UNITED STATES 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 March 31, 1998
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
STARWOOD FINANCIAL 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)
1114 Avenue of the Americas 10036
New York, NY 10036 (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 930-9400
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of each class: which registered:
-------------------- -----------------
Class A Shares, $1.00 par value American Stock Exchange
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-Q or any amendment to this
Form 10-Q |X|.
As of May 11, 1998, there were 314,341,744 Shares of Starwood Financial
Trust Class A, $1.00 par value, outstanding.
<PAGE>
Starwood Financial Trust
Index to Form 10-Q
Page
----
PART I. Consolidated Financial Information................................. 3
ITEM 1. Consolidated Balance Sheet at March 31, 1998 and
December 31, 1997.....3
Consolidated Statements of Operations - For the
three months ended March 31, 1998 and 1997.................... 4
Consolidated Statement of Changes in Shareholders' Equity -
For the three months ended March 31, 1998..................... 5
Consolidated Statements of Cash Flows - For the three
months ended March 31, 1998 and 1997.......................... 6
Notes to Consolidated Financial Statements ........................ 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 14
PART II. Other Information.................................................. 16
ITEM 2. Changes in Securities and Use of Proceeds.......................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders................ 18
ITEM 6. Exhibits and Reports on Form 8-K................................... 20
Signatures......................................................... 21
2
<PAGE>
PART I - FINANCIAL INFORMATION: STARWOOD FINANCIAL TRUST
ITEM 1. FINANCIAL STATEMENTS
Starwood Financial Trust
Consolidated Balance Sheets
(In thousands)
March 31, December 31,
1998 1997*
----------- -----------
(unaudited)
ASSETS
Real estate and related investments (Note 3) $ 1,074,035 $ 11,175
Cash and cash equivalents 42,154 296
Accrued interest and rent receivable 6,953 58
Deferred expenses and other assets 12,774 1,912
----------- -----------
Total assets $ 1,135,916 $ 13,441
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses
and other liabilities $ 1,330 $ 1,915
Debt obligation 385,630
----------- -----------
Total liabilities 386,960 1,915
----------- -----------
Minority interest in the Partnership -- 5,175
----------- -----------
Commitments and contingencies -- --
Shareholders' equity:
Class A Shares (314,341,744 and
7,550,000 shares issued and
outstanding, $1.00 par value,
unlimited shares authorized,
respectively) 314,342 7,550
Class B Shares (157,170,872 and
3,775,000 shares issued and
outstanding, $.01 par value,
unlimited shares authorized,
respectively) 1,572 38
Net unrealized loss on "available-for-sale"
investments (129) (162)
Additional paid in capital 438,121 --
Distributions in excess of net earnings (4,950) (1,075)
----------- -----------
Total Shareholders' equity 748,956 6,351
----------- -----------
Total liabilities and Shareholders'
equity $ 1,135,916 $ 13,441
=========== ===========
* Reclassified to conform to 1998 presentation.
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Starwood Financial Trust
Consolidated Statements of Operations
(In thousands except per share data)
For the
Three Months Ended
March 31,
--------------------
1998 1997
(unaudited)
Revenue:
Interest income $ 3,293 $ 238
Rental income 524 --
Other income 149 2
-------- --------
Total revenue 3,966 240
-------- --------
Costs and expenses:
Stock option compensation expense (Note 5) 5,985 --
Interest expense 1,096 --
Depreciation and amortization 195 --
General and administrative 281 76
Advisory fees 230 --
-------- --------
Total costs and expenses 7,787 76
-------- --------
Net income (loss) before minority interest (3,821) 164
Minority interest of Limited Partnership
interests in the Partnership (54) (146)
-------- --------
Net income (loss) $ (3,875) $ 18
======== ========
Basic and diluted earnings (loss) per
Class A Share $ (0.07) $ 0.01
======== ========
Weighted average number of Class A Shares
outstanding (in thousands) 51,864 6,328
======== ========
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Starwood Financial Trust
Consolidated Statements of Changes in Shareholders' Equity
(In thousands)
For the Three Months Ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Par Value Net Distributions
---------------------- Unrealized Additional in Excess
Class A Class B Losses on Paid-In Of Net
Shares Shares Investments Capital Earnings Total
--------- --------- ----------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance of December 31, 1997* $ 7,550 $ 38 $ (162) $ -- $ (1,075) $ 6,351
Recapitalization Transactions (Note 5) 306,792 1,534 432,136 740,462
Issuance of Options to the Advisor (Note 5) 5,985 5,985
Change in net unrealized gains
(losses) on investments 33 33
Net loss for the period (3,875) (3,875)
--------- --------- --------- --------- --------- ---------
Balance as of March 31, 1998 $ 314,342 $ 1,572 $ (129) $ 438,121 $ (4,950) $ 748,956
========= ========= ========= ========= ========= =========
</TABLE>
* Reclassified to conform to 1998 presentation.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Starwood Financial Trust
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,875) $ 18
Adjustments to reconcile net (loss)
income to cash flows provided
by operating activities:
Minority Interest 54 146
Non-cash expense for options issued to Advisor (Note 5) 5,985
Depreciation and amortization 429
Changes in Assets and Liabilities:
Decrease in accrued interest and rent receivable 556
Increase in deferred expenses and other assets (2,175) (138)
Decrease in accounts payable, accrued
expenses and other liabilities (585) (2)
--------- ---------
Cash flows provided by operating activities 389 24
--------- ---------
Cash flows from investing activities:
Net cash out flow for the Recapitalization
Transactions (Notes 2 & 5) (334,916) --
Investments in real estate and related investments (3,140) (6,019)
Principal collections from real estate investments 1,048 60
--------- ---------
Cash flows used in investing activities (337,008) (5,959)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Class B Shares 1,534
Net borrowings under revolving credit facility 225,000
Borrowings under term loan 125,000
Borrowings under asset repurchase agreements 35,630
Deferred financing costs (8,687)
Exercise of warrants 4,924
--------- ---------
Cash flows provided by financing activities 378,477 4,924
--------- ---------
Increase (decrease) in cash and cash equivalents 41,858 (1,011)
Cash and cash equivalents at beginning of period 296 1,888
--------- ---------
Cash and cash equivalents at end of period $ 42,154 $ 877
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ -- $ --
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Starwood Financial Trust
Notes to Consolidated Financial Statements
Note 1 - Organization and Business
Starwood Financial Trust (the "Trust"), formerly known as Angeles
Participating Mortgage Trust, was formed for the purpose of originating and
acquiring various types of mortgage and other real estate related investments.
During 1993 through 1997, the Trust failed to qualify as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). However, pursuant to a Closing Agreement with the Internal Revenue
Service (the "IRS") obtained in March 1998, the Trust will be eligible to and
intends to elect to be taxed as a REIT for the taxable year beginning January 1,
1998.
Through a series of transactions during 1994 and 1996, Starwood Mezzanine
Investors, L.P. ("Starwood Mezzanine") and certain affiliates of the general
partner of Mezzanine acquired control of the Trust. As described in Note 5, in
March 1998, the shareholders of the Trust voted to change the purpose and
investment policy of the Trust.
On September 26, 1996, the Trust became the sole general partner of the
APMT Limited Partnership (the "Partnership") (see Notes 4 and 5). As discussed
in Note 5, on March 18. 1998, all the outstanding interests in the Partnership
not held by the Trust were exchanged for additional Class A Shares of the Trust,
the Trust became the sole partner of the Partnership and the Partnership was
terminated.
Also as more fully described in Note 5, pursuant to the concurrent
approval through a shareholder vote on March 18, 1998, the Trust entered into a
series of transactions which, among other things, substantially recapitalized
the Trust and modified its investment policy.
Note 2 - Summary of Significant Accounting Policies
Basis of accounting and presentation - The accompanying audited
consolidated financial statements have been prepared in conformity with the
instructions to Form 10-Q and article 10, Rule 10-01 of Regulations S-X for
interim financial statements. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
("GAAP") for complete financial statements. The consolidated financial
statements include the accounts of the Trust, its subsidiaries, and the
Partnership.
In the opinion of management, the accompanying financial statements
contain all adjustments, consisting of normal and recurring accruals, necessary
for a fair presentation of the Trust's financial condition at March 31, 1998
and, the results of its operations, changes in stockholders' equity and its cash
flows for the three month period ended March 31, 1998 and 1997. Such operating
results are not necessarily indicative of the results that may be expected for
any other interim periods or the entire year.
Cash and cash equivalents - Cash and cash equivalents include cash held in
banks or invested in money market funds with original maturity terms of less
than 90 days.
Non-cash activity - During the three month period ended March 31, 1998,
the Trust had significant non-cash activity including (i) conversion of Units in
the Partnership representing minority interests in these consolidated financial
statements to Class A Shares (see Note 5), (ii) issuance of options to the
Advisor to acquire Class A Shares of the Trust (see Note 5) and (iii) a portion
of the acquisition of real estate investments as part of the Recapitalization
Transactions (see Note 5) in exchange for the issuance of new Class A Shares.
The cash portion of the Recapitalization Transactions is as follows (in
thousands):
Acquisition of real estate investments $(1,061,006)
Acquired accrued interest and rent receivable (7,451)
Par value of Class A Shares issued 302,223
Additional paid in capital on Class A Shares issued 431,318
-----------
Net cash outflow for the Recapitalization Transactions $ (334,916)
===========
Income taxes - The Trust did not qualify as a REIT from 1993 through 1997;
however, it did not incur any material tax liabilities as a result of its
operations. See Note 4 to these consolidated financial statements for more
information.
As confirmed in a Closing Agreement with the IRS obtained in March, 1998,
the Trust is eligible and intends to elect to be taxed as a REIT for its taxable
year beginning January 1, 1998. As a REIT, the Trust will be subject to income
taxation at corporate rates on its REIT taxable income, however, the Trust is
allowed a deduction for the amount of dividends paid to its shareholders,
thereby subjecting the distributed net income of the Trust to taxation at the
shareholder level only. For income tax purposes, the Trust reports revenue and
expenses on the accrual method.
7
<PAGE>
Earnings (loss) per Class A Share - The basic earnings per $1.00 par value
Class A Share of the Trust ("Class A Share") was based upon 51,864,000 and
6,328,000 weighted average shares outstanding during each of the three month
periods ended March 31, 1998 and 1997, respectively, after deduction of the 1%
interest of the $.01 par value Class B Shares of the Trust ("Class B Shares")
(see Note 5). Fully diluted earnings per Class A Share for the three-month
period ended March 31, 1998 equals basic earnings per Class A Share because
inclusion of convertible securities (Units and options) outstanding during the
period would be anti-dilutive. Fully diluted earnings per Class A Share for the
three-month period ended March 31, 1997 approximates basic earnings per Class A
Share.
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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New Accounting 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. The adoption of SFAS 130 has not had a material
impact on the Trust's Financial Statement disclosures.
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 ended December 31, 1998. The adoption of SFAS
No. 131 has not had a material impact on the Trust's financial statement
disclosures.
8
<PAGE>
Note 3 - Real Estate and Related Investments
The following is a summary description of the Trust's current investments
including those assets contributed to the Trust in the Recapitalization
Transactions described in Note 5:
<TABLE>
<CAPTION>
Trust's
Current Original Carrying value as of
Number of Balance of Principal ---------------------- Original
Type of Underlying Borrowers Commitment Balances March 31, December 31, Maturities
Loan/Borrower Property Type In Class Amount Outstanding 1998 1997 Dates
------------- ------------- -------- ------ ----------- ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Senior mortgages Office/Hotel/ 8 $502,114 445,3444 $445,789 1999-2004
Mixed Use/
Apartment
Mixed Use/
Subordinated Office/Hotel/ 5 175,375 155,538 167,830 2002 to 2005
Mortgages Resort/Planned
Communities
Opportunistic Office/Hotel/ 2 166,644 132,427 78,832 1999 and
Mortgages Apartment 2007
Unsecured Notes Office/Hotel 2 27,300 27,300 25,195 2002 and
2004
Construction Assisted 2 92,390 85,471 93,275 1999 and
Loans Living Resorts 2004
Real Estate Under Hotels 1 N/A(3) N/A(3) 194,034 N/A(3)
Long-term
Master Lease
Loan Participation Various 3 22,656 22,534 12,828 1999 and
2000
Other Real Estate Marketable N/A 43,150 N/A 56,252 $11,175 2002 and
Related real estate ---------- ------- 2007
Investment related
securities
Total investments $1,074,035 $11,175
========== =======
</TABLE>
Interest Interest
Type of Accrual Payment Principal Participation
Loan/Borrower Rates Rates Amortization Features
------------- ----- ----- ------------ --------
Senior mortgages Fixed: 8.97 Fixed Yes(1) Yes(2)
to 16% 8.0-10.82%
Variable: Variable:
LIBOR + LIBOR +
1.25 to 3.25% 1.25 to 3.25%
Subordinated Fixed 10 to Fixed 10.0 Yes(1) Yes(2)
Mortgages 15.25% to 15.25%
Opportunistic 6.0 to 7.0% 6.0 to 7.0% Yes(1) Yes(2)
Mortgages
Unsecured Notes 11.25% to 11.25% to No Yes(2)
15.0% 15.0%
Construction 12.0 to 12.5% 10.0 to 12.5% No No
Loans
Real Estate Under N/A(3) N/A(3) N/A(3) N/A(3)
Long-term
Master Lease
Loan Participation Fixed: 7.13% Fixed: 5.45 Yes(1) Yes
Variable: to 6.40%
LIBOR + Variable:
.58 to 1.75% LIBOR +
.58 to 1.75%
Other Real Estate 12.5 to 12.5 to No No
Related 12.75% 12.75%
Investment
Explanatory Notes
(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.
(3) The lease is a triple net lease of 17 hotels 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.
9
<PAGE>
Note 4 - Income Taxes
Although originally formed to qualify as a REIT under the Code for the
purpose of making and acquiring various types of mortgage and other loans,
during 1993 through 1997, the Trust failed to qualify as a REIT. As confirmed by
a Closing Agreement with the Internal Revenue Service (the "IRS") obtained in
March, 1998, the Trust will be eligible to and intends to elect to be taxed as a
REIT for the tax year commencing on January 1, 1998. The Trust did not incur any
material tax liabilities as a result of its operations during such years.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and income tax purposes as well as operating loss and tax credit carry
forwards. A valuation allowance is recorded if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
income tax asset will not be realized. Given the limited nature of the Trusts'
operations and assets and liabilities from 1993 through 1997, the only deferred
tax assets are net operating loss carry forwards ("NOL's") which arose during
such periods. Since the Trust intends to elect to be treated as a REIT for its
tax year beginning January 1, 1998, it is anticipated that such NOL's will
expire unutilized. Accordingly, no net value, after consideration of a 100%
valuation allowance, has been reflected in these financial statements as of
March 31, 1998 and December 31, 1997.
Note 5 - Historical Capital Activity and Current Transactions
The shares of the Trust 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 the Trust is
authorized to issue. Class B Shares are required to be issued by the Trust in an
amount equal to one-half of the number of Class A Shares outstanding. 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 Shareholders into Class A Shares on the basis of 49
Class B Shares for one Class A Share. All distributions of cash will be
distributed 99% to the Class A Shareholders and 1% to the Class B Shareholders.
In November 1993, the Trust was notified that SAHI, Inc. had acquired all
of the Trust'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 as of December 1996.
On March 15, 1994, the Trust 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 Class A Shares at a price of $1.00 per share (the "Class A
Warrant") and 2,500,000 shares of Class B Shares at a price of $.01 per share
(the "Class B Warrant"). 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 Warrants. On March 28,
1996, the Class A Warrants were assigned to Starwood Mezzanine.
On September 26, 1996, the Trust became sole general partner of the
Partnership by contributing $400,000 in cash, in exchange for a 8.05% interest
in the Partnership which was evidenced by 400,000 partnership Units ("Units").
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 the Trust at approximately $4.6 million as of
September 30, 1996. Starwood Mezzanine's interest in the Partnership is
evidenced by 4,568,944 Units, which were convertible into cash, Class A Shares
or a combination of both pursuant an exchange rights agreement. In addition,
Starwood Mezzanine has the right to require the Trust 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 Units issued to Starwood
Mezzanine. As described below, the Units were converted to Class A Shares in the
first quarter of 1998.
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 Warrants, Starwood Mezzanine beneficially owned 5,000,000 Class A Shares
and 4,568,944 Units. In addition, SAHI, Inc. exercised its rights under the
Class B Warrants to acquire 2,500,000 Class B Shares. After its exercise of the
Class B Warrants, SAHI Inc. beneficially owned 6,059,471 Class B Shares and
244,100 Class A Shares. Upon exercise of the Class A and Class B Warrants, SAHI,
SAHI, Inc., and Starwood Mezzanine jointly owned 70% of the outstanding Class A
Shares and, with the voting interest of the Class B Shares, controlled 80% of
the voting interest of the Trust. The Trust increased its capital by $5,025,000,
and funds from this capitalization were utilized to purchase qualified
short-term government securities.
During the quarter ended March 31, 1998, the Trust consummated certain
transactions and entered into agreements which significantly recapitalized and
expanded the capital resources of the Trust as well as modified future
operations including those described below in "Recapitalization Transactions."
Recapitalization Transactions
Prior to the consummation of the Recapitalization Transactions (defined
below), (i) Starwood Mezzanine and SAHI Inc. owned 70% and 100% of the
outstanding Class A Shares and Class B Shares of the Trust, respectively,
through which they together controlled approximately 80% of the voting interests
in the Trust and (ii) Starwood Mezzanine owned 4,568,944 Units which represented
the remaining 91.95% of the Partnership not held by the Trust, that were
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.
10
<PAGE>
On March 18, 1998, each outstanding Unit held by Starwood Mezzanine was
exchanged for one Class A Share of the Trust and, concurrently, the Partnership
was liquidated through a distribution of its net assets to the Trust, its then
sole Partner.
Simultaneously, Starwood Mezzanine and Starwood Opportunity Fund IV, L.P.
("SOF IV") (an affiliate of the general partners of Starwood Mezzanine)
consummated the transactions contemplated by the contribution agreement
("Contribution Agreement") among Starwood Mezzanine, SOF IV and the Trust to
substantially recapitalize and increase the size of the Trust's assets and
operations. Pursuant to the Contribution Agreement, Starwood Mezzanine
contributed various real estate debt investments to the Trust in exchange for
55,148,000 Class A Shares and $25.5 million in cash, as adjusted. SOF IV
contributed real estate loans and investments, $17.9 million in cash and certain
letters of intent in exchange for 247,074,800 Class A Shares of the Trust and a
cash payment of $324.3 million. Concurrently, the holders of the Class B Shares
who are affiliates of the general partners of Starwood Mezzanine and SOF IV
acquired 153,395,872 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"). Immediately after these transactions,
Starwood Mezzanine, SOF IV and SAHI, Inc. (collectively, "Starwood") owned
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 note are
the "Recapitalization Transactions"). Assets acquired from Starwood Mezzanine
have been reflected using step acquisition accounting at predecessor basis
adjusted to fair market value to the extent of post transaction third party
ownership. Assets acquired from SOF IV have been reflected at their fair market
value.
New Credit Facilities
On March 18, 1998, the Trust entered into bank credit agreements under
which the Trust may currently borrow up to $625.0 million, with up to an
additional $175.0 million available, subject to certain conditions, to fund loan
originations or acquisitions (including the cash portion of the Recapitalization
Transactions described above) and for other general corporate purposes. The
current credit agreement is comprised of; (i) a $500.0 million revolving credit
facility which bears interest payable monthly at LIBOR plus 1.5% and with
outstanding principal due at maturity on March 13, 2001 and (ii) a $125.0
million Term Loan, secured by the properties under a long term operating lease,
which bears interest payable monthly at LIBOR plus 1.5% and which matures on
March 15, 1999. Availability of amounts to borrow under the revolving credit
facility is subject to having sufficient assets includable as security under the
line under a percentage borrowing base calculation. An aggregate of $6.25
million in loan fees relating to these arrangements were paid at closing of the
Recapitalization Transactions. These fees will be amortized over the related
loan terms. In addition, upon closing of the recapitalization transaction,
approximately $1.75 million in loan fees were paid with respect to the
additional $175 million available. Such fee is refundable if the related
facility is not utilized.
In anticipation of consummating these financing transactions, effective on
March 16, 1998, the Trust entered into LIBOR interest rate caps at 9% in the
notional amounts of $125.0 million and $300.0 million expiring on March 16, 1999
and 2001, respectively, for an aggregate cost of $158,750.
Modification to Trust's Investment Policy
As approved by the shareholders of the Trust in March 1998, the purpose
and investment policy of the Trust is to acquire a diverse portfolio of debt and
debt-like interests in real estate or real estate related assets, including to
(i) originate mortgage loans and/or acquire mortgage loans or 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 is restricted from making certain types of investments as a
result of the restrictions and conflicts described below (the "Investment
Restrictions"). These restrictions may limit the flexibility of the Trust in
implementing its investment policy. Specifically, without the amendment,
termination or waiver of provisions of certain non-competition agreements
between Starwood Capital Group, L.P. and Starwood Hotels & Resorts, 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, including debt positions
or equity interests obtained by the Trust under, pursuant to or by reason of the
holding of debt positions.
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 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.
The Trust currently plans to originate and make investments in various
types of income producing commercial real estate and its investment program will
emphasize senior and junior commercial mortgage loans, including mezzanine
financing (i.e., capital representing
11
<PAGE>
the level between 65% and 90% of property values), higher yielding senior
mortgage loans, non-performing or sub-performing loans and performing and
non-performing subordinated interests in commercial mortgage-backed securities.
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 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.
Advisory Agreement
In connection with the Recapitalization Transactions, the Trust and
Starwood Financial Advisors, L.L.C. (the "Advisor") entered into an Advisory
Agreement (the "Advisory Agreement") pursuant to which the Advisor manages 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 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
for the Trust. The Advisor will not act in a manner that is inconsistent with
the express direction of the Board of Trustees and reports to the Board of
Trustees and/or the officers of the Trust with respect to its activities.
Commencing on the 90th day after the consummation of the Recapitalization
Transactions, 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 (as defined
in the Advisory Agreement) determined as of the last day of each quarter, but
estimated and paid in advance subject to recomputation.
In addition, commencing on the 90th day after the consummation of the
Recapitalization Transactions, the Trust will pay the Advisor a quarterly
incentive fee of five percent (5%) of the Trust's "Adjusted Net Income" (as
defined in the Advisory Agreement) 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" (as defined in the Advisory Agreement). The Advisor will be
also be reimbursed for certain expenses it incurs on behalf 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 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.
1996 Share Incentive Plan
The Trust amended and restated 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 Starwood Financial Trust 1996 Share Incentive Plan (the
"Plan"). Under the amended Plan, 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, are 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. Approximately 14,963,057 options to purchase
Class A Shares at $2.50 per share that are immediately exercisable were granted
to the Advisor under the Plan upon consummation of the Recapitalization
Transactions and future grants may be made to the Advisor or 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 $0.40 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 27.5% volatility rate and an estimated annual
dividend rate of 8.5%. 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 Recapitalization
Transactions equal to the number of options allocated to the Advisor multiplied
by the estimated value at consummation. The charge of approximately $6.0 million
has been reflected in the Trust's first quarter 1998 financial results. Future
charges may be taken to the extent of additional option grants, which are at the
discretion of the Board of Trustees.
12
<PAGE>
Pro Forma Operating Results
The following summary pro forma information includes the effects of the
following transactions consummated in March, 1998: (i) Recapitalization
Transactions, (ii) exchange of each outstanding Unit held by holders other than
the Trust for one Class A Share, (iii) liquidation and termination of the
Partnership and (iv) the borrowings necessary to consummate the aforementioned
transactions. The pro forma operating data for the three month periods ended
March 31, 1998 and 1997 are presented as if the transactions had been completed
on January 1, 1998 and 1997, respectively.
Pro Forma
Condensed Statement of Operations
(In thousands, except for net income per Class A Share)
For the Three
Month Period Ended
March 31,
-------------------
1998 1997
-------- --------
(unaudited)
Revenue:
Interest income $ 22,663 $ 10,125
Rental income 3,750 3,750
Other 425 400
-------- --------
26,838 14,275
-------- --------
Expenses:
Interest expense 6,957 --
Depreciation 1,584 1,614
General and administrative 277 192
Advisory fee 2,324 2,324
Other 450 164
-------- --------
11,592 4,294
-------- --------
Pro forma net income $ 15,246 $ 9,981
======== ========
Pro forma net income per Class A Share $ 0.05 $ 0.03
======== ========
Weighted average number of Class A Shares Outstanding 314,342 313,120
======== ========
The pro forma operating data for the three month period ended March 31, 1998
excludes a charge of approximately $6.0 million or $0.02 per Class A Share
relating to the value of options to acquire Class A Shares issued to the Advisor
concurrently with the consummation of the Recapitalization Transactions (as
described in the preceeding section) as such charge is considered largely
non-recurring in nature, however, future charges may be taken to the extent of
additional option grants, which are at the discretion of the Board of Trustees.
While real estate acquisitions are assumed to have taken place as of the
beginning of each period, mortgage note receivable acquisitions or originations
are not reflected in these pro forma numbers until the actual acquisition date
by Mezzanine or SOF-IV. Consequently, since many of the mortgage acquisitions or
originations did not occur until after March 31, 1997, the revenue from these
assets is not included in the 1997 pro forma numbers. No interest expense has
been reflected in the pro forma operating data for the three month period ended
March 31, 1997 since the aggregate capital contributed in the Recapitalization
Transactions exceeded the pro forma weighted average for the real estate and
related investments actually outstanding during the period.
The pro forma financial information is not necessarily indicative of what the
consolidated results of operations of the Trust would have been as of and for
the periods indicated, nor does it purport to represent the results of
operations for future periods
Note 6: Subsequent Events
During the period from April 1, 1998 to April 30, 1998 the Trust borrowed
approximately $73.0 million under its revolving credit facility and existing
cash to fund four newly originated, secured loans with an aggregate principal
balance of approximately $82.4 million. In addition during the period from May
1, 1998 to May 8, the Trust acquired two first mortgage loans with an aggregate
outstanding balance of approximately $100.5 for $98.5 million in cash of which
$78.8 million was funded through a new non-recourse loan at a fixed spread to
LIBOR. These six bear interest at fixed effective rates ranging from 7.275% to
17.0%. These loans mature during the fiscal years of 2001 to 2005.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Prior to the Recapitalization Transactions (described in Note 5 to the
Trust's consolidated financial statements), the Trust's primary source of cash
during 1998 and 1997 was from income earned on its interest in the participation
certificates in the Warwick Hotel mortgage note and certain investments in
government or government sponsored securities as well as short term cash
investments. On October 1, 1997 the Warwick Hotel note was repaid and the $4.5
million of proceeds were invested in government securities.
On September 26, 1996, the Trust 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 Units. Starwood Mezzanine became the
91.95% limited partner by contributing to the Partnership its entire in the
participation certificates in the Warwick Hotel mortgage note valued by the
Trust at approximately $4.6 million at the time of contribution. Starwood
Mezzanine's Units were converted into Class A Shares on March 18, 1998 on a
one-for-one basis and the Partnership was terminated.
On January 22, 1997, Starwood Mezzanine exercised its rights under a
warrant to acquire 5,000,000 Class A Shares. In addition, SAHI, Inc. exercised
its rights under the warrant to acquire 2,500,000 Class B Shares. As a result of
the exercise of the warrants, the Trust's capital increased by $5,025,000, and
funds from this capitalization were used to purchase short-term government
securities.
As more fully discussed in Note 7 to the Trust's consolidated financial
statements, for fiscal years 1993 to 1997 the Trust did not qualify as a REIT,
however, the Trust intends 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. 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.
The Recapitalization Transactions and other related transactions, as more
fully described in Note 5 to the quarterly financial statements, will materially
impact the future operations of the Trust. Accordingly, the currently reported
financial information is not believed to be indicative of the Trust's future
operating results or financial condition.
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
Recapitalization Transactions include cash flow from operations, borrowings
under lines of credit arranged concurrently with the transactions, additional
bank borrowings, mortgage loans on the Trust's real estate and future equity
offerings.
Concurrently with the Recapitalization Transactions, the Trust entered
into bank credit agreements under which the Trust may currently borrow up to
$625.0 million, with up to an additional $175.0 million available, subject to
certain conditions, to fund loan originations or acquisitions (including the
cash portion of the Recapitalization Transactions previously described) and for
other general corporate purposes. The credit agreements are comprised of a (i) a
$500.0 million revolving credit facility which bears interest only payable
monthly at LIBOR plus 1.5% and with outstanding principal due at maturity on
March 13, 2001 and (ii) a $125.0 million term loan secured by the properties
under a long term operating lease which bears interest only payable monthly at
LIBOR plus 1.5% and which matures on March 15, 1999. Availability of amounts to
borrow under the revolving credit facility is subject to having sufficient
assets includable as security under the line in accordance with a percentage
borrowing base calculation. An aggregate of $8.0 million in loan fees relating
to these arrangements were paid at closing of the Recapitalization Transactions.
These fees will be amortized over the related loan terms.
In anticipation of consummating these bank financing transactions
described above, effective on March 16, 1998, the Trust entered into LIBOR
interest rate caps at 9% in the notional amounts of $125.0 million and $300.0
million expiring on March 16, 1999 and 2001, respectively, for an aggregate cost
of $158,750.
Upon completion of the Recapitalization Transactions and consummation of
the bank credit facilities, 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 loan origination
or acquisition of additional investments.
Three Months Period Ended March 31, 1998 Compared to 1997
During the three months ended March 31, 1998, total revenue increased
$3,726,000 as compared to total revenue for the three months ended March 31,
1997. This increase is a result of the interest generated by the real estate
loan investments contributed in the Recapitalization Transactions.
14
<PAGE>
The increase in the Trusts' total costs and expenses during the three
months ended March 31, 1998 compared to the three months ended March 31, 1997 is
primarily due to the expense associated with the issuance of approximately
14,963,057 options to the Advisor (see Note 5 to the Trust's consolidated
financial statements) combined with the new Advisory Fee, and the interest
expense on the new credit facility.
The minority interest expense represents Starwood Mezzanine's share of the
net income generated by the Partnership before its termination on March 18,
1998.
Interest Rate Risks
The Trust's operating results will depend in part on the difference
between the interest income earning on its interest-earned 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 bearing assets which 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 between
interest-earning assets and interest-bearing liabilities could have material
adverse effect on the Trust. In addition, an increase in interest rates could,
among other things, reduce the value of the Trust's interest-bearing assets and
its ability to realize gains from the sale of such assets, and a decrease in the
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. 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 will cause a significant loss of basis in the
contract. With regard to loss of basis in a hedging contract, indices upon which
contracts are 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.
Other Matters
The Trust at all times intends to conduct its business so as to not become
regulated as an investment company under the Investment Company Act of 1940. If
the Trust were to become regulated as an investment company, then the Trust's
ability to use leverage would be substantially reduced. The Investment Company
Act exempts entities that are "primarily engaged in the business of purchasing
or otherwise acquiring mortgages and other liens on and interests in real
estate" (i.e. "Qualifying Interests"). Under the current interpretation of the
staff of the SEC, in order to qualify for this exemption, the Trust must
maintain at least 55% of its assets directly in Qualifying Interests. As of
March 31, 1998, the Trust calculates that it is in compliance with this
requirement.
Forward Looking Statements
When used in this Form 10-Q, in future SEC filings or in press releases or
other written or oral communications, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Trust
cautions that such forward looking statements speak only as of the date made and
that various factors including regional and national economic conditions,
changes in levels of market interest rates, credit and other risks of lending
and investment activities, and competitive and regulatory factors could affect
the Trust's financial performance and could cause actual results for future
periods to differ materially from those anticipated or projected.
The Trust does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect events or circumstances after
the date of such statements.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Trustees Regulations
On May 8, 1998, the Trustees' Regulations of the Trust were amended and
restated in their entirety. Certain provisions of the Trustees' Regulations
govern the rights of the holders of the Trust's Class A Shares and Class B
Shares. The following summary sets forth the different provisions governing
shares and shareholders in the Trustees' Regulations (the "Old Regulations") and
the Amended and Restated Trustees' Regulations (the "New Regulations"). The
following summary of the material terms of the New Regulations is qualified in
its entirety by reference to the New Regulations, which are filed as an exhibit
hereto.
Annual Meeting. Under the New Regulations, the annual meeting of
shareholders may be held within 10 days of delivery of the annual report of the
Trust. The Board may set the date and time providing the meeting is held within
six months after the end of the full fiscal year. Previously , the annual
meeting was set for the last Friday in April at 10:00 A.M.
Special Meetings. Special meetings of shareholders may be called by the
Chairman of the Board or at least two other trustees. Under the Old Regulations,
special meetings could be called by the President or two other Trustees. Both
the Old and New Regulations also allow shareholders holding at least twenty
percent of the outstanding Class A or Class B Shares to call a special meeting.
The New Regulations require that such request state the purpose of the meeting
and the matters proposed to be acted on at such meeting. Unless requested by
shareholders entitled to cast a majority of all the votes entitled to be cast
at such meeting, under the New Regulations a special meeting need not be called
to consider any matter that is substantially the same as the matter voted on at
any meeting of the shareholders held during the preceding 12 months.
Notice. Under the New Regulations, the secretary may not give notice of a
special meeting of shareholders more than 60 days prior to the meeting.
Proxies. Both the Old and the New Regulations allow shareholders to vote
his or her shares in person or by proxy executed in writing. Under the New
regulations such proxies are valid after 11 months from the date of their
execution, unless otherwise provided in the proxy. Under the Old Regulations,
proxies automatically expire after one year.
Annual Meetings of Shareholders. The New Regulations contain a number of
provisions relating to shareholder meetings not addressed in the Old
Regulations. For example, the New Regulations set forth the procedure for
nominations for election to the Board or bringing other business before a
meeting. These procedures require any such shareholder to deliver notice to the
Secretary between 60 and 90 days prior to the anniversary of the preceding
year's annual meeting, unless the meeting has been advanced by more than 30 days
or postponed by more than 60 days from the anniversary date. In such case,
notice must be delivered between 60 and 90 days prior to the meeting date or 10
days following public announcement of the meeting.
Such shareholder's notice must set forth (i) as to each nominee, all the
information relating to such person that is required to be disclosed in the
solicitations of proxies for election of trustees, or is otherwise required,
under the Securities Exchange Act of 1934 and (ii) as to any other business that
the shareholder proposes, a brief description of the business, the reasons for
conducting such business at the meeting and any material interest in such
business of such shareholder and of the beneficial owner, if any, on whose
behalf the proposal is made. The shareholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made,
must also provide the name and address of such shareholder, as they appear on
the Trust's books, and of such beneficial owner and the class and number of
shares of the Trust which are owned beneficially and of record by such
shareholder and such beneficial owner. The New Regulations provide an exception
where the number of Trustees to be elected to the Board is increased and there
is no public announcement naming all of the nominees for Trustee or specifying
the size of the increased Board made by the Trust at least 70 days prior to the
first anniversary of the preceding year's annual meeting. In such instances, a
shareholder's notice shall be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive offices of the Trust not
more than ten days following the day on which such public announcement is first
made by the Trust.
Special Meetings of Shareholders. The New Regulations limit the business
to be addressed at special shareholder meetings to those matters brought before
the meeting pursuant to the Trust's notice of meeting. Nominations of persons
for election to the Board may be made at a special meeting of shareholders at
which Trustees are to be elected by any shareholder of the Trust who was a
shareholder of record at the time of giving notice who is entitled to vote at
the meeting and who complied with the notice procedures. If the Trust calls a
special meeting of shareholders for the purpose of electing one or more trustees
to the Board, any shareholder may nominate persons for election to such
positions as specified in the Trust's notice of meeting, provided the
shareholder's notice is delivered to the Secretary of the Trust not more than 90
days prior to such meeting and not less than 60 days prior to such meeting or
ten days following the day on which public announcement of the date of the
special meeting and of nominees proposed by the Board to be elected at such
meeting is first made by the Trust.
16
<PAGE>
General. The New Regulations restrict the eligibility of nominees for
Trustee to those nominated according to the methods described above. Likewise,
only such business may be conducted at a meeting of shareholders as shall have
brought by before the meeting in accordance with the previously described
procedures. The New Regulations give the presiding officer the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made in accordance with such procedures if any proposed nomination
or business should be disregarded.
Informal Action by Shareholders. The New Regulations allow the shareholder
to take any action required or permitted to be taken at a meeting of
shareholders to be taken without a meeting if a consent in writing is signed by
a sufficient proportion of the Class A Shareholders and Class B Shareholders.
Under the Old Regulations, such action could only be taken through a unanimous
written consent.
Voting by Ballot. Under the New Regulations voting on any question or in
any election may be vive voce unless the presiding officer shall order or any
shareholder shall demand that voting be by ballot. The Old Regulations did not
address this issue.
Default Record Date. Under the Old Regulations, the record date for any
action would be set at 20 days prior to the meeting if it were not fixed by the
Trustees. Under the New Regulations, if the record date is not fixed it shall be
at the close of business on the day on which notice of the meeting is mailed or
30 days before the meeting, whichever date is closer to the meeting date.
Adjourned Meetings. The Old Regulations allow a majority of the Class A or
Class B Shares to adjourn meetings. Such adjourned meetings do not require
notice unless adjourned for more than 30 days.
Declaration of Trust
As more fully described in Item 4, pursuant to a majority vote by
shareholders at the March 13, 1998 shareholder meeting, certain changes in the
Trust's Amended and Restated Declaration of Trust ("Declaration of Trust") were
approved which modified certain shareholder rights and powers of the Trustees.
Recapitalization Transactions
On March 18, 1998, the Trust (i) paid $25.5 million of cash, as adjusted,
and issued 55,148,000 Class A Shares 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 (the "Starwood Mezzanine
Interests"), (ii) paid $324.3 million in cash, as adjusted, and issued
247,074,800 Class A Shares at a price of $2.50 per share to Starwood Opportunity
Fund IV, L.P. ("SOF IV") in exchange for the contribution by SOF IV to the Trust
of a portfolio of mortgage loans and leases secured by residential, hotel,
office and mixed use real estate and other assets (the "SOF IV Interests"), a
portfolio of first mortgage loans (the "First Mortgage Portfolio"), cash of
$17.9 million and rights under certain letters of intent (collectively, the
"Recapitalization Transactions") and (iii) 4,568,944 Class A Shares were issued
upon exchange of 4,568,944 units of beneficial interest in APMT Limited
Partnership. As required by the Declaration of Trust, in connection with the
Recapitalization Transaction the Trust issued 153,395,872 Class B Shares to the
holder of the then outstanding Class B Shares at a price of $.01 per share. The
sale of the Class A and Class B Shares was exempt from registration under the
Securities Act of 1933, as amended pursuant to Section 4(2) thereof.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 13, 1998 the Trust held its annual shareholders meeting to elect
an eight member board of trustees and to vote and approve the following
proposals.
The eight trustees that were elected as a result of the meeting are
Jeffrey G. Dishner, Jonathan D. Eilian, Merrick R. Kleeman, Robin Josephs, Barry
S. Sternlicht, Jay Sugarman, William Matthews and Kneeland Youngblood.
Eligible
Trustee Votes For Against Abstain
------- ---------- ---------- ------- -------
Jeffrey G. Dishner 11,325,000 10,580,780 25,583 -
Jonathan D. Eilian 11,325,000 10,580,780 25,583 -
Robin Josephs 11,325,000 10,580,780 25,583 -
Merrick R. Kleeman 11,325,000 10,580,780 25,583 -
William Matthes 11,325,000 10,580,780 25,583 -
Barry S. Sternlicht 11,325,000 10,580,780 25,583 -
Jay Sugarman 11,325,000 10,580,780 25,583 -
Kneeland Youngblood 11,325,000 10,580,780 25,583 -
In addition, the following is a summary of the proposals along with the
vote on such proposals:
<TABLE>
<CAPTION>
Eligible
Proposals Votes For Against Abstain
--------- -------- ------- ------- -------
<S> <C> <C> <C> <C>
1. To approve the payment of
cash and the issuance of
55,148,000 Class A Shares
to Starwood Mezzanine in
exchange for the Starwood
Mezzanine Interests. 11,325,000 9,485,558 27,975 37,590
2. To approve the payment of
cash and the issuance of
247,074,800 Class A Shares
to SOF IV in exchange for
cash, rights under certain
letters of intent, the SOF
IV Interests and the First
Mortgage Portfolio. 11,325,000 9,493,747 27,265 38,001
3. To amend the Declaration
of Trust to conform it to
the Trust's advisory
agreement with respect to
the termination of the
advisory agreement. 11,325,000 9,483,907 27,354 37,751
4. To amend the Declaration
of Trust with respect to
the independence of the
Trustees from the Trust's
advisor and Starwood
Capital Group, L.L.C. 11,325,000 9,487,738 24,416 36,858
5. To amend the Declaration
of Trust to change the
name of the Trust to
Starwood Financial Trust. 11,325,000 9,487,787 20,926 40,300
6. To amend the Trust's
Declaration of Trust to
change the purpose and
investment policy of the
Trust. 11,325,000 9,485,561 21,673 41,778
7. To amend the Declaration
of Trust to require the
approval of shareholders
holding two-thirds of the
voting shares to approve
certain asset
transactions. 11,325,000 9,486,299 23,431 39,283
8. To amend the Declaration
of Trust to eliminate
cumulative voting. 11,325,000 9,478,734 27,388 42,891
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
9. To amend the Declaration
of Trust to establish a
classified Board of
Trustees. 11,325,000 9,483,554 24,015 40,644
10. To amend the Declaration
of Trust to amend the
"Excess Share" provision
thereof. 11,325,000 9,485,743 18,892 44,378
11. 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. 11,325,000 9,484,879 23,674 40,460
12. To amend the Declaration
of Trust to permit certain
amendments thereto without
the consent of
shareholders. 11,325,000 9,468,634 40,972 39,407
13. To amend the Declaration
of Trust to effect certain
technical amendments. 11,325,000 9,479,161 26,112 43,740
14. To approve a reverse split
of the Trust's capital
stock and to grant the
Board of Trustees the
power to determine the
magnitude and timing of
the reverse split and to
amend the Declaration of
Trust to effect the
reverse split. 11,325,000 9,474,079 32,178 42,755
15. To approve the Amended and
Restated Starwood
Financial Trust 1996 Share
Incentive Plan. 11,325,000 9,490,454 21,521 37,037
16. To ratify the appointment
of Price Waterhouse LLP as
the independent auditors
of the Trust for the
fiscal year ended December
31, 1997. 11,325,000 10,546,430 7,957 33,993
</TABLE>
ITEM 5. OTHER INFORMATION
None.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM-8-K
a. Exhibits
Exhibit
Number Description of Exhibit
---------------------------------------------------------------------
2.1 Contribution Agreement dated as of February 11, 1998, between
Starwood Financial Trust, Starwood Mezzanine Investors, L.P.
and Starwood Opportunity Fund IV, L.P.*
3.1 Amended and Restated Declaration of Trust of Starwood
Financial Trust*
3.2 Trustees' Regulations of Starwood Financial Trust
4.1 Amended and Restated Registration Rights Agreement dated March
18, 1998 among Starwood Financial Trust and Starwood Mezzanine
Investors, L.P. SAHI Partners and SOFI-IV SMT Holdings,
L.L.C.*
4.2 Second Amended and Restated Shareholders' Agreement dated
March 18, 1998 among B Holdings, L.L.C., SAHI Partners,
Starwood Mezzanine Investors, L.P., SOFI-IV SMT Holdings,
L.L.C., and Starwood Financial Trust.*
10.1 Starwood Financial Trust 1996 Share Incentive Plan*
10.2 Investment Advisory Agreement dated as of March 18, 1998
between Starwood Financial Trust and Starwood Financial
Advisors, L.L.C.*
* Incorporated by reference from the Trust's 1997 Annual Report
on Form 10-K.
b. Reports on Form 8-K
On April 2, 1998 a report on Form 8-K was filed in connection
with the Recapitalization Transactions.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the Trust
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STARWOOD FINANCIAL TRUST
Registrant
Date May 14, 1998 /s/ Jay Sugarman
-------------------------------
Jay Sugarman
Chief Executive Officer and President
Date May 14, 1998 /s/ Jerome C. Silvey
-------------------------------
Jerome C. Silvey
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
STARWOOD FINANCIAL TRUST
AMENDED AND RESTATED TRUSTEES' REGULATIONS
May 8, 1998
<PAGE>
STARWOOD FINANCIAL TRUST
TRUSTEES' REGULATIONS
ARTICLE I
OFFICES
I.1 Principal Office. The principal office of Starwood Financial Trust
(the "Trust") shall be located at such place or places as the Board of Trustees
(the "Board") of the Trust may designate.
I.2 Additional Offices. The Trust may have additional offices at such
places as the Board may from time to time determine or the business of the Trust
may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
II.1 Place. All meetings of shareholders shall be held at the principal
office of the Trust or at such other place within the United States as shall be
stated in the notice of the meeting.
II.2 Annual Meeting. An annual meeting of shareholders for the election of
Trustees and the transaction of any business within the powers of the Trust
shall be held within a reasonable period (not less than 10 days) following
delivery of the annual report described in Section 6.10 of the Amended and
Restated Declaration of Trust (the "Declaration of Trust"), on such date and at
such time as the Board may prescribe, but in any event such meeting shall be
held within six months after the end of each full fiscal year.
II.3 Special Meetings. Special meetings of shareholders may be called by
the Chairman of the Board or at least two other Trustees. Special meetings of
shareholders shall also be called by the Secretary upon the written request of
shareholders holding in the aggregate not less than twenty percent of the
outstanding Class A Shares of the Trust, $1.00 par value per share ("Class A
Shares") or Class B Shares of the Trust, $.01 par value per share ("Class B
Shares") entitled to vote at such meeting. Such request shall state the purpose
of such meeting and the matters proposed to be acted on at such meeting. The
Secretary shall inform such shareholders of the reasonably estimated cost of
preparing and mailing notice of the meeting and, upon payment to the Trust of
such costs, the Secretary shall give notice to each shareholder entitled to
notice of the meeting. Unless requested by shareholders entitled to cast a
majority of all the votes entitled to be cast at such meeting, a special meeting
need not be called to consider any matter which is substantially the same as a
matter voted on at any meeting of shareholders held
2
<PAGE>
during the preceding 12 months.
II.4 Notice. Not less than ten nor more than 60 days before each meeting
of shareholders, the Secretary shall give to each shareholder of record entitled
to vote at such meeting and to each shareholder not entitled to vote who is
entitled to notice of such meeting written or printed notice stating the place,
date and time of the meeting and, in the case of a special meeting or as
otherwise may be required by statute, the purpose or purposes for which the
meeting is called, either personally or by mail. If mailed, such notice shall be
deemed to be given when deposited in the United States mail addressed to the
shareholder at his or her post office address as it appears on the records of
the Trust, with postage thereon prepaid.
II.5 Scope of Notice. Subject to Section 2.11(a), any business of the
Trust may be transacted at an annual meeting of shareholders without being
specifically designated in the notice, except such business as is required by
statute to be stated in such notice. No business shall be transacted at a
special meeting of shareholders except as specifically designated in the notice
as provided in Section 2.11(b).
II.6 Quorum. At any meeting of shareholders, the presence in person or by
proxy of persons entitled to vote a majority of the Class A Shares and a
majority of the Class B Shares at such meeting shall constitute a quorum; but
this Section 2.6 shall not affect any requirement under any statute or the
Declaration of Trust for the vote necessary for the adoption of any measure. If,
however, such quorum shall not be present at any meeting of shareholders, the
shareholders entitled to vote at such meeting, present in person or by proxy,
shall have power to adjourn the meeting from time to time to a date not more
than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.
II.7 Voting. A majority of all the votes cast at a meeting of shareholders
duly called and at which a quorum is present shall be sufficient to elect a
Trustee. Each share entitled to vote may be voted for as many individuals as
there are Trustees to be elected and for whose election the share is entitled to
be voted. There shall be no right of cumulative voting. A majority of the votes
cast at a meeting of shareholders duly called and at which a quorum is present
shall be sufficient to approve any other matter which may properly come before
the meeting, unless more than a majority of the votes cast is required by
statute or by the Declaration of Trust. Unless otherwise provided in the
Declaration of Trust, each outstanding share, regardless of class, shall be
entitled to one vote on each matter submitted to a vote at a meeting of
shareholders.
II.8 Proxies. A shareholder may vote the shares owned of record by him or
her, either in person or by proxy executed in writing by the shareholder or by
his or her duly authorized attorney in fact. Such proxy shall be filed with the
Secretary before or at the time of the meeting. No proxy shall be valid after 11
months from the date of its execution, unless otherwise provided in the proxy.
No revocation of a proxy, whether by voluntary action, death, incapacity
3
<PAGE>
of the shareholder granting such proxy, or otherwise shall be effective until
written notice thereof has been received by the Trust or one of the Trustees. At
a meeting of shareholders all questions concerning the qualification of voters,
the validity of proxies, and the acceptance or rejection of votes, shall be
decided by the Secretary of the meeting unless inspectors of election are
appointed pursuant to Section 2.11, in which event such inspectors shall pass
upon all questions and shall have all other duties specified in such Section.
II.9 Voting of Shares by Certain Holders. Shares registered in the name of
a corporation, partnership, trust or other entity, if entitled to be voted, may
be voted by the president or a vice president, a general partner or trustee
thereof, as the case may be, or a proxy appointed by any of the foregoing
individuals, unless some other person who has been appointed to vote such shares
pursuant to a bylaw or a resolution of the board of directors of such
corporation or governing body of such other entity presents a certified copy of
such bylaw or resolution, in which case such person may vote such shares. Any
trustee or other fiduciary may vote shares registered in his or her name as such
fiduciary, either in person or by proxy.
Shares of the Trust directly or indirectly owned by it shall not be voted
at any meeting and shall not be counted in determining the total number of
outstanding shares entitled to be voted at any given time, unless they are held
by it in a fiduciary capacity, in which case they may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
The Board may adopt by resolution a procedure by which a shareholder may
certify in writing to the Trust that any shares registered in the name of the
shareholder are held for the account of a specified person other than the
shareholder. The resolution shall set forth the class of shareholders who may
make the certification, the purpose for which the certification may be made, the
form of certification and the information to be contained in it; if the
certification is with respect to a record date or closing of the share transfer
books, the time after the record date or closing of the share transfer books
within which the certification must be received by the Trust; and any other
provisions with respect to the procedure which the Board considers necessary or
desirable. On receipt of such certification, the person specified in the
certification shall be regarded as, for the purposes set forth in the
certification, the shareholder of record of the specified shares in place of the
shareholder who makes the certification.
II.10 Inspectors. At any meeting of shareholders, the presiding officer of
the meeting may, and upon the request of any shareholder shall, appoint one or
more persons as inspectors for such meeting. Such inspectors shall ascertain and
report the number of shares represented at the meeting based on their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all the shareholders.
Each report of an inspector shall be in writing and signed by him or by a
majority of them if there is more than one inspector acting at such meeting. If
there is more than one inspector, the
4
<PAGE>
report of a majority shall be the report of the inspectors. The report of the
inspector or inspectors on the number of shares represented at the meeting and
the results of the voting shall be prima facie evidence thereof.
II.11 Nominations and Shareholder Business.
(a) Annual Meetings of Shareholders.
(i) Nominations of persons for election to the Board and the
proposal of business to be considered by the shareholders may be made at an
annual meeting of shareholders (A) pursuant to the Trust's notice of meeting,
(B) by or at the direction of the Board or (C) by any shareholder of the Trust
who was a shareholder of record at the time of giving the notice provided for in
this Section 2.11(a), who is entitled to vote at the meeting and who complied
with the notice procedures set forth in this Section 2.11(a).
(ii) For nominations or other business to be properly brought
before an annual meeting by a shareholder pursuant to clause (C) of paragraph
(i) of this Section 2.11(a), the shareholder must have given timely notice
thereof in writing to the Secretary. To be timely, a shareholder's notice shall
be delivered to the Secretary at the principal executive offices of the Trust
not less than 60 days nor more than 90 days prior to the first anniversary of
the preceding year's annual meeting; provided, however, that if the date of the
annual meeting is advanced by more than 30 days or delayed by more than 60 days
from such anniversary date, notice by the shareholder to be timely must be so
delivered not more than 90 days prior to such annual meeting nor less than 60
days prior to such annual meeting or ten days following the day on which public
announcement of the date of such meeting is first made by the Trust. Such
shareholder's notice shall set forth (A) as to each person whom the shareholder
proposes to nominate for election or reelection as a Trustee, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of Trustees, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a Trustee if elected), (B) as
to any other business that the shareholder proposes to bring before the meeting,
a brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such shareholder and of the beneficial owner, if
any, on whose behalf the proposal is made, and (C) as to the shareholder giving
the notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made, (1) the name and address of such shareholder, as they appear
on the Trust's books, and of such beneficial owner and (2) the class and number
of shares of the Trust which are owned beneficially and of record by such
shareholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of
paragraph (ii) of this Section 2.11(a) to the contrary, if the number of
Trustees to be elected to the Board is
5
<PAGE>
increased and there is no public announcement naming all of the nominees for
Trustee or specifying the size of the increased Board made by the Trust at least
70 days prior to the first anniversary of the preceding year's annual meeting, a
shareholder's notice required by this Section 2.11(a) shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the Trust not more than ten days following the day on which such
public announcement is first made by the Trust.
(b) Special Meetings of Shareholders. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the Trust's notice of meeting. Nominations of persons
for election to the Board may be made at a special meeting of shareholders at
which Trustees are to be elected (i) pursuant to the Trust's notice of meeting,
(ii) by or at the direction of the Board or (iii) provided that the Board has
determined that Trustees shall be elected at such special meeting, by any
shareholder of the Trust who was a shareholder of record at the time of giving
of notice provided for in this Section 2.11(b), who is entitled to vote at the
meeting and who complied with the notice procedures set forth in this Section
2.11(b). If the Trust calls a special meeting of shareholders for the purpose of
electing one or more Trustees to the Board, any such shareholder may nominate a
person or persons (as the case may be) for election to such position as
specified in the Trust's notice of meeting, if the shareholder's notice required
by paragraph (ii) of Section 2.11(a) shall be delivered to the Secretary at the
principal executive offices of the Trust not more than 90 days prior to such
meeting nor less than 60 days prior to such meeting or ten days following the
day on which public announcement of the date of the special meeting and of the
nominees proposed by the Board to be elected at such meeting is first made by
the Trust.
(c) General.
(i) Only such persons who are nominated in accordance with the
procedures set forth in this Section 2.11 shall be eligible to serve as Trustees
and only such business shall be conducted at a meeting of shareholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 2.11. The presiding officer of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made in accordance with the procedures set forth
in this Section 2.11 and, if any proposed nomination or business is not in
compliance with this Section 2.11, to declare that such nomination or proposal
be disregarded.
(ii) For purposes of this Section 2.11, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed by
the Trust with the Securities and Exchange Commission.
(iii) Notwithstanding the foregoing provisions of this Section
2.11, a
6
<PAGE>
shareholder shall also comply with all applicable requirements of state law and
of the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 2.11. Nothing in this Section 2.11 shall be
deemed to affect any rights of shareholders to request inclusion of, nor any
rights of the Trust to omit, proposals in the Trust's proxy statement pursuant
to Rule 14a-8 under the Exchange Act.
II.12 Informal Action by Shareholders. Any action required or permitted to
be taken at a meeting of shareholders may be taken without a meeting if a
consent in writing, setting forth such action, is signed by a sufficient
proportion of the Class A Shareholders and Class B Shareholders as would be
required to approve such action at a meeting.
II.13 Voting by Ballot. Voting on any question or in any election may be
vive voce unless the presiding officer shall order or any shareholder shall
demand that voting be by ballot.
ARTICLE III
TRUSTEES
III.1 General Powers. The business and affairs of the Trust shall be
managed under the direction of the Board. The Board shall keep a record of its
acts and proceedings, which shall form a part of the records of the Trust in the
custody of the Secretary.
III.2 Number, Term and Qualifications. At any regular meeting or at any
special meeting called for that purpose, a majority of the Trustees may
establish, increase or decrease the number of Trustees, provided that the number
thereof shall never be less than seven nor more than 15, and provided further
that the term of office of a Trustee shall not be affected by any decrease in
the number of Trustees. Each Trustee shall hold office for the term for which he
or she is elected and until his or her successor is elected and qualifies,
subject, however, to prior death, resignation or removal from office. The
initial number of Trustees is eight.
III.3 Annual and Regular Meetings. An annual meeting of the Board shall be
held immediately after and at the same place as the annual meeting of
shareholders, no notice other than this Bylaw being necessary. The Board may
provide, by resolution, the time and place, either within or without the State
of California, for the holding of regular meetings of the Board without other
notice than such resolution.
III.4 Special Meetings. Special meetings of the Board may be called by or
at the request of the Chairman of the Board, the Chief Executive Officer or the
President or by a majority of the Trustees then in office. The person or persons
authorized to call special meetings of the Board may fix any place, either
within or without the State of California, as the place for holding any special
meeting of the Board called by them.
III.5 Notice. Notice of any special meeting shall be given by written
notice delivered
7
<PAGE>
personally, transmitted by facsimile, telegraphed, couriered or mailed to each
Trustee at his or her business or residence address. Personally delivered,
facsimile transmitted or telegraphed notices shall be given at least two days
prior to the meeting. Notice by mail shall be given at least five days prior to
the meeting. If mailed, such notice shall be deemed to be given when deposited
in the United States mail properly addressed, with postage thereon prepaid. If
given by courier such notice shall be deemed given when delivered to the courier
company. If given by telegram, such notice shall be deemed to be given when the
telegram is delivered to the telegraph company. If given by facsimile, such
notice shall be deemed to be given upon completion of the transmission and
receipt of a completed answer-back indicating receipt. Neither the business to
be transacted at, nor the purpose of, any annual, regular or special meeting of
the Board need be stated in the notice, unless specifically required by statute
or these Trustees' Regulations.
III.6 Quorum. A majority of the Trustees shall constitute a quorum for
transaction of business at any meeting of the Board, provided that, if less than
a majority of the Trustees are present at any meeting, a majority of the
Trustees present may adjourn the meeting from time to time without further
notice. The Trustees present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough Trustees to leave less than a quorum.
III.7 Voting. Except as otherwise provided in the Declaration of Trust,
the action of a majority of the Trustees taken at a meeting at which a quorum is
present shall be the action of the Board, unless the concurrence of a greater
proportion is required for such action by applicable statute.
III.8 Telephone Meetings. Trustees may participate in a meeting by means
of a conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time. Participation
in a meeting by these means shall constitute presence in person at the meeting.
III.9 Informal Action by Trustees. Any action required or permitted to be
taken at any meeting of the Board may be taken without a meeting, if a consent
in writing to such action is signed by each Trustee and such written consent is
filed with the minutes of proceedings of the Board. Such action by written
consent shall have the same force and effect as a unanimous vote of such
Trustees.
III.10 Vacancies. If for any reason any or all of the Trustees shall cease
to be Trustees, such event shall not affect these Trustees' Regulations or the
powers of the remaining Trustees hereunder (even if fewer than seven Trustees
remain). Any vacancy (including a vacancy created by an increase in the number
of Trustees) shall be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the Trustees.
III.11 Removal. The shareholders may, at any time, remove any Trustee in
the manner
8
<PAGE>
provided in the Declaration of Trust.
III.12 Adjourned Meetings. A quorum of the Trustees may adjourn any
Trustees' meeting to meet again at a stated day and hour. In the absence of a
quorum a majority of the Trustees present may adjourn from time to time to meet
again at a stated day and hour prior to the time fixed for the next regular
meeting of the Trustees. The motion for adjournment shall be lodged within the
records of the Trust. Notice of the time and place of an adjourned meeting need
not be given to any Trustee if the time and place is fixed at the meeting
adjourned.
III.13 Compensation. Subject to the provisions of the Declaration of
Trust, the Trustees of the Trust shall receive reasonable compensation for their
services as determined by the Trustees from time to time.
ARTICLE IV
COMMITTEES
IV.1 Audit Committee. The Board, by resolution adopted by a majority of
the Trustees, may designate two or more Trustees to constitute an Audit
Committee, to serve as such, unless the resolution designating the Audit
Committee is sooner amended or rescinded by the Board, until the next annual
meeting of the Board or until their respective successors are designated. The
Board, by resolution adopted by a majority of the Trustees, may also designate
additional Trustees as alternate members of the Audit Committee to serve as
members of the Audit Committee in the place and stead of any regular member or
members who may be unable to attend a meeting or otherwise unavailable to act as
a member of the Audit Committee. In the absence or disqualification of a member
and all alternate members who may serve in the place and stead of such member,
the member or members present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may unanimously
appoint another Trustee to act at the meeting in the place of any such absent or
disqualified member. At least two members of the Audit Committee shall be
independent of management of the Trust and free from any relationship that, in
the opinion of the Board, would interfere with the exercise of independent
judgment as a member of the Audit Committee.
Except as expressly limited by the laws of the State of California or the
Declaration of Trust, the Audit Committee shall have and may exercise all the
powers and authority of the Board to establish auditing procedures for the Trust
and to appoint and oversee the Trust's independent public accountants to the
fullest extent. The Audit Committee shall keep a record of its acts and
proceedings, which shall form a part of the records of the Trust in the custody
of the Secretary, and all actions of the Audit Committee shall be reported to
the Board at the next meeting of the Board.
Meetings of the Audit Committee may be called at any time by the Chairman
of the
9
<PAGE>
Board, the Chief Executive Officer or the President or by any two Audit
Committee members. Two days' written or telephonic notice of meetings shall be
given. A majority of the members of the Audit Committee shall constitute a
quorum for the transaction of business and, except as expressly limited by this
Section 4.1, the act of a majority of the members present at any meeting at
which there is a quorum shall be the act of the Audit Committee. Except as
expressly provided in this Section 4.1, the Audit Committee shall fix its own
rules of procedure.
IV.2 Compensation Committee. The Board, by resolution adopted by a
majority of the Trustees, may designate two or more Trustees to constitute a
Compensation Committee, to serve as such, unless the resolution designating the
Compensation Committee is sooner amended or rescinded by the Board, until the
next annual meeting of the Board or until their respective successors are
designated. The Board, by resolution adopted by a majority of the Trustees, may
also designate additional Trustees as alternate members of the Compensation
Committee to serve as members of the Compensation Committee in the place and
stead of any regular member or members who may be unable to attend a meeting or
otherwise unavailable to act as a member of the Compensation Committee. In the
absence or disqualification of a member and all alternate members who may serve
in the place and stead of such member, the member or members present at any
meeting and not disqualified from voting, whether or not such member or members
constitute a quorum, may unanimously appoint another Trustee to act at the
meeting in the place of any such absent or disqualified member. Each member of
the Compensation Committee shall be a "non-employee director" within the meaning
of Rule 16b-3(b)(3)(i) promulgated under the Exchange Act.
Except as expressly limited by the laws of the State of California or the
Declaration of Trust, the Compensation Committee shall have and may exercise
such powers as the Board may determine and specify by resolution. The
Compensation Committee shall keep a record of its acts and proceedings, which
shall form a part of the records of the Trust in the custody of the Secretary,
and all actions of the Compensation Committee shall be reported to the Board at
the next meeting of the Board.
Meetings of the Compensation Committee may be called at any time by the
Chairman of the Board, the Chief Executive Officer or the President or by any
two Compensation Committee members. Two days' written or telephonic notice of
meetings shall be given. A majority of the members of the Compensation Committee
shall constitute a quorum for the transaction of business and, except as
expressly limited by this Section 4.2, the act of a majority of the members
present at any meeting at which there is a quorum shall be the act of the
Compensation Committee. Except as expressly provided in this Section 4.2, the
Compensation Committee shall fix its own rules of procedure.
IV.3 Other Committees. The Board, by resolution adopted by a majority of
the Trustees, may designate one or more other committees, each such committee to
consist of two or more Trustees. Except as expressly limited by the laws of the
State of California or the
10
<PAGE>
Declaration of Trust, any such committee shall have and may exercise such powers
as the Board may determine and specify in the resolution designating such
committee. The Board, by resolution adopted by a majority of the Trustees, may
also designate one or more additional Trustees as alternate members of any such
committee to replace any absent or disqualified member at any meeting of the
committee, and at any time may change the membership of any committee or amend
or rescind the resolution designating the committee. In the absence or
disqualification of a member or alternate member of a committee, the member of
members present at any meeting and not disqualified from voting, whether or not
such member or members constitute a quorum, may unanimously appoint another
Trustee to act at the meeting in the place of any such absent or disqualified
member, provided that the Trustee so appointed meets any qualifications stated
in the resolution designating the committee. Each committee shall keep a record
of proceedings and report the same to the Board to such extent and in such form
as the Board may require. Unless otherwise provided in the resolution
designating a committee, a majority of all the members of any such committee may
select its chairman, fix its rules of procedure, fix the time and place of its
meetings and specify what notice of meetings, if any, shall be given.
IV.4 Telephone Meetings. Members of a committee of the Board may
participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means shall
constitute presence in person at the meeting.
IV.5 Informal Action by Committees. Any action required or permitted to be
taken at any meeting of a committee of the Board may be taken without a meeting,
if a consent in writing to such action is signed by each member of the committee
and such written consent is filed with the minutes of proceedings of such
committee.
ARTICLE V
OFFICERS
V.1 General Provisions. The officers of the Trust may include a Chief
Executive Officer, a President, a Chief Financial Officer, one or more Vice
Presidents, a Secretary, a Treasurer, one or more Assistant Secretaries and one
or more Assistant Treasurers. In addition, the Board may from time to time
appoint such other officers with such powers and duties as they shall deem
proper. The officers of the Trust shall be elected annually by the Board at the
first meeting of the Board held after each annual meeting of shareholders,
except that each of the Chief Executive Officer and the President may appoint
one or more Vice Presidents, Assistant Secretaries and Assistant Treasurers. If
the election of officers shall not be held at such meeting, such election shall
be held as soon thereafter as may be convenient. Each officer shall hold office
until his or her successor is elected and qualifies or until his or her death,
resignation or removal in the manner hereinafter provided. Any two or more
offices except President and Vice President may be held by the same person. In
its discretion, the Board may leave unfilled any
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office. Election of an officer or agent shall not of itself create contract
rights between the Trust and such officer or agent.
V.2 Removal and Resignation. Any officer or agent of the Trust may be
removed by the Board if in its judgment the best interests of the Trust would be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Any officer of the Trust may resign at
any time by giving written notice of his or her resignation to the Board, the
Chairman of the Board, the Chief Executive Officer, the President or the
Secretary. Any resignation shall take effect at any time subsequent to the time
specified therein or, if the time when it shall become effective is not
specified therein, immediately upon its receipt. The acceptance of a resignation
shall not be necessary to make it effective unless otherwise stated in the
resignation. Such resignation shall be without prejudice to the contract rights,
if any, of the Trust.
V.3 Vacancies. A vacancy in any office may be filled by the Board for the
balance of the term.
V.4 Chief Executive Officer. The Chief Executive Officer shall preside
over the meetings of the Board and of shareholders at which the Chairman of the
Board is not present and he or she shall be present. The Chief Executive Officer
shall have general responsibility for implementation of the policies of the
Trust, as determined by the Board, and for the management, supervision and
control of all of the business and affairs of the Trust. He or she may execute
any deed, mortgage, bond, contract or other instrument, except in cases where
the execution thereof shall be expressly delegated by the Board or by these
Trustees' Regulations to some other officer or agent of the Trust or shall be
required by law to be otherwise executed; and in general shall perform all
duties incident to the office of Chief Executive Officer and such other duties
as may be prescribed by the Board from time to time.
V.5 President. The President shall have general responsibility for
implementation of the policies of the Trust, as determined by the Board and the
Chief Executive Officer. In the absence of the Chief Executive Officer, or if
there is a vacancy in such office, the President shall perform the duties of the
Chief Executive Officer and when so acting shall have all the powers of and be
subject to all the restrictions on the Chief Executive Officer. He or she may
execute any deed, mortgage, bond, contract or other instrument, except in cases
where the execution thereof shall be expressly delegated by the Board or the
Chief Executive Officer or by these Trustees' Regulations to some other officer
or agent of the Trust or shall be required by law to be otherwise executed; and
in general shall perform all duties incident to the office of President and such
other duties as may be prescribed by the Board or the Chief Executive Officer
from time to time.
V.6 Chief Financial Officer. The Chief Financial Officer shall have
general responsibility for implementation of the policies of the Trust, as
determined by the Board and the Chief Executive Officer or the President, and
for the management, supervision and control of the
12
<PAGE>
financial and accounting affairs of the Trust. In the absence of a designation
of a Treasurer by the Board, the Chief Financial Officer shall be the Treasurer
of the Trust. In the absence of the Chief Executive Officer and the President,
or if there are vacancies in such offices, the Chief Financial Officer shall
perform the duties of the Chief Executive Officer and the President and when so
acting shall have all the powers of and be subject to all the restrictions on
the Chief Executive Officer and the President. He or she may execute any deed,
mortgage, bond, contract or other instrument, except in cases where the
execution thereof shall be expressly delegated by the Board, the Chief Executive
Officer or the President or by these Trustees' Regulations to some other officer
or agent of the Trust or shall be required by law to be otherwise executed; and
in general shall perform all duties incident to the office of Chief Financial
Officer and such other duties as may be prescribed by the Board, the Chief
Executive Officer or the President from time to time.
V.7 Vice Presidents. In the absence of the Chief Executive Officer, the
President and the Chief Financial Officer, or if there are vacancies in such
offices, the Vice President (or if there is more than one Vice President, the
Vice Presidents in the order designated at the time of their election or, in the
absence of any designation, then in the order of their election) shall perform
the duties of the Chief Executive Officer and the President and when so acting
shall have all the powers of and be subject to all the restrictions on the Chief
Executive Officer and the President; and shall perform such other duties as from
time to time may be assigned to him or her or them by the Chief Executive
Officer, the President or the Board . The Board may designate one or more Vice
Presidents as Executive Vice Presidents or as Vice Presidents for particular
areas of responsibility.
V.8 Secretary. The Secretary shall (a) keep the minutes of the proceedings
of the shareholders, the Board and committees of the Board in one or more books
provided for that purpose, (b) see that all notices are duly given in accordance
with the provisions of these Trustees' Regulations or as required by law, (c) be
custodian of the records and of the seal of the Trust, (d) keep a register of
the post office address of each shareholder which shall be furnished to the
Secretary by such shareholder, (e) have general charge of the share transfer
books of the Trust and (f) in general perform such other duties as from time to
time may be assigned to him or her by the Chief Executive Officer or the Board.
V.9 Treasurer. The Treasurer shall have the custody of the funds and
securities of the Trust and shall keep full and accurate accounts of receipts
and disbursements in books belonging to the Trust and shall deposit all moneys
and other valuable effects in the name and to the credit of the Trust in such
depositories as may be designated by the Board. In the absence of a designation
of a Chief Financial Officer by the Board, the Treasurer shall be the Chief
Financial Officer.
The Treasurer shall disburse the funds of the Trust as may be ordered by
the Board, taking proper vouchers for such disbursements, and shall render to
the Chief Executive Officer,
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<PAGE>
the President and the Board, at the regular meetings of the Board or whenever it
may so require, an account of all his or her transactions as Treasurer and of
the financial condition of the Trust.
If required by the Board, he or she shall give the Trust a bond in such
sum and with such surety or sureties as shall be satisfactory to the Board for
the faithful performance of the duties of his or her office and for the
restoration to the Trust, in case of his or her death, resignation, retirement
or removal from office, of all books, papers, vouchers, moneys and other
property of whatever kind in his or her possession or under his or her control
belonging to the Trust.
V.10 Assistant Secretaries and Assistant Treasurers. The Assistant
Secretaries and Assistant Treasurers, in general, shall perform such duties as
shall be assigned to them by the Secretary or Treasurer, respectively, or by the
Chief Executive Officer, the President or the Board. The Assistant Treasurers
shall, if required by the Board, give bonds for the faithful performance of
their duties in such sums and with such surety or sureties as shall be
satisfactory to the Board.
V.11 Salaries. The salaries and other compensation of the officers shall
be fixed from time to time by the Board and no officer shall be prevented from
receiving such salary by reason of the fact that he or she is also a Trustee.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
VI.1 Contracts. The Chairman of the Board, the Chief Executive Officer,
the President, the Chief Financial Officer and each Vice President are each
authorized to enter into any contract and to execute and deliver any instrument
in the name of and on behalf of the Trust. The Board may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument in
the name of and on behalf of the Trust, and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by one or more of the Trustees or by an authorized person
shall be valid and binding on the Board and on the Trust when such execution is
authorized or ratified by these Trustees' Regulations or by action of the Board.
VI.2 Checks and Drafts. All checks, drafts or other orders for the payment
of money, notes or other evidences of indebtedness issued in the name of the
Trust shall be signed by the Chief Financial Officer or such officer or
officers, agent or agents of the Trust designated by the Chief Financial Officer
or in such other manner as shall from time to time be determined by the Board.
VI.3 Deposits. All funds of the Trust not otherwise employed shall be
deposited from time to time to the credit of the Trust in such banks, trust
companies or other depositories as the Chief Executive Officer, the President,
the Chief Financial Officer or the Board may designate.
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<PAGE>
ARTICLE VII
SHARES
VII.1 Certificates. Each shareholder shall be entitled to a certificate or
certificates which shall represent and certify the number of shares of each
class held by him or her in the Trust. Each certificate shall be signed by the
Chairman, the Chief Executive Officer, the President or any Vice President and
countersigned by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer and may be sealed with the seal, if any, of the Trust. The
signatures may be either manual or facsimile. Certificates shall be
consecutively numbered; and if the Trust shall, from time to time, issue several
classes of shares, each class may have its own number series. A certificate is
valid and may be issued whether or not an officer who signed it is still an
officer when it is issued. Each certificate representing shares which are
restricted as to their transferability or voting powers, which are preferred or
limited as to their dividends or distributions or as to their allocable portion
of the assets upon liquidation or which are redeemable at the option of the
Trust, shall have a statement of such restriction, limitation, preference or
redemption provision, or a summary thereof, plainly stated on the certificate.
In lieu of such statement or summary, the Trust may set forth on the face or
back of the certificate a statement that the Trust will furnish to any
shareholder, upon request and without charge, a full statement of such
information.
VII.2 Transfers. Upon surrender to the Trust or the transfer agent of the
Trust of a share certificate duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, the Trust shall issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction on its books.
The Trust shall be entitled to treat the holder of record of any share as
the holder in fact thereof and, accordingly, shall not be bound to recognize any
equitable or other claim to or interest in such share on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of the State of California.
Any issuance, redemption or transfer of, or restriction on, shares which
would operate to disqualify the Trust as a real estate investment trust for
Federal income tax purposes shall be void ab initio.
Notwithstanding the foregoing, transfers of shares of any class will be
subject in all respects to the Declaration of Trust and all of the terms and
conditions contained therein.
VII.3 Lost Certificate. The Board or the Secretary (or any other officer
designated by the Board or the Secretary) may direct a new certificate to be
issued in place of any certificate previously issued by the Trust alleged to
have been lost, stolen or destroyed upon the making of
15
<PAGE>
an affidavit of that fact by the person claiming the certificate to be lost,
stolen or destroyed. When authorizing the issuance of a new certificate, the
Board or the Secretary (or any other officer designated by the Board or the
Secretary) may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or his
or her legal representative to advertise the same in such manner as it or he or
she shall require and/or to give bond, with sufficient surety, to the Trust to
indemnify it against any loss or claim which may arise as a result of the
issuance of a new certificate.
VII.4 Closing of Transfer Books or Fixing of Record Date. The Board may
set, in advance, a record date for the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders, or shareholders
entitled to receive payment of any dividend or distribution or the allotment of
any other rights, or in order to make a determination of shareholders for any
other proper purpose. Such date, in any case, shall not be prior to the close of
business on the day the record date is fixed and shall be not more than 90 days
and, in the case of a meeting of shareholders, not less than ten days, before
the date on which the meeting or particular action requiring such determination
of shareholders is to be held or taken.
In lieu of fixing a record date, the Board may provide that the share
transfer books shall be closed for a stated period but not longer than 20 days.
If the share transfer books are closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten days before the date of such meeting.
If no record date is fixed and the share transfer books are not closed for
the determination of shareholders, (a) the record date for the determination of
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be at the close of business on the day on which the notice of meeting is mailed
or the 30th day before the meeting, whichever is the closer date to the meeting,
and (b) the record date for the determination of shareholders entitled to
receive payment of a dividend or distribution or an allotment of any other
rights shall be the close of business on the day on which the resolution of the
Board declaring the dividend or distribution or allotment of rights is adopted.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section 7.4, such determination
shall apply to any adjournment thereof, except when (a) the determination has
been made through the closing of the transfer books and the stated period of
closing has expired or (b) the meeting is adjourned to a date more than 120 days
after the record date fixed for the original meeting, in either of which cases a
new record date shall be determined as provided above.
VII.5 Share Ledger. The Trust shall maintain at its principal office or at
the office of its counsel, accountants or transfer agent, an original or
duplicate share ledger containing the name and address of each shareholder and
the number of shares of each class held by such shareholder.
16
<PAGE>
VII.6 Fractional Shares; Issuance of Units. The Board may issue fractional
shares or provide for the issuance of scrip, all on such items and under such
conditions as they may determine. Notwithstanding any other provision of the
Declaration of Trust or these Trustees' Regulations, the Board may issue units
consisting of different securities of the Trust. Any security issued in a unit
shall have the same characteristics as any identical securities issued by the
Trust, except that the Board may provide that for a specified period securities
of the Trust issued in such unit may be transferred on the books of the Trust
only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Board shall have the power, from time to time, to fix the fiscal year
of the Trust by a duly adopted resolution.
ARTICLE IX
DIVIDENDS AND DISTRIBUTIONS
IX.1 Declaration. Dividends and distributions on the shares of the Trust
may be authorized and declared by the Board, subject to the provisions of law
and the Declaration of Trust. Dividends and distributions may be paid in cash,
property or other assets of the Trust or in securities of the Trust or from any
other source as the Board in its discretion shall determine, subject to the
provisions of law and the Declaration of Trust.
IX.2 Contingencies. Before payment of any dividends or distributions,
there may be set aside out of any funds of the Trust available for dividends and
distributions such sum or sums as the Board may from time to time, in its
absolute discretion, think proper as a reserve fund for contingencies, for
equalizing dividends and distributions, for repairing or maintaining any
property of the Trust or for such other purpose as the Board shall determine to
be in the best interest of the Trust, and the Board may modify or abolish any
such reserve in the manner in which it was created.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of law and the Declaration of Trust, the Board
may from time to time adopt, amend, revise or terminate any policy or policies
with respect to investments by the Trust as it shall deem appropriate in its
sole discretion.
ARTICLE XI
17
<PAGE>
SEAL
XI.1 Seal. The Board may authorize the adoption of a seal by the Trust.
The seal shall have inscribed thereon the name of the Trust. The Board may
authorize one or more duplicate seals and provide for the custody thereof.
XI.2 Affixing Seal. Whenever the Trust is required to affix its seal to a
document, it shall be sufficient to meet the requirements of any law, rule or
regulation relating to a seal to place the word "(SEAL)" adjacent to the
signature of the person authorized to execute the document on behalf of the
Trust.
ARTICLE XII
INDEMNIFICATION
XII.1 Indemnification. To the maximum extent permitted by California law,
as amended from time to time, the Trust shall indemnify and hold harmless, and
pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to, each Trustee and officer from and against all claims and
liabilities, whether they proceed to judgment or are settled, in connection with
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which such Trustee or officer may
become subject by reason of his or her being or having been a Trustee or
officer, or by reason of any action alleged to have been taken or omitted by him
or her as Trustee or officer, and shall reimburse him or her for all reasonable
legal and other expenses incurred by him or her in connection with any such
claim or liability, including any claim or liability arising under the
provisions of federal or state securities laws; provided, however, that no
Trustee or officer shall be entitled to indemnification under the foregoing
provisions in relation to any matter if it shall have been established that his
or her action or omission was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty or the Trustee or officer actually received an improper
personal benefit in money, property or services or, in the case of any criminal
proceeding, the Trustee or officer had reasonable cause to believe that the act
or omission was unlawful. The foregoing indemnification shall include any action
alleged to have been taken or omitted by any such Trustee or officer by reason
of serving or having served at the request of the Trust as a director, trustee,
officer, partner, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
The Trust, without requiring a preliminary determination of the ultimate
entitlement to indemnification, shall pay or reimburse reasonable expenses, as
such expenses are incurred by any Trustee or officer in connection with any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which such Trustee or officer a
Trustee or officer; provided that if such payment or reimbursement is to be made
prior to the final disposition of any proceeding to which a Trustee or officer
is a party, no payment or reimbursement shall be made by the Trust unless and
until the Trust shall receive a written
18
<PAGE>
affirmation from such Trustee or officer of his or her good faith belief that
the standard for indemnification of a Trustee or officer under California law
and as provided above has been met and a written undertaking by such Trustee or
officer to repay such amounts paid or reimbursed by the Trust if it shall
ultimately be determined that such standard for indemnification has not been
met. The rights accruing to a Trustee or officer under these provisions shall
not exclude any other right to which he or she may be lawfully entitled, nor
shall anything herein contained restrict the right of the Trust to indemnify or
reimburse such Trustee or officer in any proper cause even though not
specifically provided for herein.
XII.2 Expenses Included. The indemnification authorized by this Article
XII 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 personally
liable to any person to be indemnified. This Section 12.2 shall inure to the
benefit of the Trustees and their Affiliates. For purposes of this Section 12.2
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; (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.
XII.3 Effect of Amendment. Neither the amendment nor repeal of this
Article, nor the adoption or amendment of any other provision of these Trustees'
Regulations or Declaration of Trust inconsistent with this Article, shall apply
to or affect in any respect the applicability of the preceding paragraph with
respect to any act or failure to act which occurred prior to such amendment,
repeal or adoption.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Declaration of
Trust or these Trustees' Regulations or pursuant to applicable law, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice. Neither the business to be transacted at nor the
purpose of any meeting need be set forth in the waiver of notice, unless
specifically required by statute. The attendance of any person at any meeting
shall constitute a waiver of notice of such meeting, except if such person
attends such meeting for the express purpose of objecting to the transaction of
any business on the ground that the meeting is not lawfully called or convened.
ARTICLE XIV
19
<PAGE>
AMENDMENT OF TRUSTEES' REGULATIONS
The Board shall have the exclusive power to adopt, alter or repeal any
provision of these Trustees' Regulations and to make new Trustees' Regulations
without the consent of the shareholders.
20
<PAGE>
CERTIFICATE OF SECRETARY
OF
STARWOOD FINANCIAL TRUST
I, Jerome C. Silvey, do hereby certify that:
1. I am the duly elected and acting Secretary of Starwood Financial Trust,
a California business trust (the "Trust").
2. The foregoing Trustees' Regulations were validly authorized and
approved by resolutions of the Board of Directors of the Trust duly adopted on
May 8, 1998, true and complete copies of which are attached hereto as Exhibit A,
and such resolutions are in full force and effect on the date hereof and have
not been amended, modified or repealed.
IN WITNESS THEREOF, I have executed this Certificate as Secretary of the
Trust this 8th day of May, 1998.
Jerome C. Silvey
Secretary
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<PERIOD-END> MAR-31-1998
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<SECURITIES> 56,252
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0
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