
later date with interest at such reasonable rate as the Administrator may
determine.
4.3 TERMINATION OF EMPLOYMENT OR SERVICE.
(a) Disability or Death. Except to the extent otherwise set forth in
the Agreement relating to a Performance Award, if the employment of the
holder of a Performance Award or his or her service as an officer or
consultant, adviser or Trustee of the Trust terminates by reason of
Disability or death, the Performance Period with respect to such
Performance Award shall terminate and the Performance Measure shall be
computed through such date and the applicable Performance Award shall be
settled as soon as practicable within 10 days thereafter, or if later, upon
exercise of the applicable Option, subject to the provisions of Section
4.2(c).
(b) Other Termination. Except to the extent otherwise set forth in the
Agreement relating to a Performance Award, if the holder's employment with
the Trust or service as an officer or consultant, adviser or Trustee
terminates for any reason other than Disability or death, the Performance
Period for such Performance Award shall be deemed to end on the date of
such termination, no Performance Measure shall be recognized or deemed
attained, satisfied or met, and the holder's Performance Award shall be
immediately forfeited to and canceled by the Trust.
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V. CERTAIN PROVISIONS RELATING TO TRUSTEES
5.1 ELIGIBILITY. Each Trustee who is not an officer or employee of the
Trust or a subsidiary of the Trust ("Eligible Trustee") shall be granted Options
in accordance with this Section V and may, in the discretion of the
Administrator, be granted additional Options, subject to such terms and
conditions as the Administrator shall deem advisable. All Options granted under
this Section V shall constitute non-qualified share options.
5.2 GRANTS OF OPTIONS. Each Eligible Trustee shall be granted Options as
follows:
(a) Time of Grant. As of the close of each Annual Meeting of
Shareholders held after the Effective Date, each Eligible Trustee on such
date shall be granted an Option to purchase 10,000 Shares. An individual
who becomes an Eligible Trustee after the Effective Date but on a date
other than the date of the Annual Meeting of Shareholders shall receive an
Option to purchase 10,000 Shares on the date he becomes an Eligible
Trustee, subject to a pro rata reduction to reflect the portion of the
12-month period which has elapsed since the last preceding Annual Meeting
of Shareholders during which the individual was not an Eligible Trustee.
The purchase price per Share subject to each Option shall be equal to 100%
of the Fair Market Value of a Share on the date of grant of such Option.
(b) Option Period and Exercisability. Each Option granted under
paragraph (a) above shall be fully exercisable on and after its date of
grant, shall expire ten years after its date of grant (notwithstanding
termination of service as a Trustee for any reason prior to such ten-year
anniversary date) and may be exercised in whole or in part (only with
respect to whole Shares). Options granted under this Article V shall be
exercisable in accordance with Section 2.2(c).
(c) Death. If a Trustee dies while an Option is outstanding, such
Option may thereafter be exercised by such Trustee's executor,
administrator, legal representative, beneficiary or similar person, as the
case may be, until and including the expiration date of the term of such
Option.
VI. GENERAL
6.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan, as amended and restated,
shall be submitted to the shareholders of the Trust for approval within one year
after the date of approval of such amendment and restatement by the Board and,
if approved by a majority of all the votes cast at a meeting of shareholders at
which a quorum is present, shall become effective as of the Effective Date and
shall apply, without limitation, to all Awards then or theretofore made or
granted under this Plan. This Plan shall terminate on March _____, 2008
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(ten years after the Effective Date) unless terminated earlier by the Board.
Termination of this Plan shall not affect the terms or conditions of any Award
granted prior to termination.
Awards may be granted hereunder at any time prior to the termination of
this Plan, provided that no Award may be granted later than ten years after the
Effective Date of this Plan. In the event that this Plan, as amended and
restated, is not approved by the shareholders of the Trust within one year after
the date of approval by the Board, the amendments made as of the Effective Date
and any Awards granted pursuant to the Plan as so amended and restated shall be
null and void; provided that such failure to obtain shareholder approval shall
have no effect on any Options awarded under the Plan as in effect before such
date.
6.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable,
subject to any requirement of shareholder approval required by applicable law,
rule or regulation including Rule 16b-3 under the Exchange Act and Sections 422
and 856 of the Code; provided, however, that any amendment with respect to the
persons eligible for Options designated as incentive share options or the number
of Shares reserved therefor or the maximum number of Options or Share Awards
that may be granted to any person in any calendar year under the Plan shall not
be effective without shareholder approval of such amendment within 12 months
before or after the date such amendment is approved by the Board. No amendment
may impair the rights of a holder of an outstanding Award without the consent of
such holder.
6.3 NON-TRANSFERABILITY. No Option or Performance Award shall be
transferable other than by will or the laws of descent and distribution or
pursuant to beneficiary designation procedures approved by the Trust. Except to
the extent permitted by the foregoing sentence, each Option or Performance Award
may be exercised or settled during the optionee's lifetime only by the optionee
or the optionee's legal representative or similar person. Except as permitted by
the second preceding sentence, no Option or Performance Award shall be sold,
transferred, assigned, pledged, hypothecated, voluntarily encumbered or
otherwise disposed of (whether by operation of law or otherwise) or be subject
to execution, attachment or similar process. Upon any attempt to so sell,
transfer, assign, pledge, hypothecate, voluntarily encumber or otherwise dispose
of any Option or Performance Award, such Option or Performance Award and all
rights thereunder shall, to the extent of any such attempt, immediately become
null and void.
Restricted Share granted under this Plan shall be transferable, subject to
the transferee's receiving such Restricted Share subject to the same
restrictions as those applicable to the transferor. Upon any such transfer, the
transferee shall execute such appropriate documents that may be requested by the
Trust to evidence the transferee's acceptance of the restrictions applicable to
such Restricted Share.
6.4 TAX WITHHOLDING. The Trust shall have the right to require, prior to
the delivery of any Shares or the payment of any cash pursuant to an Award made
hereunder, payment by the holder of such Award of any federal, state, local or
other taxes which may be required to be withheld or paid in connection with such
Award. An Agreement may provide that
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the holder of an Award may satisfy any such obligation by any of the following
means: (A) a cash payment to the Trust, (B) delivery to the Trust of
previously-owned whole Shares (which such holder has held for at least six
months prior to the delivery of such Shares or which such holder purchased on
the open market and for which such holder has good title, free and clear of all
liens and encumbrances) having an aggregate Fair Market Value, determined as of
the date the obligation to withhold or pay taxes arises in connection with an
Award (the "Tax Date"), equal to the amount necessary to satisfy any such
obligation, (C) in the case of the exercise of an Option, a cash payment by a
broker-dealer acceptable to the Trust to whom the holder has submitted an
irrevocable notice of exercise or (D) any combination of (A) and (B), in each
case to the extent set forth in the Agreement relating to the Award; provided,
however, that the Administrator shall have sole discretion to disapprove of an
election pursuant to any of the foregoing clauses (B) through (D). An Agreement
may provide for Shares to be delivered having a Fair Market Value in excess of
the minimum amount required to be withheld, but not in excess of the amount
determined by applying the holder's maximum marginal tax rate. Any fraction of a
Share which would be required to satisfy such an obligation shall be disregarded
and the remaining amount due shall be paid in cash by the holder.
6.5 RESTRICTIONS ON SHARES. Each Award hereunder shall be subject to the
requirement that if at any time the Trust determines that the listing,
registration or qualification of the Shares subject to such Award upon any
securities exchange or under any law, or the consent or approval of any
governmental body, or the taking of any other action is necessary or desirable
as a condition of, or in connection with, the delivery of Shares thereunder,
such Shares shall not be delivered unless such listing, registration,
qualification, consent, approval or other action shall have been effected or
obtained, free of any conditions not acceptable to the Trust. The Trust may
require that certificates evidencing Shares delivered pursuant to any Award made
hereunder bear a legend indicating that the sale, transfer or other disposition
thereof by the holder is prohibited except in compliance with the Securities Act
of 1933, as amended, and the rules and regulations thereunder.
Notwithstanding any other provision hereunder, no Award hereunder shall be
exercisable or eligible for settlement if, as a result of either the ability to
exercise or settle, or the exercise or settlement of such Award, the Trust would
not satisfy the REIT Requirements in any respect. For purposes of the preceding
sentence, "REIT Requirements" shall mean the requirements for the Trust to
qualify as a real estate investment trust under the Code and the rules and
regulations promulgated thereunder.
6.6 ADJUSTMENT. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Shares other than a regular cash
dividend, the number and class of Shares available under the Plan, the number
and class of Shares subject to each outstanding Option, the purchase price per
Share, and the number of Shares subject to each Option and the number of Shares
to be granted to Trustees pursuant to
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Article V, the number and class of Shares subject to each outstanding Share
Award and the terms of each outstanding Performance Award shall be appropriately
adjusted by the Administrator, such adjustments to be made in the case of
outstanding Options without an increase in the aggregate purchase price or base
price. The decision of the Administrator regarding any such adjustment shall be
final, binding and conclusive. If any adjustment would result in a fractional
security being (i) available under this Plan, such fractional security shall be
disregarded, or (ii) subject to an Award under this Plan, the Trust shall pay
the holder of such Award, in connection with the first vesting, exercise or
settlement of such Award in whole or in part, occurring after such adjustment,
an amount in cash determined by multiplying (A) the fraction of such security
(rounded to the nearest hundredth) by (B) the excess, if any, of (x) the Fair
Market Value of a Share on the vesting, exercise or settlement date over (y) the
exercise price or base price, if any, of such Award.
With respect to any holder who is subject to Section 16 of the Exchange Act
and notwithstanding the exercise periods set forth in paragraphs (a), (c) and
(d) of Section 2.3, paragraph (b) of Section 5.2 or as set forth in any
Agreement to which such holder is a party, and notwithstanding the expiration
date of the term of an Option (other than an Option designated as an incentive
share option), in the event the Trust is involved in a business combination
which is intended to be treated as a pooling of interests for financial
accounting purposes (a "Pooling Transaction") or pursuant to which such holder
receives a substitute option to purchase securities of any entity, including an
entity directly or indirectly acquiring the Trust, then each Option (or option
in substitution thereof) held by such holder shall be exercisable to the extent
set forth in the Agreement evidencing such option until and including the latest
of (x) the date set forth pursuant to the then applicable paragraph of Section
2.3 or 5.2, or the expiration date of the term of the Option, as the case may
be, (y) the date which is six months and one day after the consummation of such
business combination and (z) the date which is ten business days after the date
of expiration of any period during which such holder may not dispose of a
security issued in the Pooling Transaction in order for the Pooling Transaction
to be accounted for as a pooling of interests.
6.7 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any right
to participate in this Plan. Neither this Plan nor any Award made hereunder
shall confer upon any person any right to continued employment by, or service
to, the Trust, any subsidiary or any affiliate of the Trust or affect in any
manner the right of the Trust, any subsidiary or any affiliate of the Trust to
terminate the employment of, or service by, any person at any time without
liability hereunder. For purposes of Sections 2.3(a) through (c), Sections
3.3(a) and (b), and Sections 4.3(a) and (b), employment with the Trust or
service as an officer or consultant, adviser or Trustee includes such employment
or service with or for a subsidiary or affiliate of the Trust.
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6.8 RIGHTS AS SHAREHOLDER. No person shall have any rights as a shareholder
of the Trust with respect to any Shares which are subject to an Award hereunder
until such person becomes a shareholder of record with respect to such Shares.
6.9 DESIGNATION OF BENEFICIARY. If permitted by the Trust, an Eligible
Person who is granted an Award hereunder may file with the Administrator a
written designation of one or more persons as such Eligible Person's beneficiary
or beneficiaries (both primary and contingent) in the event of the person's
death.
Each beneficiary designation shall become effective only when filed in
writing with the Administrator during such Eligible Person's lifetime on a form
prescribed by the Administrator. Such person's spouse who is domiciled in a
community property jurisdiction shall join in any designation of a beneficiary
other than such spouse. The filing with the Administrator of a new beneficiary
designation shall cancel all previously filed beneficiary designations.
To the extent an outstanding Option granted hereunder is exercisable or an
outstanding Performance Award may be settled in accordance with the terms of
this Plan and the Agreement relating to such Award, such beneficiary of
beneficiaries shall be entitled to exercise such Option or settle such
Performance Award.
If such an Eligible Person fails to designate a beneficiary, or if all
designated beneficiaries predecease him, then each outstanding Award hereunder
held by such Eligible Person to the extent vested, exercisable or eligible for
settlement, may be exercised or settled by such Eligible Person's executor,
administrator, legal representative or similar person.
6.10 GOVERNING LAW. This Plan, each Award hereunder and the related
Agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the Code or the laws of the United States,
shall be governed by the laws of the State of New York and construed in
accordance therewith without giving effect to principles of conflicts of laws.
6.12 GLOSSARY. As used herein, the following words shall have the meaning
indicated.
"AGREEMENT" shall mean the written agreement evidencing an Award hereunder
between the Trust and the recipient of such Award.
"AWARD" shall include a grant of Options, an award of Restricted Shares and
an award of a Performance Award under this Plan.
"BASE PERFORMANCE MEASURE" shall mean a 15% Shareholder Return over the
Performance Period of five years commencing on the Effective Date.
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"BOARD" shall mean the Board of Trustees of the Trust.
"CAUSE" shall mean embezzlement or misappropriation of the Trust's funds or
other assets, other act deemed by the Administrator in the good faith exercise
of its sole discretion to be an act of dishonesty in respect to the Trust,
significant activities materially harmful to the reputation of the Trust,
willful and repeated refusal to perform or substantial disregard of the duties
properly assigned to the holder by the Trust (other than as a result of
Disability), material violation of any statutory or common law duty of loyalty
to the Trust or a material breach by the holder of the holder's employment
agreement with the Trust, if any (subject to any cure period therein provided).
"CHANGE OF CONTROL" shall mean:
(1) the acquisition by any individual, entity or group (a "Person"),
including any "person" within the meaning of Section 13 (d) (3) or 14(d)
(2) of the Exchange Act, of beneficial ownership within the meaning of Rule
13d-3 promulgated under the Exchange Act, of 51% or more of either (i) the
then outstanding Shares, (collectively, the "Outstanding Shares") or (ii)
the combined voting power of the then outstanding securities of the Trust
entitled to vote generally in the election of trustees (the "Outstanding
Voting Securities"); excluding, however, the following: (A) any acquisition
by the Trust, (B) any acquisition by an employee benefit plan (or related
trust) sponsored or maintained by the Trust or any corporation or trust
controlled by the Trust or (C) any acquisition by any corporation or trust
pursuant to a transaction which complies with clauses (i), (ii) and (iii)
of subsection (3) of this definition.
(2) individuals who, as of the Effective Date constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of such Board; provided that any individual who becomes a trustee
of the Trust subsequent to the Effective Date whose election or nomination
for election by the Trust's shareholders was approved (other than in
connection with a material transaction relating to the Trust or its assets
or the Shares or the Class B Shares of the Trust) by the vote of at least a
majority of the Trustees then comprising the Incumbent Board shall be
deemed a member of the Incumbent Board; and provided further, that any
individual who was initially elected as a Trustee of the Trust as a result
of an actual or threatened election contest, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act, or any other
actual or threatened solicitation of proxies or consent by or on behalf of
any Person other than the Board shall not be deemed a member of the
Incumbent Board;
(3) consummation by the Trust of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of
the assets of the Trust (a "Corporate Transaction"); excluding, however, a
Corporate Transaction pursuant to which (i) all or substantially all of the
individuals or entities who are the beneficial owners, respectively,
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of the Outstanding Shares and the Outstanding Voting Securities immediately
prior to such Corporate Transaction will beneficially own, directly or
indirectly, more than 66 2/3% of, respectively, the outstanding shares of
beneficial interest or common stock, and the combined voting power of the
outstanding securities of such trust or corporation entitled to vote
generally in the election of trustees or directors, as the case may be, of
the trust or corporation resulting from such Corporate Transaction
(including, without limitation, an entity which as a result of such
transaction owns the Trust or all or substantially all of the Trust's
assets either directly or indirectly in substantially the same proportions
relative to each other as their ownership, immediately prior to such
Corporate Transaction, of the Outstanding Shares and the Outstanding Voting
Securities as the case may be), (ii) no Person (other than: the Trust; any
employee benefit plan (or related trust) sponsored or maintained by the
Trust or any trust or corporation controlled by the Trust; the trust or
corporation resulting from such Corporate Transaction; and any Person which
beneficially owned, immediately prior to such Corporate Transaction,
directly or indirectly, 33 1/3% or more of the Outstanding Shares or the
Outstanding Voting Securities, as the case may be) will beneficially own,
directly or indirectly, 33 1/3% or more of, respectively, the outstanding
shares of beneficial interest or common stock of the trust or corporation
resulting from such Corporate Transaction or the combined voting power of
the outstanding securities of such trust or corporation entitled to vote
generally in the election of trustees or directors and (iii) individuals
who were members of the incumbent Board will constitute at least a majority
of the members of the board of trustees or directors of the trust or
corporation resulting from such Corporate Transaction; or
(4) approval by the shareholders of the Trust of a plan of complete
liquidation or dissolution of the Trust.
"COMMITTEE" shall mean the Committee designated by the Board, if any is so
designated (the Board being under no obligation to establish or maintain such a
committee) consisting of two or more members of the Board, each of whom shall be
(i) "Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange
Act, and (ii) at the election of the Board, an "outside director" within the
meaning of Section 162(m) of the Code.
"DISABILITY" shall mean the inability of the holder of an Award
substantially to perform such holder's duties and responsibilities for a
continuous period of at least six months.
"ELIGIBLE PERSONS" shall have the meaning set forth in Section 1.4.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
G-17
<PAGE>
"FAIR MARKET VALUE" shall mean the closing transaction price of a Share as
reported in the American Stock Exchange Composite Transactions on the first
business day immediately preceding the date as of which such value is being
determined, or, if there shall be no reported transaction on such day, on the
next preceding business day for which a transaction was reported; provided that
if the Fair Market Value of a Share for any date cannot be determined as above
provided, Fair Market Value of a Share shall be determined by the Administrator
by whatever means or method as to which the Administrator, in the good faith
exercise of its discretion, shall at such time deem appropriate.
"PERFORMANCE MEASURES" shall mean the criteria and objectives, established
by the Administrator, which shall be satisfied or met (i) as a condition to the
exercisability of all or a portion of an Option, or (ii) during the applicable
Restriction Period or Performance Period as a condition to the holder's receipt
or retention, in the case of a Restricted Share Award, of the Shares subject to
such award, or, in the case of a Performance Award, of payment with respect to
such award. Such criteria and objectives may include, without limitation, one or
more of the following: the attainment by a Share of a specified Fair Market
Value for a specified period of time, earnings per share, return to shareholders
(including dividends), return on equity, earnings of the Trust, revenues, market
share, funds from operations, cash flow or cost reduction goals, or any
combination of the foregoing. The Administrator may, in its sole discretion,
amend or adjust the Performance Measures or other terms and conditions of an
outstanding award in recognition of unusual or nonrecurring events affecting the
Trust or its financial statements or changes in law or accounting principles. If
the Administrator consists solely of "outside directors" (withing the meaning of
Section 162(m) of the Code and the regulations promulgated thereunder) and the
Administrator desires that compensation payable pursuant to any award subject to
Performance Measures shall be "qualified performance-based compensation" within
the meaning of Section 162(m) of the Code, the Performance Measures (i) shall be
established by the Administrator no later than the end of the first quarter of
the Performance Period or Restriction Period, as applicable (or such other time
permitted pursuant to Treasury Regulations promulgated under Section 162(m) of
the Code or otherwise permitted by the Internal Revenue Service) and (ii) shall
satisfy all other applicable requirements imposed under Treasury Regulations
promulgated under Section 162(m) of the Code, including the requirement that
such Performance Measures be stated in terms of an objective formula or
standard. Unless otherwise designated by the Administrator, the Performance
Measure shall be the Base Performance Measure.
"PERFORMANCE PERIOD" shall mean any period designated by the Administrator
for which the Performance Measures shall be calculated. The Performance Period
shall be the five-year period commencing on the Effective Date unless otherwise
designated by the Administrator.
G-18
<PAGE>
"PERFORMANCE AWARD" shall mean a right, contingent upon the attainment of
specified Performance Measures within a specified Performance Period, to receive
a payment in cash.
"PERMANENT AND TOTAL DISABILITY" shall have the meaning set forth in
Section 22(c)(3) of the Code or any successor thereto.
"RESTRICTED SHARES" shall mean Shares that are subject to a Restriction
Period.
"RESTRICTION PERIOD" shall mean any period designated by the Administrator
during which the Shares subject to a Restricted Share Award may not be sold,
transferred, assigned, pledged, hypothecated or otherwise voluntarily encumbered
or disposed of, except as provided in this Plan or the Agreement relating to
such award.
"SHAREHOLDER RETURN" shall mean the per annum compounded rate of increase
in the Fair Market Value of an investment in Shares on the first day of the
Performance Period (assuming purchase of Shares at their Fair Market Value on
such day) through the last day of the Performance Period, plus all dividends or
distributions paid with respect to such Shares during the Performance Period,
and assuming reinvestment in Shares of all such dividends and distributions,
adjusted to give effect to Section 6.6 of the Plan.
"SHARE AWARD" or "RESTRICTED SHARE AWARD" shall mean an award of Restricted
Shares.
G-19
<PAGE>
EXHIBIT H
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
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to_________________
Commission File No. 1-10150
ANGELES PARTICIPATING MORTGAGE TRUST
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to 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 57
--
<PAGE>
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
Competition........................................................................... 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>
2
<PAGE>
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 predominantly 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 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
3
<PAGE>
may include controlling or non-controlling equity ownership positions in any
general category of real estate assets, including, without limitation, office,
industrial, mini-storage 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.
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
4
<PAGE>
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.
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")
5
<PAGE>
<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
6
<PAGE>
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.
<TABLE>
High Low
---------- ----------
<S> <C> <C>
Quarter ended:
December 31, 1996
September 30, 1996 $ 2 1/8 $ 1 3/8
June 30, 1996 $ 1 7/8 $ 7/8
March 31, 1996 $ 1 1/8 $ 9/16
$ 5/8 $ 1/2
December 31, 1995
September 30, 1995 $ 5/8 $ 1/2
June 30, 1995 $ 5/8 $ 1/2
March 31, 1995 $ 11/16 $ 1/2
$ 3/4 $ 7/16
</TABLE>
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.
7
<PAGE>
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>
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) $(0.55) $(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.
8
<PAGE>
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
<PAGE>
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 3 - 1,196,000
Mortgage note receivable 4 3,707,000 -
Accrued interest 56,000 -
Other receivables 5 8,000 10,000
Other assets 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:
Class 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
In Excess of
Additional Cumulative
Class A Class B Paid-In Net Income
Shares Shares Capital (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) - - 10l,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 42,329,00 (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
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (577,000) $ (135,000) $ (330,000)
Adjustments to reconcile net loss to cash flows
from operating activities:
Minority Interest
Decrease (increase) in other receivables 154,000 - -
(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.
This 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 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
18
<PAGE>
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.
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
19
<PAGE>
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:
<TABLE>
<CAPTION>
For the year
ended December 31, 1996
-----------------------
<S> <C>
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
==========
</TABLE>
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 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
20
<PAGE>
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 2,550 2,550 2,550 2,550
outstanding
<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 2,550 2,550 2,550 2,550
outstanding
</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:
<TABLE>
<S> <C> <C>
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
</TABLE>
(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 Managing Director of Starwood Capital and has been 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, summa 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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Trustee
Compensation Fees
------------ ----
Name and Principal Position Year Salary
--------------------------- ---- ------
<S> <C> <C> <C>
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
</TABLE>
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, 9,568,944 (2) 78.2%
Suite 250, Greenwich, CT 06830
Class A Shares Starwood Mezzanine Holdings, L.P., Three Pickwick Plaza, Suite 9,568,944 (2) 78.2%
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, 9,936,706 (3) 81.2%
Greenwich, 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, CT 06830 2,046,576 (3) 38.7%
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 06830 6,059,471 (3) 100%
Class B Shares SWL Acquisition Partners, L.P., Three Pickwick Plaza, 6,059,471 (3) 100%
Suite 250, 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 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
26
<PAGE>
("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
Statements of Cash Flows for each of the three years in the
period ended December 31, 1995 B-5
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
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
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
- --------------------------------------------------------------------------------
<S> <C>
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.
</TABLE>
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
ASSETS
<TABLE>
<CAPTION>
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 guest 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
=========== ===========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
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
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
========== ==========
</TABLE>
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
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
========== ===========
</TABLE>
- 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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash paid for interest during the year $675,336 $776,493
======= =======
</TABLE>
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:
<TABLE>
<S> <C>
Building and improvements 34 years
Furniture and fixtures 5-10 years
Equipment 5-10 years
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------ ------
<S> <C>
1997 $ 439,000
1998 2,680,000
1999 524,000
2000 574,000
2001 628,000
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------ ------
<S> <C>
1997 $ 184,000
1998 185,000
1999 166,000
2000 131,000
2001 132,000
Thereafter 577,000
----------
$1,375,000
==========
</TABLE>
-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 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, 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
ASSETS
<TABLE>
<CAPTION>
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
========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
<S> <C> <C>
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
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
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)
========= ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash paid for interest during the year $776,493 $749,900
======= =======
</TABLE>
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.
-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:
<TABLE>
<S> <C>
Building and improvements 34 years
Furniture and fixtures 5-10 years
Equipment 5-10 years
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------ ------
<S> <C>
1996 $401,000
1997 439,000
1998 480,000
1999 524,000
2000 574,000
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------ ------
<S> <C>
1996 $171,000
1997 137,000
1998 121,000
1999 107,000
2000 55,000
Thereafter 130,000
</TABLE>
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-
<PAGE>
EXHIBIT I
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to____________________
Commission File No. 1-10150
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 per share, of Angeles Participating
Mortgage Trust
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
-
As of May 7, 1997, there were 7,550,000 Class A Shares of Angeles
Participating Mortgage Trust Class A, $1.00 par value, outstanding.
Total Pages 12
--
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Balance Sheets at March 31, 1997 and December 31, 1996 3
Statements of Operations - For the three months
ended March 31, 1997 and 1996 4
Statements of Cash Flows - For the three months
ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE>
Angeles Participating Mortgage Trust
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 877,000 $ 1,888,000
Investments 5,983,000 -
Mortgage note receivable 3,649,000 3,707,000
Accrued interest 197,000 56,000
Other receivables 5,000 8,000
Other assets 15,000 15,000
-------------- -------------
Total assets $ 10,726,000 $ 5,674,000
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities: $ 35,000 $ 37,000
Accounts payable 142,000 142,000
Accrued expenses -------------- -------------
Total liabilities 177,000 179,000
-------------- -------------
Minority Interest 4,053,000 3,917,000
-------------- -------------
Shareholders' equity:
Class A Shares (7,550,000 shares issued and outstanding,
$1.00 par value, unlimited shares authorized) 7,550,000 2,550,000
Class B Shares (3,775,000 shares issued and outstanding,
$.01 par value, unlimited shares authorized) 38,000 13,000
Unrealized loss on "available for sale" investments (24,000) -
Additional paid in capital 42,228,000 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 (45,841,000) (45,859,000)
-------------- -------------
Total shareholders' equity 6,496,000 1,578,000
-------------- -------------
Total liabilities and shareholders' equity $ 10,726,000 $ 5,674,000
============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Angeles Participating Mortgage Trust
Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1997 1996
----------- ------------
<S> <C> <C>
Revenue:
Interest income from mortgage notes $ 155,000 $ -
Interest income from investments 83,000 8,000
Other income 2,000 -
----------- -----------
Total revenue 240,000 8,000
----------- -----------
Costs and expenses:
General and administrative 76,000 205,000
----------- -----------
Total costs and expenses 76,000 205,000
----------- -----------
Net income (loss) before minority interest 164,000 (197,000)
Minority Interest (146,000) -
----------- -----------
Net income (loss) $ 18,000 $ (197,000)
=========== ===========
Net income (loss) per Class A Share $ 0.01 $ (0.08)
=========== ===========
Cash distributions per Class A Share $ 0.00 $ 0.00
=========== ===========
Weighted average of shares outstanding 6,328,000 2,550,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Angeles Participating Mortgage Trust
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 18,000 $ (198,000)
Adjustments to reconcile net income (loss) to cash flows
from operating activities:
Minority Interest 146,000 -
Decrease (increase) in other receivables (138,000) 5,000
Increase (decrease) in accounts payable and accrued
expenses (2,000) 114,000
------------ ------------
Cash flows provided (used) by operating activities 24,000 (79,000)
------------ ------------
Cash flows from investing activities:
Investments in securities (6,019,000) (1,478,000)
Principal collections from investment securities 2,000 209,000
Sale of investment securities - 1,477,000
Principal collections from mortgage notes 58,000 -
------------ ------------
Cash flows (used) provided by investing activities (5,959,000) 208,000
------------ ------------
Cash flows from financing activities:
Exercise of warrants 4,924,000 -
------------ ------------
Cash flows provided by financing activities 4,924,000 -
------------ ------------
(Decrease) increase in cash and cash equivalents (1,011,000) 129,000
Cash and cash equivalents at beginning of period 1,888,000 863,000
------------ ------------
Cash and cash equivalents at end of period $ 877,000 $ 992,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Angeles Participating Mortgage Trust
Notes to Consolidated Financial Statements
Note 1 - General
In the opinion of management, the accompanying unaudited financial
statements contain all of the adjustments necessary to present fairly the
consolidated financial position of Angeles Participating Mortgage Trust
("APART") and its investee operating partnership, APMT Limited Partnership, a
Delaware limited partnership (the "Partnership"), at March 31, 1997 and the
results of operations and its cash flows for the three months ended March 31,
1997 and 1996, in conformity with generally accepted accounting principles
applied on a consistent basis. All adjustments included are of a normal and
recurring nature. Although APART owns less than 50% of the Partnership, the
operations and financial position of APART and the Partnership are consolidated
under generally accepted accounting principles, because APART controls the
Partnership in its capacity as general partner of the Partnership. Furthermore,
both APART and the other investor in the Partnership are under common control as
further described in Note 4. The accounting policies followed by APART are more
fully described in Note 2 to APART's financial statements included as part of
its 1996 Annual Report on Form 10-K which is incorporated herein by reference.
The results of operations for the three month period ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997.
Note 2 - Organization
APART is a California business trust which was formed as a real estate
investment trust ("REIT") under applicable provisions of the Internal Revenue
Code initially for the purpose of making and acquiring various types of
mortgages and other loans, primarily with entities affiliated with APART's
former advisor.
On September 26, 1996, the shareholders of APART approved a Restated
Declaration of Trust which, among other things, revised APART's investment
policy to allow APART to acquire a diversified portfolio of interests (the
"Diversified Portfolio") in real estate or real estate-related assets,
including originating or acquiring mortgage loans, acquiring real estate-related
debt securities, making purchase money loans with respect to assets sold by
APART and acquiring non-performing or under performing debt secured by real
estate assets. 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
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; (d) interests which are publicly traded, including other
REIT equities, limited partnership interests and debt interests. This
investment policy is subject to restrictions which require the approval of
certain shareholders as to certain types of investments.
On September 26, 1996, APART became the sole general partner of the
Partnership (see Note 4). 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 3 - Investments
As of March 31, 1997, APART holds one investment in U.S. Treasury
Notes and four investments in Government National Mortgage Association
securities ("GNMA"). The U.S. Treasury Note has a coupon rate of 6.5%, matures
on April 30, 1997 and is classified as "held to maturity." The GNMAs each have
a coupon rate of 7.5%; three of the GNMAs mature in 2027 and the other GNMA
matures in 2026. In accordance with Statement of Financial Accounting Standards
No. 115 ("FASB 115") APART has classified all GNMA investments as "available for
sale" because they are freely tradeable. As of March 31, 1997, APART recorded a
current unrealized loss of $24,000 from its GNMAs which is reflected in the
shareholders' equity section of the balance sheet.
6
<PAGE>
Note 4 - The Partnership
On September 26, 1996, APART became the sole general partner of the
Partnership by contributing $400,000 in cash, evidenced by 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, evidenced by
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. The mortgage note contributed by Starwood Mezzanine into the
Partnership was reflected in the financial statements at its predecessor basis
of $3.76 million. As of March 31, 1997, the mortgage note had a basis of $3.65
million. Interest payments due in connection with the mortgage were current and
the borrower remained in compliance with all terms of the mortgage.
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 for the quarter ended
March 31, 1996 is not yet available; however, December 31, 1996 information is
as follows:
<TABLE>
<CAPTION>
For the year
ended December 31, 1996
-----------------------
<S> <C>
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
==========
</TABLE>
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.
7
<PAGE>
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 31, 1996.
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 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 all of the
outstanding Class A Warrants to acquire 5,000,000 Class A Shares at $1 per
share, bringing its total beneficial ownership to 5,000,000 Class A Shares and
4,568,944 OPU. In addition, SAHI, Inc. exercised all of the outstanding Class
B Warrants to acquire 2,500,000 Class B Shares, bringing its total beneficial
ownership to 3,775,000 Class B Shares and 244,100 Class A Shares, with the
opportunity to acquire an additional 2,284,471 Class B Shares upon conversion of
the OPU to Class A Shares. Each share of Class A Shares and Class B Shares is
entitled to one vote per share. Due to the exercise of the entire Class A and
Class B Warrants, SAHI, SAHI, Inc., and Starwood Mezzanine ("SAHI Nominees")
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.
Note 6 - Incentive Plan
On September 26, 1996, the shareholders approved an incentive plan for
the Trustees (the "Trustee Plan") and an incentive plan for employees (the
"Employee Plan"). 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. As of March 31, 1997, 2,000 stock options were
granted under the Trustee Plan. All Trustees affiliated with the SAHI Nominees
waived their rights to receive stock options during 1996 and 1997. The options
are fully vested and have an exercise price of $1.38 per share. No stock
options have been granted under the Employee Plan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
APART is a California business Trust organized to operate as a REIT.
On March 15, 1994, APART announced that it had entered into an agreement with
SAHI Partners ("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 Investors "(Starwood Mezzanine").
On September 26, 1996, APART became sole general partner of the APMT
Limited Partnership ("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.
8
<PAGE>
On January 22, 1997, Starwood Mezzanine exercised all of the
outstanding Class A Warrants to acquire 5,000,000 Class A Shares. In addition,
SAHI, Inc. exercised all of the outstanding Class B Warrants 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 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;
(d) interests which are publicly traded, including other REIT equities, limited
partnership interests and debt interests.
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 and cash equivalents were approximately $6.9 million and $1.9 million
as of March 31, 1997 and December 31, 1996, respectively.
APART has paid no dividends since 1993. The amount and timing of any
future cash dividends, if any, is impossible to predict at this time.
Shareholders' equity approximates the amount of remaining cash, investments, and
other assets. Management believes that there will be sufficient cash available
from operations to meet the obligations of APART in future periods and 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. During the
first quarter of 1997, these funds were primarily used to purchase Government
National Mortgage Association securities ("GNMA") and U.S. Treasury Notes.
APART has historically operated as a REIT and maintained its
qualification as a REIT under the Code. APART intends to continue to operate so
as to qualify as a REIT under the Code.
Results of Operations
During the three months ended March 31, 1997, total revenue increased
$232,000 as compared to total revenue for the three months ended March 31, 1996.
This increase is a result of the interest generated by the Partnership and the
GNMAs.
The decrease in APART's total costs and expenses during the three
months ended March 31, 1997 compared to the three months ended March 31, 1996 is
primarily due to the reduction of legal fees resulting from costs incurred in
1996 relating to the preparation of the proxy, combined with the elimination of
payroll and office rental costs.
The minority interest represents Starwood Mezzanines' share of the net
income generated by the Partnership.
9
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Refer to Exhibit Index on page 12 of this report.
b. Reports on Form 8-K
On January 28, 1997, APART filed a Form 8-K in connection with the
exercise of the Class A and Class B Warrants.
Note: All items required under Part II of Form 10-Q which are applicable have
been reported herein.
10
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
Exhibit Index
Exhibit Number Description of Exhibit
-------------------------------------
3.1 Restated Declaration of Trust of Angeles Participating Mortgage
Trust. (1)
(1) Filed as an exhibit to APART's Form 10-Q dated September 30, 1996
and incorporated herein by reference.
11
<PAGE>
SIGNATURES
Pursuant to the requirements 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
Date May 8, 1997 /s/ Barry S. Sternlicht
------------------------
Barry S. Sternlicht
Trustee and Chairman
(Chief Executive Officer)
Date May 8, 1997 /s/ Jerome C. Silvey
---------------------
Jerome C. Silvey
Chief Financial Officer
(Principal Financial and Accounting Officer)
12
<PAGE>
EXHIBIT J
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to____________________
Commission File No. 1-10150
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 06830
Greenwich, CT (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 861-07523
Securities registered pursuant to
Section 12(b) of the Act:
Name of Exchange on which registered:
-------------------------------------
Title of each class:
-------------------- American Stock Exchange
Class A Shares, $1.00 par
value per share, of Angeles Participating
Mortgage Trust
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
--- ---
As of August 12, 1997, there were 7,550,000 Class A Shares of Angeles
Participating Mortgage Trust Class A, $1.00 par value, outstanding.
Total Pages 11
--
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Consolidated Balance Sheets at June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations - For the three and six
months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows - For the six months
ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE>
Angeles Participating Mortgage Trust
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,767,000 $ 1,888,000
Investments 1,487,000 --
Mortgage note receivable 3,587.000 3,707,000
Accrued interest 53,000 56,000
Other receivables 2,000 8,000
Other assets 33,000 15,000
----------- ------------
Total assets $10,929,000 $ 5,674,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 35,000 $ 37,000
Accrued expenses 179,000 142,000
----------- ------------
Total liabilities 214,000 179,000
----------- ------------
Minority Interest 4,195,000 3,917,000
----------- ------------
Shareholders' equity:
Class A Shares (7,550,000 shares issued and outstanding,
$1.00 par value, unlimited shares authorized) 7,550,000 2,550,000
Class B Shares (3,775,000 shares issued and outstanding,
$.01 par value, unlimited shares authorized) 38,000 13,000
Unrealized loss on "available for sale" investments (5,000) --
Additional paid in capital 42,228,000 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 (45,836,000) (45,859,000)
----------- ------------
Total shareholders' equity 6,520,000 1,578,000
----------- ------------
Total liabilities and shareholders' equity $10,929,000 $ 5,674,000
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Angeles Participating Mortgage Trust
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------ ---------------------------------
1997 1996 1997 1996
----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Interest income from mortgage notes $ 152,000 $ -- $ 307,000 $ --
Interest income from investments 68,000 21,000 151,000 29,000
Other income -- -- 2,000 0
----------- ----------- ------------- ------------
Total revenue 220,000 21,000 460,000 29,000
----------- ----------- ------------- ------------
Costs and expenses:
General and administrative 81,000 80,000 157,000 285,000
----------- ----------- ------------- ------------
Total costs and expenses 81,000 80,000 157,000 285,000
----------- ----------- ------------- ------------
Net income (loss) before minority interest 139,000 -- 303,000 --
Minority interest (134,000) -- (280,000) --
Net income (loss) $ 5,000 $ (59,000) $ 23,000 $ (256,000)
=========== =========== =========== ============
Net income (loss) per Class A Share $ 0.01 $ (0.02) $ 0.01 $ (0.10)
=========== =========== =========== ============
Cash distributions per Class A Share $ 0.00 $ 0.00 $ 0.00 $ 0.00
=========== =========== =========== ============
Weighted average of shares outstanding 7,550,000 2,550,000 6,939,000 2,550,000
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Angeles Participating Mortgage Trust
Consolidated Statements of Cash Flows (Unaudited)
Six months ended
June 30,
--------------------------------
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 23,000 $ (256,000)
Adjustment to reconcile net income (loss) to cash flows
from operating activities
Minority interest 280,000 --
Decrease in other receivables 9,000 4,000
Increase in other assets (18,000) --
Increase (decrease) in accounts payable and
accrued expenses 35,000 (6,000)
----------- -----------
Cash flows provided (used) by operating activities $ 329,000 $ (258,000)
----------- -----------
Cash flows from investing activities
Investments in securities (6,006,000) (2,466,000)
Principal collections from investment securities 12,000 1,197,000
Sale of investment securities 4,500,000 1,478,000
Principal collections from mortgage note 120,000 --
----------- -----------
Cash flows (used) provided by investing activities $(1,374,000) $ 209,000
----------- -----------
Cash flows from financing activities
Exercise of warrants 4,924,000 --
----------- -----------
Cash flows provided by financing activities $4,924,000 $ --
----------- -----------
Increase (decrease) in cash and cash equivalents 3,879,000 (49,000)
Cash and cash equivalents at beginning of period $ 1,888,000 $ 863,000
----------- -----------
Cash and cash equivalents at end of period $ 5,767,000 $ 814,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Angeles Participating Mortgage Trust
Notes to Consolidated Financial Statements
Note 1 - General
In the opinion of management, the accompanying unaudited financial
statements contain all of the adjustments necessary to present fairly the
consolidated financial position of Angeles Participating Mortgage Trust
("APART") and its investee operating partnership, APMT Limited Partnership, a
Delaware limited partnership (the "Partnership"), at June 30, 1997 and the
results of operations for the three and six months ended June 30, 1997 and 1996,
and its cash flows for the six months ended June 30, 1997 and 1996, in
conformity with generally accepted accounting principles applied on a consistent
basis. All adjustments included are of a normal and recurring nature. Although
APART owns less than 50% of the Partnership, the operations and financial
position of APART and the Partnership are consolidated under generally accepted
accounting principles, because APART controls the Partnership in its capacity as
general partner of the Partnership. Furthermore, both APART and the other
investor in the Partnership are under common control as further described in
Note 4. The accounting policies followed by APART are more fully described in
Note 2 to APART's financial statements included as part of its 1996 Annual
Report on Form 10-K which is incorporated herein by reference.
The results of operations for the six month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
Note 2 - Organization
APART is a California business trust which was formed as a real estate
investment trust ("REIT") under applicable provisions of the Internal Revenue
Code initially for the purpose of making and acquiring various types of
mortgages and other loans, primarily with entities affiliated with APART's
former advisor.
On September 26, 1996, the shareholders of APART approved a Restated
Declaration of Trust which, among other things, revised APART's investment
policy to allow APART to acquire a diversified portfolio of interests (the
"Diversified Portfolio") in real estate or real estate-related assets,
including originating or acquiring mortgage loans, acquiring real estate-related
debt securities, making purchase money loans with respect to assets sold by
APART and acquiring non-performing or under performing debt secured by real
estate assets. 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
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; (d) interests which are publicly traded, including other
REIT equities, limited partnership interests and debt interests. This
investment policy is subject to restrictions which require the approval of
certain shareholders as to certain types of investments.
On September 26, 1996, APART became the sole general partner of the
Partnership (see Note 4). 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 3 - Investments
As of June 30, 1997, APART held four investments in Government
National Mortgage Association securities ("GNMA"). The GNMAs each have a coupon
rate of 7.5%; three of the GNMAs mature in 2027 and the other GNMA matures in
2026. In accordance with Statement of Financial Accounting Standards No. 115
("FASB 115") APART has classified all GNMA investments as "available for sale"
because they are freely tradeable. As of June 30, 1997, APART recorded a
current unrealized loss of $5,000 from its GNMAs which is reflected in the
shareholders' equity section of the balance sheet in accordance with FASB 115.
On April 30, 1997, the $4.5 million U.S Treasury Note purchased with the
proceeds of the warrant exercise (described in Note 5) matured, and the funds
were invested in Federal Home Loan Mortgage Corporation ("FHLMC") discount notes
which are included in cash and cash equivalents.
6
<PAGE>
Note 4 - The Partnership
On September 26, 1996, APART became the sole general partner of the
Partnership by contributing $400,000 in cash, evidenced by 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, evidenced by
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. The mortgage participation certificates contributed by Starwood
Mezzanine into the Partnership were reflected in the financial statements at its
predecessor basis of $3.76 million. As of June 30, 1997, the mortgage
participation certificates had a basis of $3.59 million. Interest payments due
in connection with the mortgage were current and the borrower remained in
compliance with all terms of the mortgage.
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 cash basis financial information, modified for depreciation and
amortization estimates, for the borrower for the six months ended June 30, 1997
is as follows:
<TABLE>
<CAPTION>
For the six months
ended June 30, 1997
-------------------
<S> <C>
Total Assets $9,574,824
==========
Total Liabilities $8,396,564
Partners' Capital 1,178,260
----------
Total liabilities and partners' capital $9,574,824
==========
Revenue $3,996,782
Expenses 3,855,732
----------
Net Income $ 141,050
==========
</TABLE>
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.
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 June 30, 1997.
7
<PAGE>
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 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 all of the
outstanding Class A Warrants to acquire 5,000,000 Class A Shares at $1 per
share, bringing its total beneficial ownership to 5,000,000 Class A Shares and
4,568,944 OPU. In addition, SAHI, Inc. exercised all of the outstanding Class
B Warrants to acquire 2,500,000 Class B Shares, bringing its total beneficial
ownership to 3,775,000 Class B Shares and 244,100 Class A Shares, with the
opportunity to acquire an additional 2,284,472 Class B Shares upon conversion of
the OPU to Class A Shares. Each share of Class A Shares and Class B Shares is
entitled to one vote per share. Due to the exercise of the entire Class A and
Class B Warrants, SAHI, SAHI, Inc., and Starwood Mezzanine (collectively, the
"SAHI Nominees") 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.
Note 6 - Incentive Plan
On September 26, 1996, the shareholders approved an incentive plan for
the Trustees (the "Trustee Plan") and an incentive plan for employees (the
"Employee Plan"). 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. As of June 30, 1997, 2,000 stock options were
granted under the Trustee Plan. All Trustees affiliated with the SAHI Nominees
waived their rights to receive stock options during 1996 and 1997. The options
are fully vested and have an exercise price of $1.38 per share. No stock
options have been granted under the Employee Plan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Angeles Participating Mortgage Trust ("APART), is a California
business trust organized to operate as a real estate investment trust ("REIT").
On March 15, 1994, APART announced that it had entered into an agreement with
SAHI Partners ("SAHI") and SAHI, Inc. for the sale of warrants for the right to
purchase five million of APART's Class A Shares at a price of $1 per share (the
"Class A Warrant") and a warrant for the right to purchase 2,500,000 Class B
Shares for a price of $0.01 per share (the "Class B Warrant" and together with
the Class A Warrant, the "Warrants"). 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
Investors ("Starwood Mezzanine").
On September 26, 1996, APART became sole general partner of the APMT
Limited Partnership ("the Partnership") by contributing $400,000 in cash in
exchange for a 8.05% interest in the Partnership evidenced by 400,000 Operating
Partnership Units ("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 the Class A Warrant
to acquire 5,000,000 Class A Shares. In addition, SAHI, Inc. exercised 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
8
<PAGE>
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 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;
(d) interests which are publicly traded, including other REIT equities, limited
partnership interests and debt interests. This investment policy is subject to
restrictions that require the approval of certain shareholders as to certain
types of investments.
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 and cash equivalents were approximately $7.3 million and $1.9 million
as of June 30, 1997 and December 31, 1996, respectively. Of the June 30, 1997
total, $5.0 million was invested in Federal Home Loan Mortgage Corporation
("FHLMC") discount notes and $1.5 million was invested in Government National
Mortgage Association securities ("GNMA"), with the remainder held in money
market funds.
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. During the
first quarter of 1997, these funds were primarily used to purchase GNMA and U.S.
Treasury Notes. On April 30, 1997, after the maturity of the U.S. Treasury
Note, the cash proceeds were used to purchase two FHLMC discount notes.
APART has paid no dividends since 1993. The amount and timing of any
future cash dividends, if any, is impossible to predict at this time.
Shareholders' equity approximates the amount of remaining cash, investments, and
other assets. Management believes that there will be sufficient cash available
from operations to meet the obligations of APART in future periods and to
operate as a going concern through the 1997 fiscal year.
APART has historically operated as a REIT and maintained its
qualification as a REIT under the Internal Revenue Code. APART intends to
continue to operate so as to qualify as a REIT under the Internal Revenue Code.
Results of Operations
During the three and six months ended June 30, 1997, total revenue
increased $199,000 and $431,000, respectively, as compared to total revenue for
the comparable periods in 1996. This increase is a result of the interest
income generated by the mortgage participation certificates contributed into the
Partnership in September, 1996 and the investments made with the funds received
from the exercise of the warrants in January, 1997.
The decrease in APART's total costs and expenses during the three and
six months ended June 30, 1997 compared to the same period ending 1996 is
primarily due to the reduction of legal fees resulting from costs incurred in
1996 relating to the preparation of the 1996 proxy, combined with the
elimination of payroll and office rental costs in 1997.
The minority interest represents Starwood Mezzanines' share of the net
income generated by the Partnership.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Refer to Exhibit Index on page 12 of this report.
b. Reports on Form 8-K
None.
Note: All items required under Part II of Form 10-Q which are applicable have
been reported herein.
9
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
Exhibit Index
Exhibit Number Description of Exhibit
-------------------------------------
3.1 Restated Declaration of Trust of Angeles Participating Mortgage
Trust. (1)
(1) Filed as an exhibit to APART's Form 10-Q dated September 30, 1996 and
incorporated herein by reference.
10
<PAGE>
SIGNATURES
Pursuant to the requirements 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
Date August 12, 1997 /s/ Barry S. Sternlicht
------------------------
Barry S. Sternlicht
Trustee and Chairman
(Chief Executive Officer)
Date August 12, 1997 /s/ Jerome C. Silvey
---------------------
Jerome C. Silvey
Chief Financial Officer
(Principal Financial and Accounting Officer)
11
<PAGE>
EXHIBIT K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to____________________
Commission File No. 1-10150
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 06830
Greenwich, CT (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 per share, of Angeles Participating
Mortgage Trust
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
---
As of October 31, 1997, there were 7,550,000 Class A Shares of Angeles
Participating Mortgage Trust Class A, $1.00 par value, outstanding.
Total Pages 11
--
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
<TABLE>
<CAPTION>
Index
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Consolidated Balance Sheets at September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations - For the three and nine
months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows - For the nine months
ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE>
Angeles Participating Mortgage Trust
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 842,000 $ 1,888,000
Investments 6,666,000 --
Mortgage note receivable 3,524,000 3,707,000
Accrued interest 53,000 56,000
Other receivables 2,000 8,000
Other assets 24,000 15,000
------------ ------------
Total assets $ 11,111,000 $ 5,674,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 35,000 $ 37,000
Accrued expenses 203,000 142,000
------------ ------------
Total liabilities 238,000 179,000
------------ ------------
Minority interest 4,340,000 3,917,000
------------ ------------
Shareholders' equity:
Class A Shares (7,550,000 shares issued and outstanding,
$1.00 par value, unlimited shares authorized) 7,550,000 2,550,000
Class B Shares (3,775,000 shares issued and outstanding,
$.01 par value, unlimited shares authorized) 38,000 13,000
Unrealized gain on "available for sale" investments 6,000 --
Additional paid in capital 42,228,000 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 (45,834,000) (45,859,000)
------------ ------------
Total shareholders' equity 6,533,000 1,578,000
------------ ------------
Total liabilities and shareholders' equity $ 11,111,000 $ 5,674,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Angeles Participating Mortgage Trust
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Interest income from mortgage notes $ 150,000 $ 6,000 $ 457,000 $ 6,000
Interest income from investments 96,000 29,000 247,000 58,000
Other income -- -- 2,000 --
----------- ----------- ----------- -----------
Total revenue 246,000 35,000 706,000 64,000
----------- ----------- ----------- -----------
Costs and expenses:
General and administrative 104,000 275,000 261,000 560,000
----------- ----------- ----------- -----------
Total costs and expenses 104,000 275,000 261,000 560,000
----------- ----------- ----------- -----------
Net income (loss) before minority interest 142,000 (240,000) 445,000 (496,000)
Minority interest (140,000) (6,000) (420,000) (6,000)
----------- ----------- ----------- -----------
Net income (loss) $ 2,000 $ (246,000) $ 25,000 $ (502,000)
=========== =========== =========== ===========
Net income (loss) per Class A Share $ 0.01 $ 0.10 $ 0.01 $ (0.19)
=========== =========== =========== ===========
Cash distributions per Class A Share $ 0.00 $ 0.00 $ 0.00 $ 0.00
=========== =========== =========== ===========
Weighted average of shares outstanding 7,550,00 2,550,000 7,143,000 2,550,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Angeles Participating Mortgage Trust
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------------
1997 1996
------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 25,000 $ (502,000)
Adjustment to reconcile net income (loss) to cash flows
from operating activities
Minority interest 420,000 6,000
Accrued interest -- (6,000)
Decrease in other receivables 9,000 8,000
Increase in other assets (9,000) --
Increase in accounts payable and accrued
expenses 59,000 128,000
------------ ------------
Cash flows provided (used) by operating activities $ 504,000 $ (366,000)
------------ ------------
Cash flows from investing activities
Investments in securities (16,255,000) --
Principal collections from investment securities 32,000 1,196,000
Sale of investment securities 9,566,000 --
Principal collections from mortgage note 183,000 --
------------ ------------
Cash flows (used) provided by investing activities $ (6,474,000) $ 1,196,000
------------ ------------
Cash flows from financing activity
Exercise of warrants 4,924,000 --
------------ ------------
Cash flows provided by financing activity $ 4,924,000 $ --
------------ ------------
Increase (decrease) in cash and cash equivalents (1,046,000) 830,000
Cash and cash equivalents at beginning of period $ 1,888,000 $ 863,000
------------ ------------
Cash and cash equivalents at end of period $ 842,000 $ 1,693,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Angeles Participating Mortgage Trust
Notes to Consolidated Financial Statements
Note 1 - General
In the opinion of management, the accompanying unaudited
financial statements contain all of the adjustments necessary to present fairly
the consolidated financial position of Angeles Participating Mortgage Trust
("APART") and its investee operating partnership, APMT Limited Partnership, a
Delaware limited partnership (the "Partnership"), at September 30, 1997 and the
results of operations for the three and nine months ended September 30, 1997 and
1996, and its cash flows for the nine months ended September 30, 1997 and 1996,
in conformity with generally accepted accounting principles applied on a
consistent basis. All adjustments included are of a normal and recurring nature.
Although APART owns less than 50% of the Partnership, the operations and
financial position of APART and the Partnership are consolidated under generally
accepted accounting principles, because APART controls the Partnership in its
capacity as general partner of the Partnership. Furthermore, both APART and the
other investor in the Partnership are under common control as further described
in Note 4. The accounting policies followed by APART are more fully described in
Note 2 to APART's financial statements included as part of its 1996 Annual
Report on Form 10-K which is incorporated herein by reference.
The results of operations for the nine month period ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
Note 2 - Organization
APART is a California business trust which was formed as a
real estate investment trust ("REIT") under applicable provisions of the
Internal Revenue Code of 1986, as amended, initially for the purpose of making
and acquiring various types of mortgages and other loans, primarily with
entities affiliated with APART's former advisor.
On September 26, 1996, the shareholders of APART approved a
Restated Declaration of Trust which, among other things, revised APART's
investment policy to allow APART to acquire a diversified portfolio of interests
(the "Diversified Portfolio") in real estate or real estate-related assets,
including originating or acquiring mortgage loans, acquiring real estate-related
debt securities, making purchase money loans with respect to assets sold by
APART and acquiring non-performing or under performing debt secured by real
estate assets. 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
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; and (d) interests which are publicly traded, including
other REIT equities, limited partnership interests and debt interests. This
investment policy is subject to restrictions which require the approval of
certain shareholders as to certain types of investments.
On September 26, 1996, APART became the sole general partner
of the Partnership (see Note 4). 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 3 - Investments
As of September 30, 1997, APART held four investments in
Government National Mortgage Association securities ("GNMA") aggregating $1.5
million. The GNMAs each have a coupon rate of 7.5%; three of the GNMAs mature in
2027 and the other GNMA matures in 2026. In accordance with Statement of
Financial Accounting Standards No. 115 ("FASB 115") APART has classified all
GNMA investments as "available for sale" because they are freely tradeable. As
of September 30, 1997, APART recorded a current unrealized gain of $6,000 from
its GNMAs which is reflected in the shareholders' equity section of the balance
sheet in accordance with FASB 115. The Federal Home Loan Mortgage Corporation
("FHLMC") discount notes held by APART matured in July 1997 and the $5.1 million
of proceeds were reinvested into a FHLMC discount note, a Federal National
Mortgage Association ("FNMA") discount note, and a Federal Home Loan Bank
Construction discount note. All of these notes mature in 3 months, at which time
interest is fully paid. In addition, the Partnership invested approximately $0.1
million in various REITs during the third quarter.
6
<PAGE>
Note 4 - The Partnership
On September 26, 1996, APART became the sole general partner of
the Partnership by contributing $400,000 in cash, evidenced by 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, evidenced by
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. The mortgage participation certificates contributed by
Starwood Mezzanine into the Partnership were reflected in the financial
statements at its predecessor basis of $3.76 million. As of September 30, 1997,
the mortgage participation certificates had a basis of $3.52 million.
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 had a face value of $4.9 million at the time of
transfer 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.
On October 1, 1997 the Warwick Hotel note was repaid and the $4.6
million were reinvested in government securities that mature in December 1997.
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 are required to be issued by APART upon issuance
of Class A Shares. 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. All
distributions of net cash will be distributed 99% to the Class A Shareholders
and 1% to the Class B Shareholders.
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 September 30, 1997.
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 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 all of the
outstanding Class A Warrants to acquire 5,000,000 Class A Shares at $1 per
share, bringing its total beneficial ownership to 5,000,000 Class A Shares and
4,568,944 OPU. In addition, SAHI, Inc. exercised all of the outstanding Class B
Warrants to acquire 2,500,000 Class B Shares, bringing its total beneficial
ownership to 3,775,000 Class B Shares and 244,100 Class A Shares, with the
opportunity to acquire an additional 2,284,472 Class B Shares upon conversion of
the OPU to Class A Shares. Each share of Class A Shares and Class B Shares is
entitled to one vote per share. Due to the exercise of the entire Class A and
Class B Warrants, SAHI, SAHI, Inc., and Starwood Mezzanine (collectively, the
"SAHI Nominees") 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.
7
<PAGE>
Note 6 - Incentive Plan
On September 26, 1996, the shareholders approved an incentive plan
for the Trustees (the "Trustee Plan") and an incentive plan for employees (the
"Employee Plan"). 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. As of September 30, 1997, 2,000 stock options were
granted under the Trustee Plan. All Trustees affiliated with the SAHI Nominees
waived their rights to receive stock options during 1996 and 1997. The options
are fully vested and have an exercise price of $1.38 per share. No stock options
have been granted under the Employee Plan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Angeles Participating Mortgage Trust ("APART") is a California
business trust organized to operate as a real estate investment trust ("REIT").
On March 15, 1994, APART announced that it had entered into an agreement with
SAHI Partners ("SAHI") and SAHI, Inc. for the sale of warrants for the right to
purchase five million of APART's Class A Shares at a price of $1 per share (the
"Class A Warrant") and a warrant for the right to purchase 2,500,000 Class B
Shares for a price of $0.01 per share (the "Class B Warrant" and together with
the Class A Warrant, the "Warrants"). SAHI and SAHI, Inc. purchased the
Warrants for $101,000, which amount was applied against the purchase price for
the Class A and Class B Shares purchased pursuant to the Warrants. On March 28,
1996, the Class A Warrants were assigned to Starwood Mezzanine Investors
("Starwood Mezzanine").
On September 26, 1996, APART became sole general partner of the
APMT Limited Partnership ("the Partnership") by contributing $400,000 in cash in
exchange for a 8.05% interest in the Partnership evidenced by 400,000 Operating
Partnership Units ("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 the Class A
Warrant to acquire 5,000,000 Class A Shares. In addition, SAHI, Inc. exercised
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 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;
(d) interests which are publicly traded, including other REIT equities, limited
partnership interests and debt interests. This investment policy is subject to
restrictions that require the approval of certain shareholders as to certain
types of investments.
Liquidity and Capital Resources
APART's primary source of cash from operations is from interest
earned on the mortgage note receivable, investments and cash and cash
equivalents. In addition, 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's investments and cash and cash equivalents were approximately $7.5
million and $1.9 million as of September 30, 1997 and December 31, 1996,
respectively. Of the September 30, 1997 total, $1.0 million was invested in a
Federal National Mortgage Association ("FNMA") discount note, $4.1 million was
invested in Federal Home Loan Mortgage Corporation ("FHLMC") discount notes and
$1.5 million was invested in Government National Mortgage Association securities
("GNMA"), with the remainder held in various REIT shares and money market funds.
8
<PAGE>
On October 1, 1997 the Warwick Hotel note was repaid and the $4.6
million of proceeds were invested in government securities that mature in
December 1997.
APART has paid no dividends since 1993. The amount and timing of any
future cash dividends, if any, is impossible to predict at this time.
Shareholders' equity approximates the amount of remaining cash, investments, and
other assets. Management believes that there will be sufficient cash available
from operations to meet the obligations of APART in future periods and to
operate as a going concern through the 1997 fiscal year.
APART has historically operated as a REIT and maintained its
qualification as a REIT under the Internal Revenue Code. APART currently intends
to continue to operate so as to qualify as a REIT under the Internal Revenue
Code of 1986, as amended.
Results of Operations
During the three and nine months ended September 30, 1997, total
revenue increased $211,000 and $642,000 respectively, as compared to total
revenue for the comparable periods in 1996. This increase is a result of the
interest income generated by the mortgage participation certificates contributed
into the Partnership in September 1996 and the investments made with the funds
received from the exercise of the Warrants in January 1997.
The decrease in APART's total costs and expenses during the three and
nine months ended September 30, 1997 compared to the same period ending 1996 is
primarily due to lower legal fees and proxy costs in 1997, combined with the
elimination of payroll and office rental costs in 1997 and lower professional
and trustee fees.
The minority interest represents Starwood Mezzanines' share of the net
income generated by the Partnership.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Refer to Exhibit Index on page 12 of this report.
b. Reports on Form 8-K
None.
Note: All items required under Part II of Form 10-Q which are applicable have
been reported herein.
9
<PAGE>
ANGELES PARTICIPATING MORTGAGE TRUST
Exhibit Index
Exhibit Number Description of Exhibit
-------------------------------------
3.1 Restated Declaration of Trust of Angeles Participating Mortgage
Trust. (1)
(1) Filed as an exhibit to APART's Form 10-Q dated September 30, 1996 and
incorporated herein by reference.
10
<PAGE>
SIGNATURES
Pursuant to the requirements 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
Date: October 31, 1997 /s/ Barry S. Sternlicht
------------------------
Barry S. Sternlicht
Trustee and Chairman
(Chief Executive Officer)
Date: October 31, 1997 /s/ Jerome C. Silvey
---------------------
Jerome C. Silvey
Chief Financial Officer
(Principal Financial and Accounting Officer)
11
