-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Fg8a7aW4RZTDiVYy4QW0Nyj9669E7Wzx3c/YrZ6y/fMGg6mpnQEj6YHY61K3i+96 sytLs9giOttf+5po7UjFBg== 0000898430-95-001286.txt : 199507190000898430-95-001286.hdr.sgml : 19950719 ACCESSION NUMBER: 0000898430-95-001286 CONFORMED SUBMISSION TYPE: T-3/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19950718 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORTGAGE & REALTY TRUST CENTRAL INDEX KEY: 0000079259 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 231862664 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: T-3/A SEC ACT: 1939 Act SEC FILE NUMBER: 022-26624 FILM NUMBER: 95554636 BUSINESS ADDRESS: STREET 1: 8380 OLD YORK RD STE 300 CITY: ELKINS PARK STATE: PA ZIP: 19117 BUSINESS PHONE: 2158811525 FORMER COMPANY: FORMER CONFORMED NAME: PNB MORTGAGE & REALTY INVESTORS DATE OF NAME CHANGE: 19850102 T-3/A 1 AMENDMENT #1 FORM T-3 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. ___________________ FORM T-3 (AMENDMENT NO. 1) FOR APPLICATIONS FOR QUALIFICATION OF INDENTURES UNDER THE TRUST INDENTURE ACT OF 1939 ___________________ MORTGAGE AND REALTY TRUST (Name of applicant) 8380 Old York Road, Suite 300 Elkins Park, Pennsylvania 19117-1590 (Address of principal executive offices) ___________________ SECURITIES TO BE ISSUED UNDER THE INDENTURE TO BE QUALIFIED TITLE OF CLASS AMOUNT -------------- ------ Senior Secured Notes Due 2002 $110,000,000 and the Guarantees thereof Approximate date of proposed public offering: The Senior Secured Notes Due 2002 - -------------------------------------------- (the "Securities") may be deemed to be offered upon the execution of the Indenture which will govern the Securities as described herein. ___________________ Name and Address for agent of service: C.W. Strong, Jr. President/Chief Executive Officer Mortgage and Realty Trust 8380 Old York Road, Suite 300 Elkins Park, Pennsylvania 19117-1590 Copies to: Eric H. Schunk Milbank, Tweed, Hadley & McCloy 601 South Figueroa Street 30th Floor Los Angeles, California 90017 ___________________ The applicant hereby amends this application for qualification on such date or dates as may be necessary to delay its effectiveness until (i) the 20th day after the filing of a further amendment which specifically states that it shall supersede this amendment, or (ii) such date as the Commission, acting pursuant to section 307(c) of the Trust Indenture Act of 1939, as amended, may determine upon the written request of the applicant. Page 1 of 13 GENERAL 1. General information. Furnish the following information as to the Applicant: (a) Form of organization: A real estate investment trust (a "REIT"). ---- (b) State or other sovereign power under the laws of which organized: Maryland. 2. Securities Act exemption applicable. State briefly the facts relied upon by the Applicant as a basis for the claim that registration of the indenture securities under the Securities Act of 1933, as amended, is not required. Except as otherwise set forth herein, capitalized terms not otherwise defined in this Form T-3 have the respective meanings assigned to them in the Disclosure Statement defined below, a copy of which is included as Exhibit T3E.1 hereto. Mortgage and Realty Trust (the "Applicant") pursuant to a prepackaged plan of reorganization (the "Prepackaged Plan") under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") intends to exchange its Senior Secured Uncertificated Notes due 1995 (the "Outstanding Notes") for (a) $110,000,000 in aggregate principal amount of new 11-1/8% Senior Secured Notes due 2002 (the "New Senior Notes"), (b) an aggregate of at least $50,000,000 in cash less any amounts paid prior to the Petition Date pursuant to the Agreement of Understanding (plus such additional amount, if any, based upon cash available in excess of the Initial Cash Reserve Fund) and (c) 10,889,000 Common Shares par value $1.00 per share (the "New Common Shares"), of the Applicant on the effective date (the "Effective Date") of the Prepackaged Plan. Concurrently with and as part of the filing with the Securities and Exchange Commission (the "Commission") of this Form T-3, the Applicant is filing with the Commission preliminary copies of (i) a Disclosure Statement and Proxy Statement - Prospectus for the Solicitation of Votes for the Prepackaged Plan or Organization of Mortgage and Realty Trust (the "Disclosure Statement") and (ii) Ballots and Master Ballots (collectively, the "Consent Solicitation Materials"). The Applicant will use the Consent Solicitation Materials to solicit consents (the "Solicitation") from the Holders for their approval of the Prepackaged Plan (and the transactions contemplated thereby). If the Requisite Plan Acceptances are obtained, the Applicant will commence a case under chapter 11 of the Bankruptcy Code and use the Plan Acceptances received to obtain confirmation of the Prepackaged Plan. If the Applicant does not receive the Requisite Plan Acceptances, the Applicant reserves the right to modify the Prepackaged Plan and/or seek confirmation of the Prepackaged Plan pursuant to section 1129(b) of the Bankruptcy Code, pursuant to "cramdown" procedures. Under the Prepackaged Plan, on the Effective Date, the Applicant will issue the New Senior Notes, which will be guaranteed by the Applicant's Subsidiaries, under the Amended and Restated Indenture (the "Indenture") between the Applicant and Wilmington Trust Company, as trustee (the "Trustee"). To the extent that the Solicitations are deemed to result in offers of new securities that are not exempt by Section 1145(a) of the Bankruptcy Code, they are being made by the Applicant in reliance upon the exception from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), afforded by Section 4(2) or Section 3(a)(9) thereof. The Applicant, therefore, will not pay any commission or other remuneration to any broker, dealer, salesman or other person for soliciting consents or acceptances. Regular employees of the Applicant, who will not receive additional compensation therefor, may solicit consents or acceptances. Page 2 of 13 There have not been nor will there be any sales of securities of the same class as any of the New Senior Notes by the Applicant or by or through an underwriter at or about the same time as the transaction for which the exemption described above is claimed. Section 1145 Exemption. If the Prepackaged Plan is confirmed, the ---------------------- Securities will be issued in reliance on the exemption from the registration requirements of the Securities Act afforded by Section 1145 of the Bankruptcy Code. AFFILIATIONS 3. Affiliates. Furnish a list or diagram of all affiliates of the Applicant and indicate the respective percentages of voting securities or other bases of control. The Applicant owns 100% of the outstanding common stock of the following corporations: MRT West, Inc., a California corporation MRT Creekside, Inc., a California corporation MRT Newark, Inc., a California corporation MRT Santa Monica, Inc., a California corporation 150 Rittenhouse Circle, Inc., a Maryland corporation The Applicant has voting control, through ownership of limited partnership interests and/or its subsidiaries' ownership of general partnership interests, of the following limited partnerships: TPIP II Limited Partnership, a Washington limited partnership Paseo Padre Associates, a California limited partnership Creekside Center Associates, a California limited partnership Newark C&C Associates, a California limited partnership Bay City Holdings, L.P., a California limited partnership Keystone Venture I, a Pennsylvania limited partnership The status of the affiliates of the Applicant will not change in connection with the adoption of the Prepackaged Plan. There are no individual persons controlling, controlled by or under common control with the Applicant other than the trustees and officers listed in Item 4 below. Page 3 of 13 MANAGEMENT AND CONTROL 4. Directors and executive officers. List the names and complete mailing addresses of all directors and executive officers of the Applicant and all persons chosen to become directors or executive officers. Indicate all offices with the Applicant held or to be held by each person named. The following persons are the current executive officers and trustees of the Applicant: Name/1/ Office ---- ------ Jeffrey M. Bucher Trustee Donald W. Burnes, Jr. Senior Vice President Kent L. Colwell Trustee James A. Dalton Executive Vice President and Chief Operating Officer Douglas R. Eckard Senior Vice President James M. Gassaway Trustee Daniel F. Hennessey Treasurer and Chief Financial Officer John E. Krout Trustee Gerhard N. Rostvold Trustee Victor H. Schlesinger Chairman and Trustee C. W. Strong, Jr. President, Chief Executive Officer and Trustee The following persons have been chosen to become the President and Chief Executive Officer and new trustees after the Effective Date: Name/2/ Office ---- ------ Martin Berstein Trustee Richard S. Frary Trustee Richard B. Jennings Trustee John B. Levy Trustee Carl A. Mayer, Jr. Trustee George R. Zoffinger President and Chief Executive Officer ________________________ /1/ The address of all trustees and executive officers is in care of the Applicant. /2/ The address of all designees is in care of the Applicant. Page 4 of 13 5. Principal owners of voting securities. Furnish the following information as to each person owning 10% or more of the voting securities of the Applicant. As of February 28, 1995
Percentage Name and Complete Title of Amount of Voting Mailing Address Class Owned Owned Securities Owned - ----------------- ----------- ------ ---------------- None
After the Effective Date
Percentage Name and Complete Title of Amount of Voting Mailing Address Class Owned Owned/1//2/ Securities Owned/1//2/ - ----------------- ----------- ----- ---------------- Mutual Series Fund Inc. Common Shares 5,000,000 44.7% 51 John F. Kennedy Parkway Short Hills, New Jersey 07078 Fidelity Investments Common Shares 1,700,000 15.0% 82 Devonshire Street - F7A Boston, Massachusetts 02019 Intermarket Corporation Common Shares 1,700,000 14.8% 667 Madison Avenue 20th Floor New York, New York 10021
UNDERWRITERS 6. Underwriters. Give the name and complete mailing address of (a) each person who, within three years prior to the date of filing the application, acted as an underwriter of any securities of the obligor which was outstanding on the date of filing the application, and (b) each proposed principal underwriter of the securities proposed to be offered. As to each person specified in (a), give the title of each class of securities underwritten. (a) No person, within the three years prior to the date of this Application, has acted as an underwriter of any securities of the Applicant which are outstanding on the date of this Application. (b) No person will act as underwriter of the Securities governed by the Indenture. ______________________ /1/ Assumes that the Prepackaged Plan is approved by holders of Outstanding Common Shares and that, consequently, holders of Outstanding Common Shares retain their interests as provided in the Prepackaged Plan. /2/ Amounts owned and percentages are approximate and includes securities to be owned by affiliates. Page 5 of 13 7. Capitalization. (a) Furnish the following information as to each authorized class of securities of the Applicant. As of February 28, 1995
Title of Class Amount Authorized Amount Outstanding -------------- ----------------- ------------------ Preferred Shares, $1.00 par value 3,500,000 shares None Common Shares, $1.00 par value 20,000,000 shares 11,226,215
After the Effective Date
Title of Class Amount Authorized Amount Outstanding -------------- ----------------- ------------------ Preferred Shares, $1.00 par value 3,500,000 shares None Common Shares, $1.00 par value 20,000,000 shares 11,226,000
(b) Give a brief outline of the voting rights of each class of voting securities referred to in paragraph (a) above. Each Common Share of the Applicant is entitled to one vote with no cumulative voting. All outstanding Common Shares of the Applicant are fully paid and nonassessable. Holders of Common Shares of the Applicant are not entitled to preemptive rights. The holders of Preferred Shares of any series would be entitled to vote only to the extent specified in the resolutions providing for such series adopted by the Trustees of the Applicant. As of the date hereof, other than Common Shares, no class of securities of the Applicant has any voting rights. INDENTURE SECURITIES 8. Analysis of indenture provisions. Insert at this point the analysis of indenture provisions required under Section 305(a)(2) of the Trust Indenture Act of 1939. The New Senior Notes will be issued under the Indenture expected to be dated as of the Effective Date, a copy of which is being filed as an exhibit thereto. The following summary of certain provisions of the New Senior Notes and the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the detailed provisions contained in the Indenture. Whenever particular provisions or defined terms of the Indenture are referred to, such provisions or defined terms are incorporated by reference as a part of the statements made herein and such statements are qualified in their entirety by such reference. Certain defined terms in the Indenture are capitalized herein. (A) Events of Default. ----------------- Each of the following events (whatever the reason for such event) constitutes an "Event of Default" under the Indenture: (a) The Applicant shall fail to make any payment in respect of principal of the New Senior Notes or under Sections 3.09 or 4.19 of the Indenture when the same becomes due and payable and such failure continues for a period of five (5) Business Days after the due date of such payment, or the Applicant shall fail to make any payment when due of interest on the new Senior Notes and such failure continues for a period of ten (10) days after the due date of such payment; or Page 6 of 13 (b) Any representation or warranty made or deemed made by the Applicant or any Subsidiary (or any of their officers) under the Disclosure Statement or the Collateral Documents shall prove to have been untrue or incorrect in any material respect when made or deemed made; or (c) The Applicant (or the Applicant or any Subsidiary in the case of the Collateral Documents) shall fail to perform or observe (i) any term, covenant or agreement contained in Article 4 (other than Section 4.07) or Article 5 of the Indenture or (ii) any other term, covenant or agreement contained in the Indenture, the Plan or the Collateral Documents, if such failure under this clause (ii) shall remain unremedied for 30 days after the earlier of the date on which (A) an officer of the Applicant becomes aware of such failure or (B) written notice thereof shall have been given to the Applicant by the Trustee or the Holders; or (d) The Applicant or any Subsidiary shall fail, after any applicable grace period, to pay any principal of or premium, if any, or interest on any of its Indebtedness in an amount exceeding $1,000,000 (excluding the New Senior Notes), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise); or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) The Applicant or any Material Subsidiary of the Applicant shall generally not pay its debts as such debts become due except such debts that are the subject of a good faith dispute, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Applicant or such Material Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against the Applicant or such Material Subsidiary (but not instituted by it), either such proceedings shall remain undismissed or unstayed for a period of 30 days or any of the actions sought in such proceedings shall occur; or the Applicant or such Material Subsidiary shall take any action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment or order for the payment of money in excess of $1,000,000 shall be rendered against the Applicant or such Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (ii) there shall be any period of ten consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) Except for releases of Collateral pursuant to Asset Sales effected in accordance with Section 4.11 of the Indenture, the Indenture or the Collateral Documents shall, for any reason, cease to create a valid Lien on Collateral having a value of $1,000,000 or more purported to be covered thereby, or such Lien shall cease to have the priority Lien status initially granted and be a perfected Lien as to Collateral having a value of $1,000,000 or more. If a Default or Event of Default occurs and is continuing and if it is known to a Responsible Officer of the Trustee and/or the Collateral Agent, the Trustee and/or the Collateral Agent shall promptly notify the other, and the Trustee shall mail to Holders of New Senior Notes a notice of the Default or Event of Default within 30 days after it occurs. If an Event of Default (other than an Event of Default specified in clause (e) of Section 6.01 of the Indenture) occurs and is continuing, the Trustee by notice to the Applicant may, or upon written notice from the Required Holders shall, or the Required Holders by written notice to the Applicant and the Trustee may, declare all the New Senior Notes to be due and payable immediately. Upon such declaration, the principal of, premium, if any, and interest on the New Senior Notes shall be due and payable immediately. If an Event of Default specified in clause (e) of Section 6.01 of the Indenture occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Required Holders by written notice to the Trustee may on behalf of all of the Holders rescind an Page 7 of 13 acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal, interest or premium that has become due solely because of the acceleration) have been cured or waived. If an Event of Default occurs and is continuing, the Trustee and/or the Collateral Agent, as applicable, may pursue any available remedy (under the Indenture, the Collateral Documents or otherwise) to collect the payment of principal and interest on the New Senior Notes or to enforce the performance of any provision of the New Senior Notes, the Indenture or the Collateral Documents. The Trustee or the Collateral Agent may maintain a proceeding even if it does not possess any of the New Senior Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee, the Collateral Agent or any Holder of a New Senior Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. The Required Holders by notice to the Trustee may on behalf of the Holders of all of the New Senior Notes waive an existing Default or Event of Default and its consequences under the Indenture, except a continuing Default or Event of Default in the payment of the principal of or interest on the New Senior Notes. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of the Indenture and the Collateral Documents; but no such waiver shall extend to any subsequent or other Default or Event of Default. The Required Holders may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee and/or the Collateral Agent or exercising any trust or power conferred on it or them. However, the Trustee and/or the Collateral Agent may refuse to follow any direction that conflicts with the law, the Indenture or the Collateral Documents, that the Trustee and/or the Collateral Agent determines may be unduly prejudicial to the rights of other Holders of New Senior Notes or that may involve the Trustee and/or the Collateral Agent in personal liability. (B) Authentication and Execution and Delivery of New Senior Notes. ------------------------------------------------------------- An Officer of the Applicant shall sign the New Senior Notes for the Applicant by manual or facsimile signature. One Officer of each Guarantor shall sign the Guarantee for such Guarantor by facsimile or manual signature. The Applicant's seal shall be reproduced on the New Senior Notes and may be in facsimile form. If an Officer whose signature is on a New Senior Note no longer holds that office at the time the Note is authenticated, the Note shall nevertheless be valid. A New Senior Note shall not be valid until authenticated by the manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Note has been authenticated under the Indenture. The Trustee shall, upon a written order of the Applicant signed by two Officers of the Applicant, authenticate New Senior Notes for original issue of up to the aggregate principal amount stated in paragraph 4 of the New Senior Notes. The aggregate principal amount of New Senior Notes outstanding at any time shall not exceed the amount set forth herein. The Trustee may appoint an authenticating agent acceptable to the Applicant to authenticate New Senior Notes. Unless limited by the terms of such appointment, an authenticating agent may authenticate New Senior Notes whenever the Trustee may do so. Each reference in the Indenture to authentication by the Page 8 of 13 Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Applicant or an Affiliate of the Applicant. (C) Release of Collateral. --------------------- Subject to subsections (b) and (d) of Section 10.03 of the Indenture, Collateral may be released (from the Lien and security interest created by the Collateral Documents) from time to time in accordance with the provisions of the Collateral Documents. No Collateral shall be released from the Lien and security interest created by the Collateral Documents unless the Applicant shall have made an Asset Sale Offer in accordance with Section 3.09 of the Indenture. Notwithstanding any of the terms of the Indenture or of any of the Collateral Documents, at any time when an Event of Default shall have occurred and be continuing and the maturity of the New Senior Notes shall have been accelerated (whether by declaration or otherwise), the Collateral Agent shall not, without the consent of the Required Holders, release any Collateral pursuant to the provisions of the Indenture or any of the Collateral Documents. The release of any Collateral from the terms of the Indenture and the Collateral Documents shall not be deemed to impair the security under the Indenture in contravention of the provisions thereof if and to the extent the Collateral is released pursuant to the terms thereof. To the extent applicable, the Applicant shall cause TIA (S) 314(d) relating to the release of property or securities from the Lien and security interest of the Collateral Documents and relating to the substitution therefor of any property or securities to be subjected to the Lien and security interest of the Collateral Documents to be complied with. Any certificate or opinion required by TIA (S) 314(d) may be made by an Officer of the Applicant except in cases where TIA (S) 314(d) requires that such certificate or opinion be made by an independent Person, which Person shall be an independent engineer, appraiser or other expert selected or approved by the Trustee or the Collateral Agent in the exercise of reasonable care. The Applicant shall furnish to the Trustee and the Collateral Agent, prior to each proposed release of Collateral pursuant to the Collateral Documents or the Indenture, (i) all documents required by Section 314(d) of the TIA and (ii) an Opinion of Counsel to the effect that such accompanying documents constitute all documents required by Section 314(d) of the TIA. The Trustee and the Collateral Agent may, to the extent permitted by Sections 7.01 and 7.02 of the Indenture, accept as conclusive evidence of compliance with the foregoing provisions the appropriate statements contained in such documents and such Opinion of Counsel. (D) Satisfaction and Discharge of Indenture. --------------------------------------- Upon the indefeasible payment in full of all Obligations of the Applicant under the Indenture and under the New Senior Notes, the Applicant and Guarantors shall be released from all their respective obligations under the Indenture and under the New Senior Notes and the Indenture shall cease to be of further effect. The Applicant may, at the option of its Board of Trustees evidenced by a resolution set forth in an Officers' Certificate, at any time, with respect to the New Senior Notes, elect to have Section 8.02 of the Indenture be applied to all outstanding New Senior Notes upon compliance with the conditions set forth in Article Eight of the Indenture. Upon the Applicant's exercise under Section 8.01 of the Indenture of the option applicable to Section 8.02 of the Indenture, the Applicant shall be deemed to have been discharged from its obligations with respect to all outstanding New Senior Notes on the date the conditions set forth in Sections 8.03 to 8.06 of the Indenture are satisfied (hereinafter "Defeasance"). For this purpose, such Defeasance means that the Applicant shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding New Senior Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.04 of the Indenture and the other Sections of the Indenture referred to in (a) and (b) of this paragraph, and to have satisfied all its other obligations under such New Senior Notes and the Indenture (and the Trustee, on demand of and at the expense of the Applicant, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding New Senior Notes to receive solely from the trust fund described in Section 8.03 of the Indenture, and as more fully set forth in such Section, payments in respect of the principal of and interest on Page 9 of 13 such New Senior Notes when such payments are due, (b) the Applicant's obligations with respect to such New Senior Notes under Sections 2.04, 2.06, 2.07, 2.10 and 4.02 of the Indenture, (c) the rights, powers, trusts, duties and immunities of the Trustee described hereunder and the Applicant's obligations in connection therewith, and (d) Article Eight of the Indenture. The following shall be the conditions to the application of Defeasance: (a) the Applicant shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10 of the Indenture who shall agree to comply with the provisions of this Article Eight of the Indenture applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the holders of such New Senior Notes, (i) cash in an amount or (ii) non-callable Governmental Securities which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment under the New Senior Notes, cash in an amount, or (iii) a combination thereof, in such amounts, as will be sufficient to pay and discharge and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge (A) the principal of and interest on the outstanding New Senior Notes on the stated maturity or on the applicable redemption date, as the case may be, of such principal or interest to maturity and (B) any mandatory sinking fund payments or analogous payments applicable to the outstanding New Senior Notes on the day on which such payments are due and payable in accordance with the terms of the Indenture and of such New Senior Notes; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such non-callable Governmental Securities to said payments with respect to the New Senior Notes; (b) no Default or Event of Default with respect to the New Senior Notes shall have occurred and be continuing on the date of such deposit; (c) such Defeasance shall not result in a breach or violation of, or constitute a default under, the Indenture or any other agreement or instrument to which the Applicant is a party or by which the Applicant is bound; (d) the Applicant shall have delivered to the Trustee an Officers' Certificate stating that the deposit made by the Applicant pursuant to its election under Section 8.02 of the Indenture was not made by the Applicant with the intent of preferring the holders of New Senior Notes over other creditors of the Applicant or with the intent of defeating, hindering, delaying or defrauding creditors of the Applicant or others; (e) the Applicant shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the Defeasance under Section 8.02 of the Indenture have been complied with as contemplated by Section 8.03 of the Indenture; (f) the Applicant shall have delivered to the Trustee an Opinion of Counsel reasonably acceptable to the Trustee confirming that (i) the Applicant has received from or there has been published by, the Internal Revenue Service a ruling or (ii) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the holders of the outstanding New Senior Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Defeasance had not occurred; and (g) the Applicant shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit would not constitute a preference as defined in Section 547 of the Bankruptcy Code, and the trust funds would not constitute property included within the estate of the debtor. (E) Evidence of Compliance with Conditions. -------------------------------------- To the extent not otherwise required pursuant to Section 4.09 of the Indenture, the Applicant shall deliver to the Trustee, within 90 days after the end of each Fiscal Year commencing with the 1995 Fiscal Year, an Officers' Certificate stating that in the course of the performance by each signer of such signer's duties as an Officer of the Applicant such signer would normally have knowledge of the Applicant's and the Subsidiaries' compliance with the covenants contained in Sections 4.01 and 4.02 and 4.04 to 4.19 of the Indenture and the other covenants and conditions applicable to the Applicant or any Subsidiary set forth in the Indenture, stating whether or not such signer has knowledge of any Default in such compliance (such compliance having been determined without regard to any period of grace or requirement of notice provided under the Indenture) and, if so, specifying each such Default of which such signer has knowledge and the nature thereof and what action the Applicant proposes to take in connection thereto. For purposes of Section 4.03 of Page 10 of 13 the Indenture, one of the signatories of such Officers' Certificate shall be one of the principal executive officer, the principal financial officer or the principal accounting officer of the Applicant. The Applicant will also deliver to the Trustee the certificates of accountants required pursuant to Section 4.09 of the Indenture. Pursuant to Section 4.09 of the Indenture, to the extent not otherwise required by Section 4.03 of the Indenture, the Applicant shall furnish to the Holders of New Senior Notes and the Trustee in the case of paragraphs (a) through (c) below, and to any prospective purchaser of the New Senior Notes in the case of paragraph (d) below: (a) as soon as available and in any event within 45 days after the end of each of the first three fiscal quarters in each fiscal year, a consolidated income statement, a consolidated statement of shareholders' equity, a consolidated statement of cash flows, a consolidated statement of deferred and capitalized interest for the period from the beginning of the current fiscal year to the end of such fiscal quarter, and a consolidated balance sheet as at the end of such fiscal quarter, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, certified by the chief financial officer of the Applicant, together with (i) a certificate of said officer stating that no Default or Event of Default has occurred and is continuing or, if a Default or an Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which the Applicant proposes to take with respect thereto, (ii) a schedule of the computations used by the Applicant in determining compliance with Section 4.12 of the Indenture, (iii) a written discussion and analysis by the management of the Applicant of the consolidated financial statements furnished in respect of such fiscal quarter, and (iv) a certificate demonstrating the calculating of Available Cash, including, without limitation, the minimum dividend distribution required to maintain the status of the Applicant as a REIT; (b) as soon as available and in any event within 90 days after the end of fiscal year, a consolidated balance sheet of the Applicant as of the end of such year and a consolidated statement of income, retained earnings and cash flows of the Applicant and its Subsidiaries all of which are prepared in accordance with GAAP and certified without qualifications as to the scope of the audit or otherwise and without any disclaimer by Ernst & Young or other independent certified public accountants of recognized national standing acceptable to the Trustee, together with (i) a certificate of such accounting firm stating that in the course of the regular audit of the business of the Applicant and the Subsidiaries, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default or Event of Default has occurred and is continuing, or, if in the opinion of such accounting firm a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof, (ii) a schedule in form satisfactory to the Trustee of the computations used by such accounting firm in determining, as of the end of such fiscal year, the Applicant's compliance with Section 4.12 of the Indenture, (iii) a certificate of the chief financial officer stating deferred and capitalized interest for the fiscal year and an "Agreed Upon Procedures" report by the Applicant's independent public accounting firm stating that such accounting firm has no knowledge of any material error in the information set forth in the certificate, and (iv) a Page 11 of 13 written discussion and analysis by the management of the Applicant of the consolidated financial statements furnished in respect of such fiscal year; (c) as soon as available and, in any event, within 120 days from and after the end of a fiscal year, a copy of the management letter required to be provided to the Applicant by its independent certified public accountants which refers in whole or in part to any inadequacy, defect, problem, qualification or other lack of fully satisfactory accounting controls utilized by the Applicant; and (d) upon the request of the Required Holders, to any prospective purchaser of any New Senior Notes, all information that may be required to be delivered to such purchaser to enable any Holder to sell to such purchaser its New Senior Notes without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144A under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Securities Exchange Commission subject to receipt of an appropriate confidentiality agreement from such prospective purchasers in form and substance reasonably satisfactory to the Applicant (with appropriate exceptions to permit resale); provided, however, upon the request of the Required Holders, the Applicant shall - -------- ------- deliver to the Required Holders a written statement as to whether it has complied with such requirements. 9. Other obligors. Give the name and complete mailing address of any person, other than the Applicant, who is an obligor upon the indenture securities. There is no other person who is an obligor under the Indenture or otherwise upon the New Senior Notes, except that each of the Subsidiaries, each of which is a corporation, has granted a lien on substantially all of its assets to secure the Applicant's obligations under the Indenture and the New Senior Notes and each such Subsidiary has also guaranteed the Applicant's obligations under the Indenture and the New Senior Notes. See Section 3 of this Form T-3 for a list of the Applicant's subsidiaries. The mailing address of each such subsidiary is c/o Mortgage and Realty Trust, 8380 Old York Road, Suite 300, Elkins Park, PA 19027-1590, Attention: Treasurer. Contents of application for qualification. This application for qualification comprises: (a) Pages number 1 to 13, consecutively. (b) The statement of eligibility and qualification of Wilmington Trust Company, as trustee under the indenture to be qualified (on Form T-1). (c) The following exhibits in addition to those filed as part of the statement of eligibility and qualification of the Trustee: Exhibit T3A. A copy of the Declaration of Trust of the Applicant, as amended to date. Exhibit T3B. Bylaws of the Applicant, as amended to date. Exhibit T3C. Form of Indenture, to be dated as of the Expiration Date, between the Applicant and Wilmington Trust Company, as Trustee. Exhibit T3D. Not Applicable. Exhibit T3E.1 A copy of the Disclosure Statement and Proxy-Statement Prospectus for the Solicitation of Votes for the Prepackaged Plan of Reorganization of Mortgage and Realty Trust (with exhibits attached thereto). Exhibit T3E.2 Prepackaged Plan of Reorganization (with appendices and exhibits attached thereto). See Annex A to the Disclosure Statement, filed as Exhibit T3E.1 herewith. Exhibit T3F. See the Cross-Reference Sheet contained in the --- Indenture filed herewith as Exhibit T3C. Page 12 of 13 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Applicant, Mortgage and Realty Trust, a real estate investment trust organized and existing under the laws of the State of Maryland, has duly caused this application to be signed on its behalf by the undersigned, thereunto duly authorized, and its seal to be hereunto affixed and attested, all in the City of Burbank, and State of California, on the 29th day of March 1995. MORTGAGE AND REALTY TRUST By /s/ C.W. Strong, Jr. ------------------------- C.W. Strong, Jr. President and Chief Executive Officer (SEAL) Attest: By /s/ Claire M. Adams --------------------------------------- Name: Claire M. Adams Title: Secretary Page 13 of 13 Registration No. 22-26624 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) ___ WILMINGTON TRUST COMPANY (Exact name of trustee as specified in its charter) Delaware 51-0055023 (State of incorporation) (I.R.S. employer identification no.) Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 (Address of principal executive offices) Cynthia L. Corliss Vice President and Trust Counsel Wilmington Trust Company Rodney Square North Wilmington, Delaware 19890 (302) 651-8516 (Name, address and telephone number of agent for service) MORTGAGE AND REALTY TRUST (Exact name of obligor as specified in its charter) Maryland 23-1862664 (State of incorporation) (I.R.S. employer identification no.) 8380 Old York Road Elkins Park, Pennsylvania 19117-1590 (Address of principal executive offices) (Zip Code) Senior Secured Notes Due 2003 (Title of the indenture securities) ================================================================================ ITEM 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Deposit Insurance Co. State Bank Commissioner Five Penn Center Dover, Delaware Suite #2901 Philadelphia, PA (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH THE OBLIGOR. If the obligor is an affiliate of the trustee, describe each affiliation: Based upon an examination of the books and records of the trustee and upon information furnished by the obligor, the obligor is not an affiliate of the trustee. ITEM 3. LIST OF EXHIBITS. List below all exhibits filed as part of this Statement of Eligibility and Qualification. A. Copy of the Charter of Wilmington Trust Company, which includes the certificate of authority of Wilmington Trust Company to commence business and the authorization of Wilmington Trust Company to exercise corporate trust powers. B. Copy of By-Laws of Wilmington Trust Company. C. Consent of Wilmington Trust Company required by Section 321(b) of Trust Indenture Act. D. Copy of most recent Report of Condition of Wilmington Trust Company. Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, Wilmington Trust Company, a corporation organized and existing under the laws of Delaware, has duly caused this Statement of Eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Wilmington and State of Delaware on the 30th day of March, 1995. WILMINGTON TRUST COMPANY [SEAL] Attest: /s/ Donald G. MacKelcan By: /s/ Norma P. Closs ----------------------------- ----------------------------- Assistant Secretary Name: Norma P. Closs Title: Vice President EXHIBIT A EXHIBIT A AMENDED CHARTER WILMINGTON TRUST COMPANY WILMINGTON, DELAWARE AS EXISTING ON MAY 9, 1987 AMENDED CHARTER OR ACT OF INCORPORATION OF WILMINGTON TRUST COMPANY WILMINGTON TRUST COMPANY, originally incorporated by an Act of the General Assembly of the State of Delaware, entitled "An Act to Incorporate the Delaware Guarantee and Trust Company", approved March 2, A.D. 1901, and the name of which company was changed to "WILMINGTON TRUST COMPANY" by an amendment filed in the Office of the Secretary of State on March 18, A.D. 1903, and the Charter or Act of Incorporation of which company has been from time to time amended and changed by merger agreements pursuant to the corporation law for state banks and trust companies of the State of Delaware, does hereby alter and amend its Charter or Act of Incorporation so that the same as so altered and amended shall in its entirety read as follows: FIRST: - The name of this corporation is WILMINGTON TRUST COMPANY. SECOND: - The location of its principal office in the State of Delaware is at Rodney Square North, in the City of Wilmington, County of New Castle; the name of its resident agent is WILMINGTON TRUST COMPANY whose address is Rodney Square North, in said City. In addition to such principal office, the said corporation maintains and operates branch offices in the City of Newark, New Castle County, Delaware, the Town of Newport, New Castle County, Delaware, at Claymont, New Castle County, Delaware, at Greenville, New Castle County Delaware, and at Milford Cross Roads, New Castle County, Delaware, and shall be empowered to open, maintain and operate branch offices at Ninth and Shipley Streets, 418 Delaware Avenue, 2120 Market Street, and 3605 Market Street, all in the City of Wilmington, New Castle County, Delaware, and such other branch offices or places of business as may be authorized from time to time by the agency or agencies of the government of the State of Delaware empowered to confer such authority. THIRD: - (a) The nature of the business and the objects and purposes proposed to be transacted, promoted or carried on by this Corporation are to do any or all of the things herein mentioned as fully and to the same extent as natural persons might or could do and in any part of the world, viz.: (1) To sue and be sued, complain and defend in any Court of law or equity and to make and use a common seal, and alter the seal at pleasure, to hold, purchase, convey, mortgage or otherwise deal in real and personal estate and property, and to appoint such officers and agents as the business of the Corporation shall require, to make by-laws not inconsistent with the Constitution or laws of the United States or of this State, to discount bills, notes or other evidences of debt, to receive deposits of money, or securities for money, to buy gold and silver bullion and foreign coins, to buy and sell bills of exchange, and generally to use, exercise and enjoy all the powers, rights, privileges and franchises incident to a corporation which are proper or necessary for the transaction of the business of the Corporation hereby created. (2) To insure titles to real and personal property, or any estate or interests therein, and to guarantee the holder of such property, real or personal, against any claim or claims, adverse to his interest therein, and to prepare and give certificates of title for any lands or premises in the State of Delaware, or elsewhere. (3) To act as factor, agent, broker or attorney in the receipt, collection, custody, investment and management of funds, and the purchase, sale, management and disposal of property of all descriptions, and to prepare and execute all papers which may be necessary or proper in such business. (4) To prepare and draw agreements, contracts, deeds, leases, conveyances, mortgages, bonds and legal papers of every description, and to carry on the business of conveyancing in all its branches. (5) To receive upon deposit for safekeeping money, jewelry, plate, deeds, bonds and any and all other personal property of every sort and kind, from executors, administrators, guardians, public officers, courts, receivers, assignees, trustees, and from all fiduciaries, and from all other persons and individuals, and from all corporations whether state, municipal, corporate or private, and to rent boxes, safes, vaults and other receptacles for such property. (6) To act as agent or otherwise for the purpose of registering, issuing, certificating, countersigning, transferring or underwriting the stock, bonds or other obligations of any corporation, association, state or municipality, and may receive and manage any sinking fund therefor on such terms as may be agreed upon between the two parties, and in like manner may act as Treasurer of any corporation or municipality. 2 (7) To act as Trustee under any deed of trust, mortgage, bond or other instrument issued by any state, municipality, body politic, corporation, association or person, either alone or in conjunction with any other person or persons, corporation or corporations. (8) To guarantee the validity, performance or effect of any contract or agreement, and the fidelity of persons holding places of responsibility or trust; to become surety for any person, or persons, for the faithful performance of any trust, office, duty, contract or agreement, either by itself or in conjunction with any other person, or persons, corporation, or corporations, or in like manner become surety upon any bond, recognizance, obligation, judgment, suit, order, or decree to be entered in any court of record within the State of Delaware or elsewhere, or which may now or hereafter be required by any law, judge, officer or court in the State of Delaware or elsewhere. (9) To act by any and every method of appointment as trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian, bailee, or in any other trust capacity in the receiving, holding, managing, and disposing of any and all estates and property, real, personal or mixed, and to be appointed as such trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian or bailee by any persons, corporations, court, officer, or authority, in the State of Delaware or elsewhere; and whenever this Corporation is so appointed by any person, corporation, court, officer or authority such trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian, bailee, or in any other trust capacity, it shall not be required to give bond with surety, but its capital stock shall be taken and held as security for the performance of the duties devolving upon it by such appointment. (10) And for its care, management and trouble, and the exercise of any of its powers hereby given, or for the performance of any of the duties which it may undertake or be called upon to perform, or for the assumption of any responsibility the said Corporation may be entitled to receive a proper compensation. (11) To purchase, receive, hold and own bonds, mortgages, debentures, shares of capital stock, and other securities, obligations, contracts and evidences of indebtedness, of any private, public or municipal 3 corporation within and without the State of Delaware, or of the Government of the United States, or of any state, territory, colony, or possession thereof, or of any foreign government or country; to receive, collect, receipt for, and dispose of interest, dividends and income upon and from any of the bonds, mortgages, debentures, notes, shares of capital stock, securities, obligations, contracts, evidences of indebtedness and other property held and owned by it, and to exercise in respect of all such bonds, mortgages, debentures, notes, shares of capital stock, securities, obligations, contracts, evidences of indebtedness and other property, any and all the rights, powers and privileges of individual owners thereof, including the right to vote thereon; to invest and deal in and with any of the moneys of the Corporation upon such securities and in such manner as it may think fit and proper, and from time to time to vary or realize such investments; to issue bonds and secure the same by pledges or deeds of trust or mortgages of or upon the whole or any part of the property held or owned by the Corporation, and to sell and pledge such bonds, as and when the Board of Directors shall determine, and in the promotion of its said corporate business of investment and to the extent authorized by law, to lease, purchase, hold, sell, assign, transfer, pledge, mortgage and convey real and personal property of any name and nature and any estate or interest therein. (b) In furtherance of, and not in limitation, of the powers conferred by the laws of the State of Delaware, it is hereby expressly provided that the said Corporation shall also have the following powers: (1) To do any or all of the things herein set forth, to the same extent as natural persons might or could do, and in any part of the world. (2) To acquire the good will, rights, property and franchises and to undertake the whole or any part of the assets and liabilities of any person, firm, association or corporation, and to pay for the same in cash, stock of this Corporation, bonds or otherwise; to hold or in any manner to dispose of the whole or any part of the property so purchased; to conduct in any lawful manner the whole or any part of any business so acquired, and to exercise all the powers necessary or convenient in and about the conduct and management of such business. (3) To take, hold, own, deal in, mortgage or otherwise lien, and to lease, sell, exchange, transfer, or in any 4 manner whatever dispose of property, real, personal or mixed, wherever situated. (4) To enter into, make, perform and carry out contracts of every kind with any person, firm, association or corporation, and, without limit as to amount, to draw, make, accept, endorse, discount, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures, and other negotiable or transferable instruments. (5) To have one or more offices, to carry on all or any of its operations and businesses, without restriction to the same extent as natural persons might or could do, to purchase or otherwise acquire, to hold, own, to mortgage, sell, convey or otherwise dispose of, real and personal property, of every class and description, in any State, District, Territory or Colony of the United States, and in any foreign country or place. (6) It is the intention that the objects, purposes and powers specified and clauses contained in this paragraph shall (except where otherwise expressed in said paragraph) be nowise limited or restricted by reference to or inference from the terms of any other clause of this or any other paragraph in this charter, but that the objects, purposes and powers specified in each of the clauses of this paragraph shall be regarded as independent objects, purposes and powers. FOURTH: - (a) The total number of shares of all classes of stock which the Corporation shall have authority to issue is forty-one million (41,000,000) shares, consisting of: (1) One million (1,000,000) shares of Preferred stock, par value $10.00 per share (hereinafter referred to as "Preferred Stock"); and (2) Forty million (40,000,000) shares of Common Stock, par value $1.00 per share (hereinafter referred to as "Common Stock"). (b) Shares of Preferred Stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors each of said series to be distinctly designated. All shares of any one series of Preferred Stock shall be alike in every particular, except that there may be different dates from which dividends, if any, thereon shall be cumulative, if made cumulative. The voting powers and the preferences and relative, participating, optional and other special rights of each 5 such series, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding; and, subject to the provisions of subparagraph 1 of Paragraph (c) of this Article FOURTH, the Board of Directors of the Corporation is hereby expressly granted authority to fix by resolution or resolutions adopted prior to the issuance of any shares of a particular series of Preferred Stock, the voting powers and the designations, preferences and relative, optional and other special rights, and the qualifications, limitations and restrictions of such series, including, but without limiting the generality of the foregoing, the following: (1) The distinctive designation of, and the number of shares of Preferred Stock which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors; (2) The rate and times at which, and the terms and conditions on which, dividends, if any, on Preferred Stock of such series shall be paid, the extent of the preference or relation, if any, of such dividends to the dividends payable on any other class or classes, or series of the same or other class of stock and whether such dividends shall be cumulative or non-cumulative; (3) The right, if any, of the holders of Preferred Stock of such series to convert the same into or exchange the same for, shares of any other class or classes or of any series of the same or any other class or classes of stock of the Corporation and the terms and conditions of such conversion or exchange; (4) Whether or not Preferred Stock of such series shall be subject to redemption, and the redemption price or prices and the time or times at which, and the terms and conditions on which, Preferred Stock of such series may be redeemed. (5) The rights, if any, of the holders of Preferred Stock of such series upon the voluntary or involuntary liquidation, merger, consolidation, distribution or sale of assets, dissolution or winding- up, of the Corporation. (6) The terms of the sinking fund or redemption or purchase account, if any, to be provided for the Preferred Stock of such series; and 6 (7) The voting powers, if any, of the holders of such series of Preferred Stock which may, without limiting the generality of the foregoing include the right, voting as a series or by itself or together with other series of Preferred Stock or all series of Preferred Stock as a class, to elect one or more directors of the Corporation if there shall have been a default in the payment of dividends on any one or more series of Preferred Stock or under such circumstances and on such conditions as the Board of Directors may determine. (c) (1) After the requirements with respect to preferential dividends on the Preferred Stock (fixed in accordance with the provisions of section (b) of this Article FOURTH), if any, shall have been met and after the Corporation shall have complied with all the requirements, if any, with respect to the setting aside of sums as sinking funds or redemption or purchase accounts (fixed in accordance with the provisions of section (b) of this Article FOURTH), and subject further to any conditions which may be fixed in accordance with the provisions of section (b) of this Article FOURTH, then and not otherwise the holders of Common Stock shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors. (2) After distribution in full of the preferential amount, if any, (fixed in accordance with the provisions of section (b) of this Article FOURTH), to be distributed to the holders of Preferred Stock in the event of voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding-up, of the Corporation, the holders of the Common Stock shall be entitled to receive all of the remaining assets of the Corporation, tangible and intangible, of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. (3) Except as may otherwise be required by law or by the provisions of such resolution or resolutions as may be adopted by the Board of Directors pursuant to section (b) of this Article FOURTH, each holder of Common Stock shall have one vote in respect of each share of Common Stock held on all matters voted upon by the stockholders. (d) No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any preemptive right to purchase or subscribe for any unissued stock of any 7 class or series or any additional shares of any class or series to be issued by reason of any increase of the authorized capital stock of the Corporation of any class or series, or bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of the Corporation of any class or series, or carrying any right to purchase stock of any class or series, but any such unissued stock, additional authorized issue of shares of any class or series of stock or securities convertible into or exchangeable for stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations, whether such holders or others, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion. (e) The relative powers, preferences and rights of each series of Preferred Stock in relation to the relative powers, preferences and rights of each other series of Preferred Stock shall, in each case, be as fixed from time to time by the Board of Directors in the resolution or resolutions adopted pursuant to authority granted in section (b) of this Article FOURTH and the consent, by class or series vote or otherwise, of the holders of such of the series of Preferred Stock as are from time to time outstanding shall not be required for the issuance by the Board of Directors of any other series of Preferred Stock whether or not the powers, preferences and rights of such other series shall be fixed by the Board of Directors as senior to, or on a parity with, the powers, preferences and rights of such outstanding series, or any of them; provided, however, that the Board of Directors may provide in the resolution or resolutions as to any series of Preferred Stock adopted pursuant to section (b) of this Article FOURTH that the consent of the holders of a majority (or such greater proportion as shall be therein fixed) of the outstanding shares of such series voting thereon shall be required for the issuance of any or all other series of Preferred Stock. (f) Subject to the provisions of section (e), shares of any series of Preferred Stock may be issued from time to time as the Board of Directors of the Corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. (g) Shares of Common Stock may be issued from time to time as the Board of Directors of the Corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. 8 (h) The authorized amount of shares of Common Stock and of Preferred Stock may, without a class or series vote, be increased or decreased from time to time by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote thereon. FIFTH: - (a) The business and affairs of the Corporation shall be conducted and managed by a Board of Directors. The number of directors constituting the entire Board shall be not less than five nor more than twenty-five as fixed from time to time by vote of a majority of the whole Board, provided, however, that the number of directors shall not be reduced so as to shorten the term of any director at the time in office, and provided further, that the number of directors constituting the whole Board shall be twenty-four until otherwise fixed by a majority of the whole Board. (b) The Board of Directors shall be divided into three classes, as nearly equal in number as the then total number of directors constituting the whole Board permits, with the term of office of one class expiring each year. At the annual meeting of stockholders in 1982, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the directors, may be filled by the Board of Directors, acting by a majority of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next annual election of directors. At such election, the stockholders shall elect a successor to such director to hold office until the next election of the class for which such director shall have been chosen and until his successor shall be elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director. (c) Notwithstanding any other provisions of this Charter or Act of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, this Charter or Act of Incorporation or the By-Laws of the Corporation), any director or the entire Board of Directors of the Corporation may be removed at any time without cause, but only by the affirmative vote of the holders of two- thirds or more of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for 9 that purpose. (d) Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Such nominations shall be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than 14 days nor more than 50 days prior to any meeting of the stockholders called for the election of directors; provided, however, that if less than 21 days' notice of the meeting is given to stockholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to stockholders. Notice of nominations which are proposed by the Board of Directors shall be given by the Chairman on behalf of the Board. (e) Each notice under subsection (d) shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of such nominee and (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee. (f) The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (g) No action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. SIXTH: - The Directors shall choose such officers, agent and servants as may be provided in the By-Laws as they may from time to time find necessary or proper. SEVENTH: - The Corporation hereby created is hereby given the same powers, rights and privileges as may be conferred upon corporations organized under the Act entitled "An Act Providing a General Corporation Law", approved March 10, 1899, as from time to time amended. EIGHTH: - This Act shall be deemed and taken to be a private Act. NINTH: - This Corporation is to have perpetual existence. 10 TENTH: - The Board of Directors, by resolution passed by a majority of the whole Board, may designate any of their number to constitute an Executive Committee, which Committee, to the extent provided in said resolution, or in the By-Laws of the Company, shall have and may exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, and shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it. ELEVENTH: - The private property of the stockholders shall not be liable for the payment of corporate debts to any extent whatever. TWELFTH: - The Corporation may transact business in any part of the world. THIRTEENTH: - The Board of Directors of the Corporation is expressly authorized to make, alter or repeal the By-Laws of the Corporation by a vote of the majority of the entire Board. The stockholders may make, alter or repeal any By-Law whether or not adopted by them, provided however, that any such additional By-Laws, alterations or repeal may be adopted only by the affirmative vote of the holders of two-thirds or more of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class). FOURTEENTH: - Meetings of the Directors may be held outside of the State of Delaware at such places as may be from time to time designated by the Board, and the Directors may keep the books of the Company outside of the State of Delaware at such places as may be from time to time designated by them. FIFTEENTH: - (a) In addition to any affirmative vote required by law, and except as otherwise expressly provided in sections (b) and (c) of this Article FIFTEENTH: (A) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with or into (i) any Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder), which, after such merger or consolidation, would be an Affiliate (as hereinafter defined) of an Interested Stockholder, or (B) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate fair market value 11 of $1,000,000 or more, or (C) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of related transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value of $1,000,000 or more, or (D) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation, or (E) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any similar transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder, or any Affiliate of any Interested Stockholder, shall require the affirmative vote of the holders of at least two-thirds of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for the purpose of this Article FIFTEENTH as one class ("Voting Shares"). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. (2) The term "business combination" as used in this Article FIFTEENTH shall mean any transaction which is referred to any one or more of clauses (A) through (E) of paragraph 1 of the section (a). (b) The provisions of section (a) of this Article FIFTEENTH shall not be applicable to any particular business combination and such business combination shall require only such affirmative vote as is required by law and any other provisions of the Charter or Act of Incorporation of By-Laws if such business combination has been approved by a majority of the whole Board. (c) For the purposes of this Article FIFTEENTH: 12 (1) A "person" shall mean any individual firm, corporation or other entity. (2) "Interested Stockholder" shall mean, in respect of any business combination, any person (other than the Corporation or any Subsidiary) who or which as of the record date for the determination of stockholders entitled to notice of and to vote on such business combination, or immediately prior to the consummation of any such transaction: (A) is the beneficial owner, directly or indirectly, of more than 10% of the Voting Shares, or (B) is an Affiliate of the Corporation and at any time within two years prior thereto was the beneficial owner, directly or indirectly, of not less than 10% of the then outstanding voting Shares, or (C) is an assignee of or has otherwise succeeded in any share of capital stock of the Corporation which were at any time within two years prior thereto beneficially owned by any Interested Stockholder, and such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (3) A person shall be the "beneficial owner" of any Voting Shares: (A) which such person or any of its Affiliates and Associates (as hereafter defined) beneficially own, directly or indirectly, or (B) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding, or (C) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation. (4) The outstanding Voting Shares shall include shares 13 deemed owned through application of paragraph (3) above but shall not include any other Voting Shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options or otherwise. (5) "Affiliate" and "Associate" shall have the respective meanings given those terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on December 31, 1981. (6) "Subsidiary" shall mean any corporation of which a majority of any class of equity security (as defined in Rule 3a11-1 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect in December 31, 1981) is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Investment Stockholder set forth in paragraph (2) of this section (c), the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (d) majority of the directors shall have the power and duty to determine for the purposes of this Article FIFTEENTH on the basis of information known to them, (1) the number of Voting Shares beneficially owned by any person (2) whether a person is an Affiliate or Associate of another, (3) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in paragraph (3) of section (c), or (4) whether the assets subject to any business combination or the consideration received for the issuance or transfer of securities by the Corporation, or any Subsidiary has an aggregate fair market value of $1,00,000 or more. (e) Nothing contained in this Article FIFTEENTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. SIXTEENTH: Notwithstanding any other provision of this Charter or Act of Incorporation or the By-Laws of the Corporation (and in addition to any other vote that may be required by law, this Charter or Act of Incorporation by the By-Laws), the affirmative vote of the holders of at least two-thirds of the outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) shall be required to amend, alter or repeal any provision of Articles FIFTH, THIRTEENTH, FIFTEENTH or SIXTEENTH of this Charter or Act of Incorporation. 14 SEVENTEENTH: (a) a Director of this Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Laws as the same exists or may hereafter be amended. (b) Any repeal or modification of the foregoing paragraph shall not adversely affect any right or protection of a Director of the Corporation existing hereunder with respect to any act or omission occurring prior to the time of such repeal or modification." 15 EXHIBIT B EXHIBIT B BY-LAWS WILMINGTON TRUST COMPANY WILMINGTON, DELAWARE AS EXISTING ON FEBRUARY 21, 1991 BY-LAWS OF WILMINGTON TRUST COMPANY ARTICLE I STOCKHOLDERS' MEETINGS Section 1. The Annual Meeting of Stockholders shall be held on the third Thursday in April each year at the principal office at the Company or at such other date, time, or place as may be designated by resolution by the Board of Directors. Section 2. Special meetings of all stockholders may be called at any time by the Board of Directors, the Chairman of the Board or the President. Section 3. Notice of all meetings of the stockholders shall be given by mailing to each stockholder at least ten (10 days before said meeting, at his last known address, a written or printed notice fixing the time and place of such meeting. Section 4. A majority in the amount of the capital stock of the Company issued and outstanding on the record date, as herein determined, shall constitute a quorum at all meetings of stockholders for the transaction of any business, but the holders of a small number of shares may adjourn, from time to time, without further notice, until a quorum is secured. At each annual or special meeting of stockholders, each stockholder shall be entitled to one vote, either in person or by proxy, for each shares of stock registered in the stockholder's name on the books of the Company on the record date for any such meeting as determined herein. ARTICLE II DIRECTORS Section 1. The number and classification of the Board of Directors shall be as set forth in the Charter of the Bank. Section 2. No person who has attained the age of seventy-two (72) years shall be nominated for election to the Board of Directors of the Company, provided, however, that this limitation shall not apply to any person who was serving as director of the Company on September 16, 1971. Section 3. The class of Directors so elected shall hold office for three years or until their successors are elected and qualified. Section 4. The affairs and business of the Company shall be managed and conducted by the Board of Directors. Section 5. Regular meetings of the Board of Directors shall be held on the third Thursday of each month at the principal office of the Company, or at such other place and time as may be designated by the Board of Directors, the Chairman of the Board, or the President. Section 6. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board of Directors or by the President, and shall be called upon the written request of a majority of the directors. Section 7. A majority of the directors elected and qualified shall be necessary to constitute a quorum for the transaction of business at any meeting of the Board of Directors. Section 8. Written notice shall be sent by mail to each director of any special meeting of the Board of Directors, and of any change in the time or place of any regular meeting, stating the time and place of such meeting, which shall be mailed not less than two days before the time of holding such meeting. Section 9. In the event of the death, resignation, removal, inability to act, or disqualification of any director, the Board of Directors, although less than a quorum, shall have the right to elect the successor who shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred, and until such director's successor shall have been duly elected and qualified. Section 10. The Board of Directors at its first meeting after its election by the stockholders shall appoint an Executive Committee, a Trust Committee, an Audit Committee and a Compensation Committee, and shall elect from its own members a Chairman of the Board of Directors and a President who may be the same person. The Board of Directors shall also elect at such meeting a Secretary and a Treasurer, who may be the same person, may appoint at any time such other committees and elect or appoint such other officers as it may deem advisable. The Board of Directors may also elect at such meeting one or more Associate Directors. Section 11. The Board of Directors may at any time remove, with or without cause, any member of any Committee appointed by it or any associate director or officer elected by it and may appoint or elect his successor. Section 12. The Board of Directors may designate an officer to be in charge of such of the departments or division of the Company as it may deem advisable. 2 ARTICLE III COMMITTEES Section I. Executive Committee (A) The Executive Committee shall be composed of not more than nine members who shall be selected by the Board of Directors from its own members and who shall hold office during the pleasure of the Board. (B) The Executive Committee shall have all the powers of the Board of Directors when it is not in session to transact all business for and in behalf of the Company that may be brought before it. (C) The Executive Committee shall meet at the principal office of the Company or elsewhere in its discretion at least once a week in each week the Board is not regularly scheduled to meet. A majority of its members shall be necessary to constitute a quorum for the transaction of business. Special meetings of the Executive Committee may be held at any time when a quorum is present. (D) Minutes of each meeting of the Executive Committee shall be kept and submitted to the Board of Directors at its next meeting. (E) The Executive Committee shall advise and superintend all investments that may be made of the funds of the Company, and shall direct the disposal of the same, in accordance with such rules and regulations as the Board of Directors from time to time make. (F) In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Company by its directors and officers as contemplated by these By-Laws any two available members of the Executive Committee as constituted immediately prior to such disaster shall constitute a quorum of that Committee for the full conduct and management of the affairs and business of the Company in accordance with the provisions of Article III of these By-Laws; and if less than three members of the Trust Committee is constituted immediately prior to such disaster shall be available for the transaction of its business, such Executive Committee shall also be empowered to exercise all of the powers reserved to the Trust Committee under Article III Section 2 hereof. In the event of the unavailability, at such time, of a minimum of two members of such Executive Committee, any three available directors shall constitute the Executive Committee for the full conduct and management of the affairs and business of the Company in accordance with the foregoing provisions of this Section. 3 This By-Law shall be subject to implementation by Resolutions of the Board of Directors presently existing or hereafter passed from time to time for that purpose, and any provisions of these By-Laws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementary Resolutions shall be suspended during such a disaster period until it shall be determined by any interim Executive Committee acting under this section that it shall be to the advantage of the Company to resume the conduct and management of its affairs and business under all of the other provisions of these By-Laws. Section 2. Trust Committee (A) The Trust Committee shall be composed of not more than thirteen members who shall be selected by the Board of Directors, a majority of whom shall be members of the Board of Directors and who shall hold office during the pleasure of the Board. (B) The Trust Committee shall have general supervision over the Trust Department and the investment of trust funds, in all matters, however, being subject to the approval of the Board of Directors. (C) The Trust Committee shall meet at the principal office of the Company or elsewhere in its discretion at least once a month. A majority of its members shall be necessary to constitute a quorum for the transaction of business. Special meetings of the Trust Committee may be held at any time when a quorum is present. (D) Minutes of each meeting of the Trust Committee shall be kept and promptly submitted to the Board of Directors. (E) The Trust Committee shall have the power to appoint Committees and/or designate officers or employees of the Company to whom supervision over the investment of trust funds may be delegated when the Trust Committee is not in session. Section 3. Audit Committee (A) The Audit Committee shall be composed of five members who shall be selected by the Board of Directors from its own members, none of whom shall be an officer of the Company, and shall hold office at the pleasure of the Board. (B) The Audit Committee shall have general supervision over the Audit Division in all matters however subject to the approval of the Board of Directors; it shall consider all matters brought to its attention by the officer in 4 charge of the Audit Division, review all reports of examination of the Company made by any governmental agency or such independent auditor employed for that purpose, and make such recommendations to the Board of Directors with respect thereto or with respect to any other matters pertaining to auditing the Company as it shall deem desirable. (C) The Audit Committee shall meet whenever and wherever the majority of its members shall deem it to be proper for the transaction of its business, and a majority of its Committee shall constitute a quorum. Section 4. Compensation Committee (A) The Compensation Committee shall be composed of not more than five (5) members who shall be selected by the Board of Directors from its own members who are not officers of the Company and who shall hold office during the pleasure of the Board. (B) The Compensation Committee shall in general advise upon all matters of policy concerning the Company brought to its attention by the management and from time to time review the management of the Company, major organizational matters, including salaries and employee benefits and specifically shall administer the Executive Incentive Compensation Plan. (C) Meetings of the Compensation Committee may be called at any time by the Chairman of the Compensation Committee, the Chairman of the Board of Directors, or the President of the Company. Section 5. Associate Directors (A) Any person who has served as a director may be elected by the Board of Directors as an associate director, to serve during the pleasure of the Board. (B) An associate director shall be entitled to attend all directors meetings and participate in the discussion of all matters brought to the Board, with the exception that he would have no right to vote. An associate director will be eligible for appointment to Committees of the Company, with the exception of the Executive Committee, Audit Committee and Compensation Committee, which must be comprised solely of active directors. Section 6. Absence or Disqualification of Any Member of a Committee (A) In the absence or disqualification of any member of any Committee created under Article III of the By-Laws 5 of this Company, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absence or disqualified member. ARTICLE IV OFFICERS Section 1. The Chairman of the Board of Directors shall preside at all meetings of the Board and shall have such further authority and powers and shall perform such duties as the Board of Directors may from time to time confer and direct. He shall also exercise such powers and perform such duties as may from time to time be agreed upon between himself and the President of the Company. Section 2. The President shall have the powers and duties pertaining to the office of the President conferred or imposed upon him by statute or assigned to him by the Board of Directors in the absence of the Chairman of the Board the President shall have the powers and duties of the Chairman of the Board. Section 3. The Chairman of the Board of Directors or the President as designated by the Board of Directors, shall carry into effect all legal directions of the Executive Committee and of the Board of Directors, and shall at all times exercise general supervision over the interest, affairs and operations of the Company and perform all duties incident to his office. Section 4. There may be one or more Vice Presidents, however denominated by the Board of Directors, who may at any time perform all the duties of the Chairman of the Board of Directors and/or the President and such other powers and duties as may from time to time be assigned to them by the Board of Directors, the Executive Committee, the Chairman of the Board or the President and by the officer in charge of the department or division to which they are assigned. Section 5. The Secretary shall attend to the giving of notice of meetings of the stockholders and the Board of Directors, as well as the Committees thereof, to the keeping of accurate minutes of all such meetings and to recording the same in the minute books of the Company. In addition to the other notice requirements of these By-Laws and as may be practicable under the circumstances, all such notices shall be in writing and mailed well in advance of the scheduled date of any other meeting. He shall have custody of the corporate seal and shall affix the same to any documents requiring such corporate seal and to attest the same. 6 Section 6. The Treasurer shall have general supervision over all assets and liabilities of the Company. He shall be custodian of and responsible for all monies, funds and valuables of the Company and for the keeping of proper records of the evidence of property or indebtedness and of all the transactions of the Company. He shall have general supervision of the expenditures of the Company and shall report to the Board of Directors at each regular meeting of the condition of the Company, and perform such other duties as may be assigned to him from time to time by the Board of Directors of the Executive Committee. Section 7. There may be a Controller who shall exercise general supervision over the internal operations of the Company, including accounting, and shall render to the Board of Directors at appropriate times a report relating to the general condition and internal operations of the Company. There may be one or more subordinate accounting or controller officers however denominated, who may perform the duties of the Controller and such duties as may be prescribed by the Controller. Section 8. The officer designated by the Board of Directors to be in charge of the Audit Division of the Company with such title as the Board of Directors shall prescribe, shall report to and be directly responsible only to the Board of Directors. There shall be an Auditor and there may be one or more Audit Officers, however denominated, who may perform all the duties of the Auditor and such duties as may be prescribed by the officer in charge of the Audit Division. Section 9. There may be one or more officers, subordinate in rank to all Vice Presidents with such functional titles as shall be determined from time to time by the Board of Directors, who shall ex officio hold the office Assistant Secretary of this Company and who may perform such duties as may be prescribed by the officer in charge of the department or division to whom they are assigned. Section 10. The powers and duties of all other officers of the Company shall be those usually pertaining to their respective offices, subject to the direction of the Board of Directors, the Executive Committee, Chairman of the Board of Directors or the President and the officer in charge of the department or division to which they are assigned. ARTICLE V STOCK AND STOCK CERTIFICATES Section 1. Shares of stock shall be transferrable on the 7 books of the Company and a transfer book shall be kept in which all transfers of stock shall be recorded. Section 2. Certificate of stock shall bear the signature of the President or any Vice President, however denominated by the Board of Directors and countersigned by the Secretary or Treasurer or an Assistant Secretary, and the seal of the corporation shall be engraved thereon. Each certificate shall recite that the stock represented thereby is transferrable only upon the books of the Company by the holder thereof or his attorney, upon surrender of the certificate properly endorsed. Any certificate of stock surrendered to the Company shall be cancelled at the time of transfer, and before a new certificate or certificates shall be issued in lieu thereof. Duplicate certificates of stock shall be issued only upon giving such security as may be satisfactory to the Board of Directors or the Executive Committee. Section 3. The Board of Directors of the Company is authorized to fix in advance a record date for the determination of the stockholders entitled to notice of, and to vote at, any meeting of stockholders and any adjournment thereof, or entitled to receive payment of any dividend, or to any allotment or rights, or to exercise any rights in respect of any change, conversion or exchange of capital stock, or in connection with obtaining the consent of stockholders for any purpose, which record date shall not be more than 60 nor less than 10 days proceeding the date of any meeting of stockholders or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining such consent. ARTICLE VI SEAL Section 1. The corporate seal of the Company shall be in the following form: Between two concentric circles the words "Wilmington Trust Company" within the inner circle the words "Wilmington, Delaware." 8 ARTICLE VII FISCAL YEAR Section 1. The fiscal year of the Company shall be the calendar year. ARTICLE VIII EXECUTION OF INSTRUMENTS OF THE COMPANY Section 1. The Chairman of the Board, the President or any Vice President, however denominated by the Board of Directors, shall have full power and authority to enter into, make, sign, execute, acknowledge and/or deliver and the Secretary or any Assistant Secretary shall have full power and authority to attest and affix the corporate seal of the Company to any and all deeds, conveyances, assignments, releases, contracts, agreements, bonds, notes, mortgages and all other instruments incident to the business of this Company or in acting as executor, administrator, guardian, trustee, agent or in any other fiduciary or representative capacity by any and every method of appointment or by whatever person, corporation, court officer or authority in the State of Delaware, or elsewhere, without any specific authority, ratification, approval or confirmation by the Board of Directors or the Executive Committee, and any and all such instruments shall have the same force and validity as although expressly authorized by the Board of Directors and/or the Executive Committee. ARTICLE IX COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES Section 1. Directors and associate directors of the Company, other than salaried officers of the Company, shall be paid such reasonable honoraria or fees for attending meetings of the Board of Directors as the Board of Directors may from time to time determine. Directors and associate directors who serve as members of committees, other than salaried employees of the Company, shall be paid such reasonable honoraria or fees for services as members of committees as the Board of Directors shall from time to time determine and directors and associate directors may be employed by the Company for such special services as the Board of Directors may from time to time determine and shall be paid for such special services so performed reasonable compensation as may be determined by the Board of Directors. 9 ARTICLE X INDEMNIFICATION Section 1. (A) The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") by reason of the fact that he, or a person for whom he is the legal representative, is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person. The Corporation shall indemnify a person in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board of Directors of the Corporation. (B) The Corporation shall pay the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that the -------- ------- payment of expenses incurred by a Director officer in his capacity as a Director or officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Director or officer to repay all amounts advanced if it should be ultimately determined that the Director or officer is not entitled to be indemnified under this Article or otherwise. (C) If a claim for indemnification or payment of expenses, under this Article X is not paid in full within ninety days after a written claim therefor has been received by the Corporation the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification of payment of expenses under applicable law. (D) The rights conferred on any person by this Article X shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Charter or Act of Incorporation, these By- Laws, agreement, vote of stockholders or disinterested Directors or otherwise. (E) Any repeal or modification of the foregoing provisions of this Article X shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. 10 EXHIBIT C Section 321(b) Consent Pursuant to Section 321(b) of the Trust Indenture Act of 1939, Wilmington Trust Company hereby consents that reports of examinations by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities Exchange Commission upon requests therefor. WILMINGTON TRUST COMPANY Dated: March 30, 1995 By: /s/ NORMA P. CLOSS --------------------------------- Name: Norma P. Closs Title: Vice President EXHIBIT D NOTICE This form is intended to assist state nonmember banks and savings banks with state publication requirements. It has not been approved by any state banking authorities. Refer to your appropriate state banking authorities for your state publication requirements. REPORT OF CONDITION Consolidating domestic subsidiaries of the WILMINGTON TRUST COMPANY of WILMINGTON - -------------------------------------------- ------------------------------ Name of Bank City in the state of Delaware , at the close of business on December 31, 1994. --------------- ASSETS
Thousands of dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin................ 196,088 Interest-bearing balances......................................... 0 Held-to-maturity securities......................................... 706,396 Available-for-sale securities....................................... 252,556 Federal funds sold.................................................. 15,860 Securities purchased under agreements to resell..................... 116,500 Loans and lease financing receivables: Loans and leases, net of unearned income........... 3,189,633 LESS: Allowance for loan and lease losses.......... 46,554 LESS: Allocated transfer risk reserve.............. 0 Loans and leases, net of unearned income, allowance, and reserve.. 3,143,079 Assets held in trading accounts..................................... 0 Premises and fixed assets (including capitalized leases)............ 66,834 Other real estate owned............................................. 21,404 Investments in unconsolidated subsidiaries and associated companies. 2,415 Customers' liability to this bank on acceptances outstanding........ 0 Intangible assets................................................... 5,129 Other assets........................................................ 98,605 Total assets........................................................ 4,624,866
LIABILITIES Deposits: In domestic offices............................................... 3,200,395 Noninterest-bearing............................. 700,402 Interest-bearing................................ 2,499,993 Federal funds purchased............................................. 153,625 Securities sold under agreements to repurchase...................... 126,856 Demand notes issued to the U.S. Treasury............................ 37,308 Trading liabilities................................................. 0 Other borrowed money: With original maturity of one year or less........................ 621,800 With original maturity of more than one year...................... 0 Mortgage indebtedness and obligations under capitalized leases...... 2,093 Bank's liability on acceptances executed and outstanding............ 0 Subordinated notes and debentures................................... 0 Other liabilities................................................... 88,513 Total liabilities................................................... 4,230,590 Limited-life preferred stock and related surplus.................... 0 EQUITY CAPITAL Perpetual preferred stock and related surplus....................... 0 Common stock........................................................ 500 Surplus............................................................. 62,118 Undivided profits and capital reserves.............................. 331,953 Net unrealized holding gains (losses) on available-for-sale securities........................................................ (295) Total equity capital................................................ 394,276 Total liabilities, limited-life preferred stock, and equity capital. 4,624,866
We, the undersigned directors, attest to the correctness of this statement of resources and liabilities. We declare that it has been examined by us, and to the best of our knowledge and belief has been prepared in conformance with the instructions and is true and correct. /s/ CAROLYN S. BURGER - --------------------------------- /s/ DAVID P. ROSELLE - --------------------------------- Directors /s/ ROBERT C. FORNEY - --------------------------------- DAVID R. GIBSON - --------------------------------- Name Senior Vice President - --------------------------------- Title of the above-named bank do hereby declare that this Report of Condition is true and correct to the best of my knowledge and belief. /s/ DAVID R. GIBSON - --------------------------------- Signature 1/30/95 - --------------------------------- Date EX-99.T3A 2 AMENDED & RESTATED DECLARATION OF TRUST Exhibit T3A ================================================== MORTGAGE AND REALTY TRUST --------------- AMENDED AND RESTATED DECLARATION OF TRUST As amended and restated through February 20, 1985 ======================================================================== INDEX TO DECLARATION OF TRUST _______________ Page ---- ARTICLE 1 The Trust; Definitions 1.1 Name.................................................. - 1 - 1.2 Places of Business.................................... - 1 - 1.3 Nature of Trust....................................... - 1 - 1.4 Definitions........................................... - 1 - ARTICLE 2 Trustees 2.1 Number, Term and Qualifications of Trustees........... - 5 - 2.2 Compensation and Other Remuneration................... - 5 - 2.3 Resignation, Removal and Death of Trustees............ - 5 - 2.4 Vacancies............................................. - 6 - 2.5 Successor and Additional Trustees..................... - 6 - 2.6 Action by Trustees.................................... - 6 - 2.7 Non-Affiliated Trustees............................... - 6 - ARTICLE 3 Trustees' Powers 3.1 Power and Authority of Trustees....................... - 7 - 3.2 Specific Powers and Authorities....................... - 7 - 3.3 By-Laws.............................................. - 11 - ARTICLE 4 Advisory Agreement 4.1 Employment of Adviser................................ - 11 - 4.2 Term................................................. - 12 - 4.3 No Restrictions on Adviser........................... - 12 - 4.4 Duties of Adviser.................................... - 12 - 4.5 Agreement with Affiliate of Adviser.................. - 12 - ARTICLE 5 Investment Policy 5.1 General Statement of Policy.......................... - 13 - 5.2 REIT Provisions of the Internal Revenue Code......... - 13 - -i- 5.3 Additional Investments............................... - 13 - 5.4 Other Permissible Investments........................ - 14 - 5.5 Prohibited Investments and Activities................ - 14 - 5.6 Additional Limitations............................... - 16 - 5.7 Obligor's Default.................................... - 16 - ARTICLE 6 The Shares And Shareholders 6.1 Shares............................................... - 16 - 6.2 Common Shares........................................ - 16 - 6.3 Preferred Shares..................................... - 17 - 6.4 Legal Ownership of Trust Estate...................... - 17 - 6.5 Shares Deemed Personal Property...................... - 17 - 6.6 Share Record; Issuance and Transferability of Shares............................................... - 18 - 6.7 Dividends or Distributions to Shareholders........... - 18 - 6.8 Transfer Agent, Dividend Disbursing Agent and Registrar............................................ - 18 - 6.9 Shareholders' Meetings............................... - 18 - 6.10 Proxies.............................................. - 19 - 6.11 Reports to Shareholders.............................. - 19 - 6.12 Fixing Record Date................................... - 20 - 6.13 Notice to Shareholders............................... - 20 - 6.14 Shareholders' Disclosures; Redemption of Shares...... - 20 - 6.15 Exculpation of Trustees and Officers................. - 21 - ARTICLE 7 Liability Of Trustees, Shareholders And Officers, And Other Matters 7.1 Exculpation of Trustees and Officers................. - 21 - 7.2 Limitation of Liability of Shareholders, Trustees and Officers......................................... - 21 - 7.3 Express Exculpatory Clauses in Instruments........... - 21 - 7.4 Indemnification of Trustees and Officers............. - 22 - 7.5 Right of Trustees and Officers to Own Shares or Other Property and to Engage in Other Business............. - 23 - 7.6 Transactions Between the Trustees and the Trust...... - 24 - 7.7 Restriction of Duties and Liabilities................ - 25 - 7.8 Persons Dealing with Trustees or Officers............ - 25 - 7.9 Reliance............................................. - 25 - -ii- ARTICLE 8 Duration, Amendment, Termination And Qualification Of Trust 8.1 Duration of Trust.................................... - 26 - 8.2 Termination of Trust................................. - 26 - 8.3 Amendment Procedure.................................. - 27 - ARTICLE 9 Miscellaneous 9.1 Applicable Law....................................... - 27 - 9.2 Index and Headings for Reference Only................ - 27 - 9.3 Successors in Interest............................... - 27 - 9.4 Counterparts......................................... - 27 - 9.5 Provisions of the Trust in Conflict with Law or Regulations.......................................... - 27 - 9.6 Certifications....................................... - 28 - 9.7 Recording and Filing................................. - 29 - 9.8 Resident Agent....................................... - 29 - 9.9 Names and Addresses of Trustees and Officers......... - 29 - -iii- DECLARATION OF TRUST The below-named Trustees have agreed to hold in trust as Trustees, any and all property, real, personal or otherwise, tangible or intangible, which is transferred, conveyed, or paid to them as such Trustees and all rents, income, profits, and gains therefrom for the benefit of Shareholders hereunder subject to the terms and conditions and for the uses and purposes hereinafter set forth. ARTICLE 1 The Trust; Definitions 1.1 Name. The name of the Trust shall be "Mortgage and Realty Trust". As far as practicable and except as otherwise provided in this Declaration, the Trustees shall conduct the Trust's activities, execute all documents and sue or be sued in the name of the Trust or in their names as Trustees of the Trust. 1.2 Places of Business. The registered office of the Trust in the State of Maryland shall be c/o The Corporation Trust, Incorporated, 32 South Street, Baltimore, Maryland 21202. However, the Trustees may from time to time change such location and maintain other offices or places of business. 1.3 Nature of Trust. The Trust is a real estate investment trust organized under Article 78C of the Annotated Code of the State of Maryland. It is intended that the Trust shall carry on business as a "real estate investment trust" as described in the REIT Provisions of the Internal Revenue Code (as defined herein). The Trust is not intended to be, shall not be deemed to be, and shall not be treated as, a general partnership, limited partnership, joint venture, corporation, joint stock company or association (but nothing herein shall preclude the Trust from being taxable as an association under the REIT Provisions of the Internal Revenue Code), nor shall the Trustees or Shareholders or any of them for any purpose be, or be deemed or be treated in any way whatsoever to be, liable or responsible hereunder as partners or joint venturers. The relationship of the Shareholders to the Trustees shall be solely that of beneficiaries of the Trust and their rights shall be limited to those conferred upon them by this Declaration. 1.4 Definitions. The terms defined in this Section 1.4 whenever used in this Declaration shall, unless the context otherwise requires, have the respective meanings hereinafter specified in this Section 1.4. In this Declaration, words in the singular number include the plural and in the plural number include the singular. (1) Adviser. "Adviser" shall mean any person employed by the Trustees under the provisions of Section 4.1 to manage and administer the affairs of the Trust. (2) Affiliate. "Affiliate" shall mean as to any Person, any other Person which controls, is controlled by or under common control with, such Person or is an officer, director, employee, partner or trustee of such Person or of any other Person which controls, is controlled by, or under common control with, such Person. - 1 - (3) Appraisal. "Appraisal" shall mean a determination of the market value, as of the date of such determination, of Real Property in its existing state or in a state to be created, taking into consideration existing or available financing where appropriate, (i) by any disinterested independent appraiser who in the judgment of the Trustees is properly qualified to make such a determination, or (ii) by an employee of the Adviser or of an Affiliate of the Adviser if such employee has no economic interest in such Real Property and (A) if such determination is relied upon by the permanent lender (other than the Trust) on the same property or (B) if such employee's appraisals are customarily accepted by institutional customers of Colonial or (C) if the property to be appraised is a one-to-four family residential property. For purposes of clause (i) above, no person who is a director, officer or employee of the Adviser or of any Affiliate of the Adviser shall be deemed to be a disinterested independent appraiser. (4) Appraised Value. "Appraised Value" shall mean the market value of Real Property as of the date of determination as determined by an Appraisal. (5) Bank. "Bank" shall mean the Philadelphia National Bank. (6) Book Value. "Book Value" of an asset or assets shall mean the value of such asset or assets on the books of the Trust, before provision for amortization, depreciation or depletion and before deducting any indebtedness or other liability in respect of such asset or assets, except that no asset shall be valued at more than its fair market value as determined by the Trustees. (7) By-Laws. "By-Laws" shall mean the regulations referred to in Section 3.3. (8) Capital Funds. "Capital Funds" shall mean Shareholders' Equity plus Long Term Debt less undistributed Net Income of the Trust. (9) Colonial. "Colonial" shall mean Colonial Mortgage Service Company, collectively together with its affiliate, Colonial Mortgage Service Co. of California. (10) Construction Loans. "Construction Loans" shall mean Mortgage loans to finance all or part of the cost of acquiring and improving land and the construction or improvement of buildings thereon. (11) Declaration. "Declaration" shall mean this Declaration of Trust and all amendments or modifications thereof. References in this Declaration to "herein" and "hereunder" shall be deemed to refer to this Declaration and shall not be limited to the particular text, article or section in which such words appear. (12) Development Loans. "Development Loans" shall mean Mortgage loans to finance all or part of the cost of developing vacant land - 2 - into a site or sites suitable for the construction of buildings thereon or suitable for other residential, commercial, industrial or public uses, including the cost of acquiring land for such purpose. (13) First Mortgage. "First Mortgage" shall mean a Mortgage which takes priority or precedence over all other charges or encumbrances upon the same Real Property and which must be satisfied before such other charges or encumbrances are entitled to participate in the proceeds of any sale or disposition. Such Mortgage may be upon a lessee's interest in Real Property. Such priority shall not be deemed as abrogated by liens for taxes, assessments which are not delinquent or remain payable without penalty, contracts (other than contracts for repayment of borrowed moneys), leases, mechanic's and materialman's liens for work performed and materials furnished which are not in default or are in good faith being contested, and other claims and interests normally deemed in the local jurisdiction not to abrogate the priority of a first mortgage. (14) Indebtedness. "Indebtedness" shall mean the amount as shown on the balance sheet of the Trust of all obligations of the Trust for money borrowed and all obligations issued or assumed by the Trust as full or partial payment for property, in each case except to the extent money shall have been set aside or deposited for the payment thereof. (15) Junior Mortgage. "Junior Mortgage" shall mean any Mortgage other than a First Mortgage. (16) Long Term Debt. "Long Term Debt" shall mean Indebtedness with original final maturities of more than three years from the date of incurring such Indebtedness. (17) Mortgage. "Mortgage" shall mean a mortgage, deed of trust or other security interest in Real Property. (18) Net Assets. "Net Assets" shall mean Total Assets less all Indebtedness of the Trust. (19) Person. "Person" shall mean an individual, a corporation, a partnership, an association, a joint stock company, a trust, a joint venture, any unincorporated organization, or a government or political subdivision thereof. (20) Real Property. "Real Property" shall mean and include land, interests in land, leasehold interests (including but not limited to interests of a lessor or lessee therein), and any buildings, structures, improvements and fixtures located on or used in connection with land, leasehold interests and rights in land or interests therein, but does not include Mortgages, Mortgage loans, or interests therein. (21) REIT Provisions of the Internal Revenue Code. "REIT Provisions of the Internal Revenue Code" shall mean Part II, Subchapter M - 3 - of Chapter 1, of the Internal Revenue Code of 1954, as now enacted or hereafter amended, or similar provisions of successor statutes, and regulations promulgated thereunder. (22) Securities. "Securities" shall mean any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. (23) Shareholders. "Shareholders" shall mean as of any particular time the holders of record of outstanding Shares at such time. (24) Shareholders' Equity. "Shareholders' Equity" shall mean the amount of Shareholders' equity as shown on the books of the Trust. (25) Shares. "Shares" shall mean the Common Shares and Preferred Shares in the Trust as described in Section 6.1. (26) Short Term Borrowings. "Short Term Borrowings" shall mean Indebtedness with original final maturities of three years or less from the date of incurring such Indebtedness. (27) Total Assets. "Total Assets" shall mean the total assets of the Trust as shown on its balance sheet, without deducting therefrom any liabilities of the Trust and including depreciable assets therein at the lesser of either (i) the cost of such assets on the books of the Trust less depreciation thereof determined in accordance with generally accepted accounting principles on a straight-line basis over the useful life of such assets used as the basis of depreciation in preparing the Trust's federal income tax returns, or (ii) the fair market value of such assets in the judgment of the Trustees. (28) Trust. "Trust" shall mean the Trust created by this Declaration. (29) Trust Estate. "Trust Estate" shall mean, as of any particular time any and all property, real, personal or otherwise, tangible or intangible, transferred, conveyed or paid to the Trust or Trustees, and all rents, income, profits and gains therefrom, which at such time is owned or held by the Trust or the Trustees. (30) Trustees. "Trustees" shall mean as of any particular time, Trustees holding office under this Declaration at such time, whether they be the Trustees named herein or additional or successor Trustees and shall not include the officers, representatives or agents of the Trust or the - 4 - Shareholders, but nothing herein shall be deemed to preclude the Trustees from also serving as officers, representatives or agents of the Trust or owning Shares. ARTICLE 2 Trustees 2.1 Number, Term and Qualifications of Trustees. There shall be not less than five nor more than fourteen Trustees, at least a majority of whom shall at all times be persons who are not Affiliates of the Adviser. The names of the Trustees are set forth in Section 9.9. Within the limits set forth in this Section 2.1, and subject to the provisions of any series of Preferred Shares which may at the time be outstanding, the number of Trustees may be increased or decreased from time to time by the Trustees. Subject to the provisions of Section 2.3, each Trustee shall hold office for one year and until the election and qualification of his successor. At each Annual Meeting of Shareholders, the Shareholders entitled to vote for the election of Trustees shall elect Trustees to serve until the next Annual Meeting of Shareholders. There shall be no cumulative voting in the election of Trustees. Trustees may be reelected. A Trustee shall be an individual at least 21 years of age who is not under legal disability. Such individual shall qualify as a Trustee when he has either signed this Declaration or agreed in writing to be bound by it. Unless otherwise required by law, no Trustee shall be required to give bond, surety or security in any jurisdiction for the performance of any duties or obligations hereunder. The Trustees in their capacity as Trustees shall not be required to devote their entire time to the business and affairs of the Trust. 2.2 Compensation and Other Remuneration. The Trustees shall be entitled to receive such reasonable compensation for their services as Trustees as they may determine from time to time. The Trustees shall also be entitled to receive, directly or indirectly, remuneration for services rendered to the Trust in any other capacity, including, without limitation, services as an officer of the Trust, legal, accounting or other professional services, or services as a transfer agent, or underwriter, or otherwise. The Trustees shall be reimbursed for their reasonable expenses incurred in connection with their services as Trustees. Notwithstanding the foregoing, except as provided in Article 7, no Trustee shall receive any fee or other remuneration, directly or indirectly, as a result of any sale of property to or purchase of property from the Trust. 2.3 Resignation, Removal and Death of Trustees. A Trustee may resign at any time by giving written notice to the remaining Trustees at the principal office of the Trust. Such resignation shall take effect on the date such notice is given or at any later time specified in the notice without need for prior accounting. A Trustee may be removed at any time with or without cause by a vote or consent of holders of two-thirds of the outstanding Shares entitled to vote thereon or with cause by two-thirds of the Trustees in office. Upon the resignation or removal of any Trustee, or his otherwise ceasing to be a Trustee, he shall execute and deliver such documents as the remaining Trustees shall require for the conveyance of any Trust property held in his name, shall account to the remaining Trustee or Trustees as they require for all property which he holds as Trustee and shall thereupon be discharged as Trustee. - 5 - Upon the incapacity or death of any Trustee, his legal representative shall perform the acts set forth in the preceding sentence and the discharge mentioned therein shall run to such legal representative and to the incapacitated Trustee or the estate of the deceased Trustee as the case may be. Notwithstanding failure of any Trustee or his legal representative to execute and deliver documents and to render an accounting as aforesaid, said Trustee shall cease to hold legal title to the Trust Estate as of the time of his resignation, removal, incapacity, death or his otherwise ceasing to be a Trustee. 2.4 Vacancies. If any or all of the Trustees cease to be Trustees hereunder, whether by reason of resignation, removal, incapacity, death or otherwise, such event shall not terminate the Trust or affect its continuity. Until vacancies are filled, the remaining Trustee or Trustees (even though less than three) may exercise the powers of the Trustees hereunder. Except as may otherwise be required by the provisions of any series of Preferred Shares then outstanding, vacancies (including vacancies created by increases in the number of Trustees) may be filled by the remaining Trustee or by a majority of the remaining Trustees even though less than a quorum. If at any time there shall be no Trustees in office, successor Trustees shall be elected by the Shareholders entitled to vote as provided in Section 6.9. 2.5 Successor and Additional Trustees. The right, title and interest of the Trustees in and to the Trust Estate shall also vest in successor and additional Trustees upon their qualification, and they shall thereupon have all the rights and obligations of Trustees hereunder. Such right, title and interest shall vest in the Trustees whether or not conveyancing documents have been executed and delivered pursuant to Section 2.3 or otherwise. 2.6 Action by Trustees. A quorum for all meetings of the Trustees shall be a majority of the Trustees. Unless specifically provided otherwise in this Declaration or in the provisions of any series of Preferred Shares then outstanding, any action of the Trustees may be taken at a meeting by vote of a majority of the Trustees present at such meeting if a quorum is present, or without a meeting by unanimous written consent of the Trustees. The Trustees may participate in meetings by means of conference telephone or similar means of communications equipment. Any agreement, deed, mortgage, lease or other instrument or writing executed by any one or more of the Trustees or by any one or more authorized persons shall be valid and binding upon the Trustees and upon the Trust when authorized by action of the Trustees or as provided in the By-Laws. 2.7 Non-Affiliated Trustees. In order that a majority of the Trustees shall at all times be Persons who are not Affiliates of the Adviser, if at any time, by reason of one or more vacancies, there shall not be such a majority, then within 60 days after such vacancy occurs, the continuing Trustee or Trustees then in office shall appoint, pursuant to Section 2.4, a sufficient number of other Persons who are not such Affiliates so that there shall be such a majority. - 6 - ARTICLE 3 Trustees' Powers 3.1 Power and Authority of Trustees. The Trustees, subject only to the specific limitations contained in this Declaration or in the provisions of any series of Preferred Shares which may be outstanding, shall have, without further or other authorization, and free from any power or control on the part of the Shareholders, full, absolute and exclusive power, control and authority over the Trust Estate and over the business and affairs of the Trust to the same extent as if the Trustees were the sole owners thereof in their own right, and to do all such acts and things as in their sole judgment and discretion are necessary or incidental to, or desirable for, the carrying out of any of the purposes of the Trust or conducting the business of the Trust. Any determination made in good faith by the Trustees of the purposes of the Trust or the existence of any power or authority hereunder shall be conclusive. In construing the provisions of this Declaration, presumption shall be in favor of the grant of powers and authority to the Trustees. The enumeration of any specific power or authority herein shall not be construed as limiting the general powers or authority or any other specified power or authority conferred herein upon the Trustees. 3.2 Specific Powers and Authorities. Subject only to the express limitations contained in this Declaration or in the provisions of any series of Preferred Shares which may be outstanding, and in addition to any powers and authorities conferred by this Declaration or which the Trustees may have by virtue of any present or future statute or rule of law, the Trustees without any action or consent by the Shareholders shall have and may exercise at any time and from time to time the following powers and authorities which may or may not be exercised by them in their sole judgment and discretion and in such manner and upon such terms and conditions as they may from time to time deem proper: (1) To retain, invest and reinvest the capital or other funds of the Trust and, for such consideration as they deem proper, to purchase or otherwise acquire for cash or other property or through the issuance of Shares or other Securities of the Trust and hold for investment real or personal property of any kind, tangible or intangible, in entirety or in participation, all without regard to whether any such property is authorized by law for the investment of trust funds and to possess and exercise all the rights, powers and privileges appertaining to the ownership of the Trust Estate with respect thereto. (2) To increase the capital of the Trust by the issuance of additional Shares at such time or times and for such consideration as may be deemed appropriate by the affirmative vote of a majority of the Trustees, including a majority of the Trustees who are not Affiliates of the Adviser. (3) To sell, rent, lease, hire, exchange, release, partition, assign, mortgage, pledge, hypothecate, grant security interests in, encumber, negotiate, convey, transfer or otherwise dispose of or grant interests in all or any portion of the Trust Estate by deeds, trust deeds, assignments, bills of - 7 - sale, transfers, leases, mortgages, financing statements, security agreements and other instruments for any of such purposes. (4) To issue other Securities, which may be secured or unsecured and may be subordinated to any indebtedness of the Trust and may be convertible into Shares, all without vote of or other action by the Shareholders, to such Persons for such cash, property or other consideration (including Securities issued or created by, or interests in, any Person) at such time or times and on such terms as may be deemed appropriate by the affirmative vote of a majority of the Trustees, including a majority of the Trustees who are not Affiliates of the Adviser, and to purchase or otherwise acquire, hold, cancel, reissue, sell and transfer any of such Securities; provided, however, that the Trust shall not (i) issue "redeemable securities" as defined in Section 2(a)(32) of the Investment Company Act of 1940; or (ii) issue Long Term Debt unless the historical cash flow of the Trust or the estimated future cash flow of the Trust excluding extraordinary non-recurring items, is sufficient to cover interest payments on such debt securities. (5) To issue Share Purchase Warrants ("Warrants") which entitle the holders thereof to subscribe for Preferred or Common Shares (which Shares shall be reserved at the time of issuance of such Warrants by the Trustees for issuance upon exercise of such Warrants) at such time or times and on such terms as the Trustees may prescribe. Warrants may be issued to such Persons and for such consideration as the Trustees may from time to time determine, and may be issued in detachable or nondetachable form in conjunction with the issuance of debt securities or as an inducement to those acquiring or underwriting Securities of the Trust, and may be redeemable at the option of the Trust. Warrants shall be evidenced by certificates in such from as the Trustees may approve. (6) To enter into leases, indentures, contracts, obligations, and other agreements for a term extending beyond the term of office of the Trustees and beyond the possible termination of the Trust or for a lesser term. (7) To borrow money, incur indebtedness and issue Securities of the Trust therefor; to guarantee, indemnify or act as surety with respect to payment or performance of obligations of third parties; to enter into other obligations on behalf of the Trust; and to assign, convey, transfer, mortgage, subordinate, pledge, grant security interests in, encumber or hypothecate the Trust Estate to secure any of the foregoing; provided, however, that in no event shall the Trust incur Long Term Debt if after giving effect thereto the total amount of Long Term Debt would exceed 400% of Net Assets or incur any Short Term Borrowings if after giving effect thereto the total amount of Short Term Borrowings would exceed 400% of Net Assets and provided further that the aggregate Long Term Debt and Short Term Borrowings shall not exceed 500% of Net Assets prior to December 31, 1972. Compliance with the provisions of the foregoing proviso shall be determined on the basis of the latest available balance sheet of the Trust (which shall be as of a date not more than 90 days prior to the date of incurring such Indebtedness) - 8 - adjusted on a pro forma basis to give effect to the incurring of such Indebtedness. (8) To lend money, whether secured or unsecured. (9) To create reserve funds for any purpose. (10) To incur and pay out of the Trust Estate any charges or expenses, and disburse any funds of the Trust, which charges, expenses or disbursements are, in the opinion of the Trustees, necessary or incidental to or desirable for the carrying out of any of the purposes of the Trust or conducting the business of the Trust, including without limitation taxes and other governmental levies, charges and assessments, of whatever kind or nature, imposed upon or against the Trustees in connection with the Trust or the Trust Estate or upon or against the Trust Estate or any part thereof and for any of the purposes herein. (11) To deposit funds of the Trust in banks, trust companies, savings and loan associations and other depositories, including the Bank, whether or not such deposits will draw interest, the same to be subject to withdrawal on such terms and in such manner and by such Person or Persons (including any one or more Trustees, officers, agents or representatives) as the Trustees may determine. (12) To possess and exercise all the rights, powers and privileges appertaining to the ownership of any or all Mortgages or Securities issued or created by, or interests in, any Person, forming part of the Trust Estate, to the same extent that an individual might, and, without limiting the generality of the foregoing, to vote or give any consent, request or notice, or waive any notice, either in person or by proxy or power of attorney, with or without power of substitution, to one or more Persons, which proxies and powers of attorney may be for meetings or action generally or for any particular meeting or action, and may include the exercise of discretionary powers. (13) After approval by the holders of two-thirds of the outstanding Shares entitled to vote, by vote of two-thirds of the Trustees, to cause a corporation or other entity to be organized under the laws of Maryland or any other jurisdiction and transfer the assets of the Trust to it in exchange for its shares or other Securities (which Securities shall then be distributed to the Shareholders) and terminate the Trust; provided that, such new corporation or entity and its shareholders would then be entitled to federal income tax treatment substantially equal to that enjoyed by a qualified real estate investment trust and its shareholders, and the resulting investment received by Preferred or Common Shareholders would be substantially equal in quality and substantially the same in type as an investment in the Preferred or Common Shares of the Trust, as the case may be. (14) To enter into joint ventures, general or limited partnerships and any other lawful combinations or associations. - 9 - (15) To elect, appoint, engage or employ officers for the Trust, who may be removed or discharged at the discretion of the Trustees, such officers to have such titles, powers and duties, and to serve such terms, as may be prescribed by the Trustees or by the By-Laws; subject to the provisions of Sections 7.5 and 7.6, to engage or employ any Persons as agents, representatives, employees, or independent contractors (including without limitation real estate advisers, investment advisers, transfer agents, registrars, underwriters, accountants, attorneys at law, real estate agents, managers, appraisers, brokers, architects, engineers, construction managers, general contractors or otherwise) in one or more capacities, and to pay compensation from the Trust for services in as many capacities as such Person may be so engaged or employed; and, except as prohibited by law, to delegate any of the powers and duties of the Trustees to any one or more Trustees, agents, representatives, officers, employees, independent contractors or other Persons except as provided in Article 4 hereof, provided, however, that no such delegation shall be made to an Affiliate of the Adviser except with the approval of a majority of the Trustees who are not Affiliates of the Adviser. (16) To appoint from among the Trustees an executive committee and other committees composed of two or more Trustees, and to delegate to such committees, in the intervals between meetings of the Trustees, any or all of the powers of the Trustees in the management of the business and affairs of the Trust, except the power to declare dividends, issue Shares or recommend to Shareholders any action requiring Shareholders' approval. (17) To determine from time to time the value of all or any part of the Trust Estate and of any services, Securities, property or other consideration to be furnished to or acquired by the Trust, and from time to time to revalue all or any part of the Trust Estate in accordance with such appraisals or other information as the Trustees, in their sole judgment, may deem necessary. (18) To collect, sue for, and receive all sums of money coming due to the Trust, and to engage in, intervene in, prosecute, join, defend, compound, compromise, abandon or adjust, by arbitration or otherwise, any actions, suits, proceedings, disputes, claims, controversies, demands or other litigation relating to the Trust, the Trust Estate or the Trust's affairs, to enter into agreements therefor, whether or not any suit is commenced or claim accrued or asserted and, in advance of any controversy, to enter into agreements regarding arbitration, adjudication or settlement thereof. (19) To renew, modify, release, compromise, extend, consolidate, or cancel, in whole or in part, any obligation to or of the Trust. (20) To extend, renew or reissue outstanding rights, warrants or options to purchase Shares of the Trust. (21) To purchase and pay for out of the Trust Estate insurance contracts and policies insuring the Trust Estate against any and all risks and - 10 - insuring the Trust, the Trustees, the Shareholders or the officers of the Trust, or any or all of them, against any and all claims and liabilities of every nature asserted by any Person arising by reason of any action alleged to have been taken or omitted by the Trust or by the Trustees, Shareholders, or officers. (22) To cause legal title to any of the Trust Estate to be held by or in the name of the Trustees or, except as prohibited by law, by or in the name of the Trust or one or more of the Trustees or any other Person, on such terms, in such manner, with such powers in such Person as the Trustees may determine, and with or without disclosure that the Trust or Trustees are interested therein. (23) To adopt a fiscal year for the Trust, and from time to time to change such fiscal year. (24) To adopt and use a seal (but the use of a seal shall not be required for the execution of instruments or obligations of the Trust). (25) To file any and all documents and take any and all such other action as the Trustees, in their sole judgment, may deem necessary in order that the Trust may lawfully conduct its business in any jurisdiction. (26) To change the name of the Trust. (27) To adopt a plan for reinvestment by Shareholders of distributions of the Trust containing provision for the sale of Shares by the Trust at book value in the event market value is higher and such other provisions as the Trustees may determine. (28) To do all other such acts and things as are incident to the foregoing, and to exercise all powers which are necessary or useful to carry on the business of the Trust, to promote and attain any of the purposes for which the Trust is formed, and to carry out the provisions of this Declaration. 3.3 By-Laws. The Trustees may make, adopt, amend or repeal By- Laws containing provisions relating to the government of the Trust, and the administration of its affairs, including its rights or powers and the rights or powers of its Shareholders, Trustees or officers not inconsistent with law or with this Declaration or the provisions of any series of Preferred Shares which may then be outstanding. ARTICLE 4 Advisory Agreement 4.1 Employment of Adviser. The Trustees are responsible for the general policies of the Trust and for such general supervision of the business of the Trust conducted by all officers, agents, employees, advisers, managers or independent contractors of the Trust as may be necessary to insure that such business conforms to - 11 - the provisions of this Declaration. However, the Trustees shall not be required personally to conduct the business of the Trust, and, consistent with their ultimate responsibility as stated above, the Trustees shall have the power to appoint, employ or contract with any Person or Persons (including one or more of themselves or any Person in which one or more of them may be directors, officers, shareholders, partners or trustees) as the Trustees may deem necessary or proper for the transaction of the business of the Trust, and for such purpose may grant or delegate such authority to any such Person as the Trustees may in their sole discretion deem necessary or desirable without regard to whether such authority is normally granted or delegated by Trustees; provided, however, that any determination to employ or contract with the Adviser or an Affiliate of a Trustee or the Adviser shall be valid only if made or ratified with the approval of a majority of the Trustees who are not such Affiliates. The Trustees shall have the power to determine the terms and compensation of the Adviser or any other Person whom they may employ or with whom they may contract. The Trustees may exercise broad discretion in allowing the Adviser to administer and regulate the operations of the Trust, to act as agent for the Trust, to execute documents on behalf of the Trustees, and to take action which conforms to general policies and general principles previously established by the Trustees. 4.2 Term. The Trustees shall not enter into any contract with an Adviser unless such contract has an initial term of not more than two years and provides that it may be terminated by the Trust on not more than 60 days notice by the affirmative vote of a majority of the Trustees who are not Affiliates of the Adviser. 4.3 No Restrictions on Adviser. Nothing contained in this Declaration shall limit or restrict the right of any director, officer, employee or shareholder of the Adviser, whether or not also a Trustee, officer or employee of the Trust, to engage in any other business or to render services of any kind to any other Person. 4.4 Duties of Adviser. The Adviser shall: (i) administer the Trust's day-to-day investment operations; (ii) serve as the Trust's investment adviser and consultant on policy decisions to be made by the Trustees; (iii) present to the Trust opportunities for investment within the Trust's investment policies; (iv) investigate, select and recommend to the Trustees, and conduct relations with, accountants, mortgage loan originators and correspondents, lenders, builders, developers and others as necessary in connection with the Trust's mortgage and other investments, and enter into appropriate contracts with such persons in its own name or the Trust's; and (v) generally take such other action as the Trustees may request in connection with the conduct of the business of the Trust. 4.5 Agreement with Affiliate of Adviser. In the event that the Adviser shall be an Affiliate of a Person engaged in the mortgage banking business, the employment of the Adviser by the Trust shall be conditioned upon an undertaking by such Affiliate that such Affiliate shall consult with the Adviser and present to the Adviser, for presentation to the Trust, opportunities to acquire mortgage loans and other investments which are consistent with the investment policies of the Trust and which are generally representative of comparable investments of similar quality being - 12 - made or placed by such Affiliate with other institutional investors and shall furnish the Adviser and the Trust with information as to any investments within the Trust's investment policies made or placed by such Affiliate with other institutions. The Trust may also enter into agreements with Affiliates of the Adviser for servicing any or all of the Trust's loans or for any other purposes, subject to the provisions of Section 7.6 hereof. ARTICLE 5 Investment Policy 5.1 General Statement of Policy. It is the general investment policy of the Trust to invest in long term investments consisting principally of permanent First Mortgage loans, Junior and wrap-around Mortgage loans, net lease financings, sale leaseback transactions, leasehold Mortgage loans and ownership or other interests in Real Property or in Persons involved in owning, operating, leasing, developing, financing or dealing in Real Property, which investments shall ordinarily be made in connection with properties having proven or projected income-producing capabilities and in short term and intermediate term Mortgage loans, warehouse loans, and installment contracts. The Trustees may make commitments to make investments consistent with the foregoing policies and may also participate in investments with other investors on the same or different terms, including investors to whom the Adviser may also act as adviser. The Trustees shall endeavor to invest the Trust's assets in accordance with the investment policies set forth in this Article 5, but the failure so to invest its assets shall not affect the validity of any investment made or action taken by the Trustees. 5.2 REIT Provisions of the Internal Revenue Code. The Trustees intend at all times to make investments in such a manner as to comply with the requirements of the REIT Provisions of the Internal Revenue Code with respect to the composition of the Trust's investments and the derivation of its income; provided, however, that no Trustee, officer, employee, agent, investment adviser or independent contractor of the Trust shall be liable for any act or omission resulting in the loss of tax benefits under the Internal Revenue Code, except as provided in Section 7.1 hereof. 5.3 Additional Investments. The Trustees may also invest the Trust Estate in the ownership of or participation in the ownership of: (1) Shares of other real estate investment trusts to the extent permitted by the REIT Provisions of the Internal Revenue Code and which do not hold investments or engage in the activities prohibited by Section 5.5; (2) Securities, including but not limited to convertible or subordinated bonds, other than those referred to in Section 5.4; and (3) Office and other equipment leased to tenants of Real Property owned by the Trust or subject to the lien of a Mortgage securing a Mortgage loan owned by the Trust, if the Trustees in good faith determine that the making of such investments will not disqualify the Trust as a real - 13 - estate investment trust under the REIT Provisions of the Internal Revenue Code. 5.4 Other Permissible Investments. To the extent that the Trust has assets not invested in accordance with the foregoing Sections of this Article 5, the Trustees may employ such assets by investing them in: (1) Obligations of the United States Government or agencies thereof; (2) Obligations of any state or territory of the United States of America or any political subdivision thereof or any agencies of any thereof; (3) Evidences of deposits in or obligations of banking institutions and savings institutions which are members of the Federal Deposit Insurance Corporation or of the Federal Home Loan Bank System; (4) Commercial paper; and (5) Financial futures, forward and standby contracts for the deferred or future delivery of the obligations and securities described in Subsections (1) through (4) of this Section 5.4. 5.5 Prohibited Investments and Activities. The Trustees shall not engage in any of the following investment practices or activities: (1) Invest in any Mortgage loan (except those insured by the Federal Housing Administration) if immediately thereafter and as a result thereof any one borrower on any one project shall be obligated to the Trust, either primarily or secondarily, in an amount exceeding 15% of Total Assets; provided, however, that in the calculation of any obligor's obligation to the Trust for the purpose of this limitation there shall not be included any payments which any obligor may be required to make to the Trust on account of senior Mortgages held by other creditors in connection with wrap-around loans made by the Trust; (2) Purchase (which shall not be deemed to include the receipt of equity interests in connection with loans made by the Trust) Real Property at a price in excess of its Appraised Value determined by a disinterested independent appraiser as of a date not more than 90 days prior to the date of such purchase; (3) Invest more than 10% of the Total Assets of the Trust Estate in the ownership of, participation in the ownership of, or loans on, unimproved non-income-producing Real Property, other than Real Property which is expected to be improved within a reasonable period of time; (4) Make warehousing loans secured by the pledge of First Mortgage loans to Colonial or the Bank unless a majority of the Trustees who are not Affiliates of Colonial or the Bank approve such loans and, in the case - 14 - of such loans to Colonial, the Bank or Philadelphia National Corporation guarantees repayment of the loan; (5) Invest in commodities, bullion or chattels except such chattels as are required in the day-to-day business of the Trust or in connection with its Mortgage loans or Real Property; (6) Invest in any contracts for the sale of real estate; provided, however, that nothing herein shall prevent the holding of contracts of sale as additional security for Mortgage loans made by the Trust and the ownership of such contracts of sale upon the foreclosure of or realization upon such security interests; (7) Engage in any short sale, except that the Trustees may purchase or sell financial futures, forward and standby contracts for the deferred or future delivery of the obligations and securities described in Section 5.4; (8) Engage in trading as compared with investment activities or engage in underwriting or agency distribution of securities issued by others, but this prohibition shall not prevent the Trustees from selling participation in Mortgage loans or interests in Real Property or from purchasing or selling financial futures, forward and standby contracts as permitted in Section 5.4(5) and 5.5(7); (9) Invest in any Real Property which is subject to a Mortgage to any person other than a bank, insurance company, pension fund, other institutional lender, or corporation or trust engaged in the business of mortgage investments except in the case of a purchase money Mortgage; (10) Hold property primarily for sale to customers in the ordinary course of the trade or business of the Trust, but this prohibition shall not be construed to deprive the Trust of the power to sell any property which it owns at any time; (11) Invest in companies for the purpose of exercising control or management, but freedom of action is reserved with respect to exercise of voting rights in respect of securities in the portfolio of the Trust; (12) Invest in equity securities (except equity securities related to long term mortgage loans made by the Trust or leases of real property owned by the Trust) issued by any Person which to the actual knowledge of the Trustees is holding investments or engaging in activities prohibited to the Trust, if, after giving effect to the investment, the aggregate amount of such investment exceeds 5% of Total Assets. Compliance with the provisions of paragraphs (1) and (4) shall be determined on the basis of the latest available balance sheet of the Trust (which need not be audited but which shall be as of a date not more than 90 days prior to the date of making such - 15 - investment) adjusted on a pro forma basis to give effect to the making of such investment. 5.6 Additional Limitations. The By-Laws may contain additional limitations on the investments of the Trust, which limitations may be changed from time to time by amendment of the By-Laws as provided therein. 5.7 Obligor's Default. Notwithstanding any provision in any Article of this Declaration, when an obligor to the Trust is in default under the terms of any obligation to the Trust, the Trustees shall have the power to pursue any remedies permitted by law which in their sole judgment are in the interest of the Trust and the Trustees shall have the power to enter into any necessary investment, commitment, or obligation of the Trust resulting from the pursuit of such remedies or necessary or desirable to dispose of property acquired in the pursuit of such remedies. ARTICLE 6 The Shares And Shareholders 6.1 Shares. The units into which the beneficial interests in the Trust will be divided shall be designated as Shares, which Shares shall be of two classes, one of which shall be designated Common Shares and one of which shall be designated Preferred Shares. All such Shares shall have a par value of $1.00 per share. The certificates evidencing the Shares shall specify the class and series of such Shares and shall be in such form and signed (manually or by facsimile) on behalf of the Trust in such a manner as the Trustees may from time to time prescribe or as may be prescribed in the By-Laws. The certificates shall be negotiable and title thereto and to the Shares represented thereby shall be transferable by assignment and delivery thereof, subject, however, to the provisions of Section 6.15. The number of Common Shares which may be issued is limited to 15,000,000 and the number of Preferred Shares which may be issued is limited to 3,500,000. The Shares may be issued for such consideration as the Trustees shall determine or by way of share dividend or share split in the discretion of the Trustees; provided, however, that except in the case of a share dividend or share split, the Shares shall be issued for a consideration of at least $1.00 value per share. The Shares shall be held by at least 100 Persons. Shares reacquired by the Trust shall no longer be deemed outstanding and shall have no voting or other rights unless and until reissued. Shares reacquired by the Trust may be cancelled by action of the Trustees. All Shares shall be fully paid and nonassessable by or on behalf of the Trust upon receipt of full consideration for which they have been issued or without additional consideration if issued by way of share dividend or share split. 6.2 Common Shares. All of the Common Shares shall be of the same class and shall have equal voting, dividend or distribution, liquidation and other rights. Subject to the provisions of any series of Preferred Shares which may at the time be outstanding, the holders of Common Shares shall be entitled to receive, when and as declared by the Trustees out of any funds legally available for the purpose, such dividends or distributions as may be declared from time to time by the Trustees in accordance with Section 6.7. In the event of the termination of the Trust pursuant to Section 12.3, or upon the distribution of its assets, after the payment in full or the - 16 - setting apart for payment of such preferential amounts, if any, as the holders of Preferred Shares at the time outstanding shall be entitled, the remaining assets of the Trust available for payment and distribution to Shareholders shall, subject to any participating or similar rights of Preferred Shares at the time outstanding, be distributed ratably among the holders of Common Shares at the time outstanding in accordance with Section 8.2. Common Shares shall not entitle the holder to preference, conversion, exchange or preemptive rights of any kind. 6.3 Preferred Shares. The Trustees shall have power by resolution or resolutions, to the extent not inconsistent with the provisions of this Declaration, to divide and issue Preferred Shares in series, to fix the number of Preferred Shares constituting any such series and to set or change the preferences, conversion or other rights, voting powers, restrictions, including restrictions on transferability, limitations as to dividends, qualifications or terms or conditions of redemption of such Preferred Shares or any series thereof. The Trustees shall have power, unless otherwise provided in such resolution or resolutions as may be adopted pursuant to this Section 6.3 and to the extent not inconsistent with the provisions of this Declaration, to increase or decrease by resolution (but not below the number of Preferred Shares thereof then outstanding) the number of Preferred Shares of any series subsequent to the issue of Preferred Shares of that series. Except as provided by the provisions of a series of Preferred Shares, Preferred Shares of that series shall not entitle the holder to preference, conversion, exchange or preemptive rights of any kind. Before the Trust issues any Preferred Shares or any series thereof, or sets or changes the preferences, conversion or other rights, voting powers, restrictions, including restrictions on transferability, limitations as to dividends, qualifications or terms or conditions of redemption with respect to Preferred Shares or any series thereof, the Trustees shall file Articles Supplementary for record with the Department of Assessments and Taxation of the State of Maryland which shall set forth a description of the Preferred Shares or series thereof including the preferences, conversion and other rights, voting powers, restrictions, including restrictions on transferability, limitations as to dividends, qualifications and terms and conditions of redemption, as set or changed by the Trustees and which shall state that such Preferred Shares or series thereof have been classified or reclassified under the authority contained in this Declaration of Trust. 6.4 Legal Ownership of Trust Estate. The legal ownership of the Trust Estate and the right to conduct the business of the Trust are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest in the Trust conferred by their Shares issued hereunder and, subject to the provisions of Section 8.2, they shall have no right to compel any partition, division, dividend or distribution of the Trust or any of the Trust Estate. 6.5 Shares Deemed Personal Property. The Shares shall be personal property. The Common Shares shall confer upon the holders thereof only the interest and rights specifically set forth in this Declaration. The Preferred Shares shall confer upon the holders thereof only the interest and rights specifically set forth in this Declaration and in the resolution or resolutions adopted by the Trustees pursuant to Section 6.3. The death, insolvency or incapacity of a Shareholder shall not dissolve or terminate the Trust or affect its continuity nor give his legal representative any rights whatsoever, whether against or in respect of other Shareholders, the Trustees or - 17 - the Trust Estate or otherwise except the sole right to demand and, subject to the provisions of this Declaration, the By-Laws and any requirements of law, to receive a new certificate for Shares registered in the name of such legal representative, in exchange for the certificate held by such Shareholder. 6.6 Share Record; Issuance and Transferability of Shares. Records shall be kept by or on behalf of and under the direction of the Trustees, which shall contain the names and addresses of the Shareholders, the class, series and number of Shares held by them respectively, and the numbers of the certificates representing the Shares, and in which there shall be recorded all transfers of Shares. The Persons in whose names certificates are registered on the records of the Trust shall be deemed the absolute owners of the Shares represented thereby for all purposes of this Trust; but nothing herein shall be deemed to preclude the Trustees or officers, or their agents or representatives, from inquiring as to the actual ownership of Shares. Until a transfer is duly registered on the records of the Trust, the Trustees shall not be affected by any notice of such transfer, either actual or constructive. The payment thereof to the Person in whose name any Shares are registered on the records of the Trust or to the duly authorized agent of such Person (or if such Shares are so registered in the names of more than one Person, to any one of such Persons or to the duly authorized agent of such Person), shall be a sufficient discharge for all dividends or distributions payable or deliverable in respect of such Shares and from all liability to see to the application thereof. The By-Laws may provide for the regulation of the transfer of Share certificates and the Shares represented thereby. 6.7 Dividends or Distributions to Shareholders. The Trustees may from time to time declare and pay to holders of Preferred and Common Shares such dividends or distributions in cash or other property, out of current or accumulated income, capital, capital gains, principal, surplus, proceeds from the increase or refinancing of Trust obligations, or from the sale of portions of the Trust Estate or from any other source as the Trustees in their discretion shall determine, subject to the provisions of any series of Preferred Shares which may at the time be outstanding. Holders of Preferred and Common Shares shall have no right to any dividend or distribution unless and until declared by the Trustees. The Trustees shall furnish the holders of Preferred and Common Shares at the time of each such distribution with a statement in writing advising as to the source of the funds so distributed or that the source thereof has not then been determined, in which event a statement in writing as to such source shall be sent to each Shareholder who received the distribution not later than 90 days after the close of the fiscal year in which the distribution was made. 6.8 Transfer Agent, Dividend Disbursing Agent and Registrar. The Trustees shall have power to employ one or more transfer agents, dividend disbursing agents and registrars and to authorize them on behalf of the Trust to keep records, to hold and disburse any dividends and distributions, and to have and perform in respect of all original issues and transfers of Shares, dividends and distributions and reports and communications to Shareholders, such powers and duties customarily had and performed by transfer agents, dividend disbursing agents and registrars as may be conferred upon them by the Trustees. 6.9 Shareholders' Meetings. There shall be an annual meeting of the Shareholders at such time and at such convenient place within or without the State of - 18 - Maryland as provided in or pursuant to the By-Laws at which Trustees shall be elected and any other proper business may be conducted. The Annual Meeting of Shareholders shall be held after delivery to the Shareholders of the report specified in Section 6.11 and within six months after the end of each fiscal year. Special meetings of Shareholders may be called by the Trustees and such other Persons as shall be provided in the By-Laws and shall be called upon the written request of Shareholders holding not less than 25% of the outstanding Shares of the Trust entitled to vote, in the manner provided in or pursuant to the By-Laws. If there shall be no Trustees, a special meeting of the Shareholders shall be held promptly for the election of successor Trustees. Notice of any special meeting shall state the purposes of the meeting. At each Shareholders' meeting each Shareholder of record of a Common Share shall be entitled to one vote for each Common Share standing in his name on the books of the Trust. The holders of Preferred Shares of any series shall be entitled to vote upon any matter at any Shareholders' meeting only to the extent specified in the resolution or resolutions providing for such series adopted by the Trustees. A majority of the outstanding Shares entitled to vote at any meeting represented in person or by proxy shall constitute a quorum at such meeting. The vote or consent of the holders of two-thirds of the outstanding Shares entitled to vote shall be required to approve the nature and amount of the consideration and the other principal terms of any transaction involving the sale, lease, exchange or other disposition of substantially all of the Trust Estate as a whole. Whenever Shareholders are required or permitted to take any action, such action may be taken, except as otherwise provided by this Declaration or the provisions of any series of Preferred Shares which may be outstanding or required by law, by a majority of the votes cast at a meeting of Shareholders at which a quorum is present by holders of Shares entitled to vote thereon, or without a meeting by written consent setting forth the action so taken signed by the holders of a majority of the outstanding Shares entitled to vote thereon or such larger proportion thereof as would be required for a vote of Shareholders at a meeting. Written notice of any action taken by written consent shall be given all Shareholders who have not signed such consent at least ten days prior to the effective date of such action. The vote or consent of Shareholders shall not be required for the pledging, hypothecating, granting security interests in, mortgaging, or encumbering of all or any of the Trust Estate, or for the sale, lease, exchange or other disposition of less than substantially all of the Trust Estate as a whole. 6.10 Proxies. Whenever the vote or consent of Shareholders is required or permitted under this Declaration, such vote or consent may be given either directly by the Shareholder or by a proxy in the form provided in or pursuant to the By-Laws. The Trustees may solicit such proxies from the Shareholders or any of them in any matter requiring or permitting the Shareholders' vote or consent. 6.11 Reports to Shareholders. (1) Not later than 120 days after the close of each fiscal year of the Trust, the Trustees shall mail a report of the business and operation of the Trust during such fiscal year to the Shareholders, which report shall constitute the accounting of the Trustees for such fiscal year. The report shall be in such form and have such content as the Trustees deem proper. Each Annual Report shall include a balance sheet and statement of surplus of the Trust as of the close of the preceding fiscal year and a statement of - 19 - income of the Trust for such preceding fiscal year together with a comparable statement of income for the preceding fiscal year. Such financial statements shall be accompanied by a report of an independent certified public accountant. A manually signed copy of the accountant's report shall be filed with the Trustees. (2) Within 90 days after the close of each of the first three quarters of each fiscal year, the Trustees shall send interim reports containing summary financial statements (which may be unaudited) to the Shareholders, having such form and content as the Trustees deem proper. 6.12 Fixing Record Date. The By-Laws may provide for fixing or, in the absence of such provision, the Trustees may fix, in advance, a date as the record date for determining the Shareholders entitled to notice of or to vote at any meeting of Shareholders or to express consent to any proposal without a meeting, or for the purpose of determining Shareholders entitled to receive payment of any dividend or distribution (whether before or after a termination of the Trust) or any report or other communication from the Trustees; or for any other purpose. The record date so fixed shall be not less than ten days nor more than 60 days prior to the date of the meeting or event for the purposes of which it is fixed. 6.13 Notice to Shareholders. Any notice of meeting or other notice, communication or report to any Shareholders shall be deemed duly delivered to such Shareholder when such notice, communication or report is deposited, with postage thereon prepaid, in the United States mail, addressed to such Shareholder at his address as it appears on the records of the Trust or is delivered in person to such Shareholder. 6.14 Shareholders' Disclosures; Redemption of Shares. The Shareholders shall upon demand disclose to the Trustees in writing such information with respect to direct and indirect ownership of the Shares as the trustees deem necessary to comply with the provisions of the Internal Revenue Code and the regulations thereunder as the same shall be from time to time amended or to comply with the requirements of any other taxing authority or to enable the Trustees to carry out any of the provisions of this Section 6.14. The Trustees may at any time (i) call Shares for redemption, (ii) refuse to register the transfer of Shares, or (iii) refuse to honor the exercise of convertible Securities or warrants, if they in good faith are of the opinion that the direct or indirect ownership of Shares existing or resulting from such registration or exercise is or would be concentrated to an extent contrary to the requirements of the REIT Provisions of the Internal Revenue Code; provided, however, that failure to call for redemption of Shares or refusal to register the transfer of Shares or honor the exercise of convertible Securities or Warrants as herein provided shall not render the Trustees or any Shareholder liable to anyone for such failure. The Trustees may also at their option call for redemption that number of Shares as may at the time be owned, either of record or beneficially, individually or as a group, by any Person and an Affiliate of such Person in excess of 4.9% of the Shares of any class outstanding at that time. The specific Shares of a Shareholder to be redeemed shall be chosen in such manner as the Trustees may determine. A notice shall be given to each registered holder whose Shares are to be redeemed by mailing such notice by prepaid registered mail to the last known address of such Shareholder on the books of the - 20 - Trust (or to each such beneficial holder in care of the registered holder in whose name such Shares are registered) specifying the number of Shares to be redeemed, the price to be paid for such Shares, the specific Shares to be redeemed, if applicable, and the place at which the redemption price of such Shares is payable. The redemption price shall be equal to the fair market value of such Shares as reflected in the closing sales price on the day preceding such notice on the New York or American Stock Exchange if the Shares are listed thereon, or, if the Shares are not so listed, in the latest bid quotation for the Shares as of the date fixed for redemption or, if no quotations for the Shares are available, as determined in good faith by the Trustees. From and after the date fixed for redemption by the Trustees, the holders of any Shares so called for redemption shall cease to be entitled to dividends, voting rights and other benefits with respect to such Shares, excepting only the right to payment of the redemption price fixed as aforesaid. 6.15 Exculpation of Trustees and Officers. Non-voting Equity Securities. Effective February 27, 1991, the Trust shall not issue non-voting equity securities ARTICLE 7 Liability Of Trustees, Shareholders And Officers, And Other Matters 7.1 Exculpation of Trustees and Officers. No Trustee or officer of the Trust shall be liable to the Trust or to any Trustee for any act or omission of any other Trustee, Shareholder, officer or agent of the Trust or be held to any personal liability whatsoever in tort, contract or otherwise in connection with the affairs of the Trust except only that arising from his own willful misfeasance, bad faith, gross negligence or reckless disregard of duty. 7.2 Limitation of Liability of Shareholders, Trustees and Officers. The Trustees and officers of the Trust in incurring any debts, liabilities or obligations, or in taking or omitting any other actions for or in connection with the Trust are, and shall be deemed to be, acting as Trustees or officers of the Trust and not in their own individual capacities. Except to the extent provided in Section 7.1, no Trustee or officer of the Trust shall, nor shall any Shareholder, be liable for any debt, claim, demand, judgment, decree, liability or obligation of any kind of, against or with respect to the Trust, arising out of any action taken or omitted for or on behalf of the Trust and the Trust shall be solely liable therefor and resort shall be had solely to the Trust Estate for the payment or performance thereof. Each Shareholder shall be entitled to pro rata indemnity from the Trust Estate if, contrary to the provisions hereof, such Shareholder shall be held to any such personal liability. 7.3 Express Exculpatory Clauses in Instruments. As far as practicable, the Trustees shall cause any written instrument creating an obligation of the Trust to include a reference to this Declaration and to provide that neither the Shareholders nor the Trustees nor the officers of the Trust shall be liable thereunder and that the other parties to such instrument shall look solely to the Trust Estate for the payment of any claim thereunder or for the performance thereof; provided, however, that the omission of such provision from any such instrument shall not render the Shareholders or any - 21 - Trustee or officer of the Trust liable nor shall the Trustees or any officer of the Trust be liable to anyone for such omission. 7.4 Indemnification of Trustees and Officers. (1) Subject to the provisions of sub-section (3) of this Section, the Trust shall indemnify any Person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Trustee or officer of the Trust, or is or was serving at the request of the Trust as a director or officer of a corporation or trust in which it now owns or may hereafter own shares of capital stock or beneficial interest, or of which it now is or may hereafter be a creditor, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust; and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to be best interests of the Trust; and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (2) Subject to the provisions of sub-section (3) of this Section, the Trust shall indemnify any Person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that he is or was a Trustee or officer of the Trust, or is or was serving at the request of the Trust as a director or officer of a corporation or trust in which it now owns or may hereafter own shares of capital stock or beneficial interest, or of which it now is or may hereafter be a creditor, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with such action or suit, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and except that no indemnification shall be made in respect of any claim, issue, or matter as to which such Person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Trust, except to the extent (i) such indemnification is permitted by law, and (ii) the Trustees, independent legal counsel, or the Shareholders specifically determine in the manner set forth in sub-section (3) of this Section that such indemnification is proper in the circumstances, in each case notwithstanding such judgment. (3) Any indemnification under sub-sections (1) and (2) of this Section (unless ordered by a court) shall be made by the Trust only as authorized in the specific case upon a determination that indemnification of - 22 - the Person is proper in the circumstances because he has met the applicable standard of conduct set forth in said sub-sections (1) and (2). Such determination shall be made (i) by the Trustees by a majority vote of a quorum consisting of Trustees who were not parties to such action, suit, or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable and a quorum of disinterested Trustees so directs, by independent legal counsel (who may be of counsel to the Trust) in a written opinion, or (iii) by the Shareholders. (4) Expenses incurred in connection with a civil, criminal, administrative, or investigative action, suit, or proceeding, or threat thereof, may be paid by the Trust in advance of the final disposition of such action, suit, or proceeding as authorized in the manner provided in subsection (3) of this Section, upon receipt of an undertaking by or on behalf of the Person to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Trust as authorized in this Section. (5) The indemnification provided by this Section shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any other agreement, vote of Shareholders or disinterested Trustees, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a Person who has ceased to be a Trustee or officer and shall inure to the benefit of the heirs, executors, and administrators of such Person. (6) The Trust shall have the power by resolution of a majority of the Trustees to purchase and maintain insurance on behalf of any Person who is or was a Trustee or officer of the Trust, or is or was serving at the request of the Trust as a director or officer of a corporation or trust in which it now owns or may hereafter own shares of capital stock or beneficial interest, or of which it now is or may hereafter be a creditor, against any expenses incurred in any proceeding and any liabilities asserted against him in his capacity, whether or not the Trust would have the power to indemnify him against such liability under the provisions of this Section. (7) Nothing contained in this Section shall entitle a Trustee or officer of the Trust to indemnification for any liability to the Trust or its Shareholders arising by reason of such Person's willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. 7.5 Right of Trustees and Officers to Own Shares or Other Property and to Engage in Other Business. (1) Any Trustee or officer of the Trust may acquire, own, hold and dispose of Shares and other Securities of the Trust for his individual account, and may exercise all rights of a Shareholder to the same extent and in the same manner as if he were not a Trustee or officer. Any Trustee or officer of the Trust may have personal business interests and may engage in personal business activities, which interests and activities may include the - 23 - acquisition, syndication, holding, management, operation or disposition, for his own account or for the account of others, of interests in Mortgages, interests in Real Property, or interests in Persons engaged in the real estate business, provided the same do not (except as permitted in subsection 7.5(2)) directly compete with the actual business being conducted by the Trust. Subject to the provisions of Article 4, any Trustee or officer of the Trust may be interested as trustee, officer, director, stockholder, partner, member, adviser or employee, or otherwise have a direct or indirect interest in any Person who may be engaged to render advice or services to the Trust, and may receive compensation from such Person as well as compensation as Trustee, officer or otherwise hereunder and no such activities shall be deemed to conflict with his duties and powers as Trustee or officer. (2) Nothing in this Declaration shall be deemed: (i) to prohibit a Trustee or officer of the Trust who is also engaged in rendering professional services from rendering such professional services to any Person or from acting as trustee, director, member, adviser, officer or representative of any such Person to whom he renders or has rendered such services; or (ii) to prohibit a Trustee or officer of the Trust from having personal business interests or engaging in personal business activities which: (A) the Trustees (by vote or consent sufficient for such purpose without counting the vote of the interested Trustee) have decided should not be acquired or engaged in by the Trust; or (B) the Trust could not have acquired or engaged in without violating any provision of this Declaration or applicable law, even though any such Person, interests or activities are or could be in competition, in any way, with the Trust, or any such Person is in the same or similar business as that of the Trust. 7.6 Transactions Between the Trustees and the Trust. Notwithstanding any other provisions of this Declaration, the Trust shall not knowingly, directly or indirectly, (i) acquire any property from, or sell, lend, or otherwise transfer any property to, any Trustee, or (ii) make any such transaction with any Affiliate of any Trustee or any Person of which a Trustee owns more than 1% of the voting securities, unless such transaction has been approved by the affirmative vote of a majority of the Trustees who are not Affiliates of such Trustee or any Person of which a Trustee owns more than 1% of the voting securities, after full disclosure as to the interest of the Trustee or his Affiliate or such Person in such transaction, is on terms not less favorable to the Trust than those then prevailing for comparable transactions at arm's length, is fair and reasonable to the Shareholders, and relates to (i) acquisition by the Trust from Affiliates of a Trustee or the Adviser or any Person of which a Trustee - 24 - owns more than 1% of the voting securities, of participation in any Mortgage loans if such Affiliate or Person retains, on no more favorable terms than the Trust, at least a 25% participation therein, provided that no such participation need be retained by an Affiliate which is principally engaged in the mortgage banking business and has undertaken to provide the Trust with investment opportunities within the Trust's investment policies, (ii) acquisition or disposition of assets at the formation of the Trust or within 120 days thereafter or when purchased with the proceeds of subsequent offerings of securities of the Trust, (iii) repayment of Construction Loans at maturity or upon completion of the construction, or (iv) acquisition of properties by the Trust at prices not exceeding fair value as determined by independent appraisal. The Trustees are not restricted by this Section 7.6 from forming a corporation, partnership, trust or other business association owned by the Trustees or by their nominees for the purpose of holding title to property of the Trust or managing property of the Trust provided the Trustees' motive for the formation of such business association is not their own enrichment. 7.7 Restriction of Duties and Liabilities. To the extent that the nature of this Trust will permit, the duties and liabilities of Shareholders, Trustees and officers shall in no event be greater than the duties and liabilities of shareholders, directors and officers of a Maryland corporation. The Shareholders, Trustees and officers shall in no event have any greater duties or liabilities than those imposed by applicable law as shall be in effect from time to time. 7.8 Persons Dealing with Trustees or Officers. Any act of the Trustees or officers purporting to be done in their capacity as such shall, as to any Persons dealing with such Trustees or officers, be conclusively deemed to be within the purposes of this Trust and within the powers of the Trustees and officers. No Person dealing with the Trustees or any of them, or with the authorized officers, agents or representatives of the Trust, shall be bound to see to the application of any funds or property passing into their hands or control. The receipt of the Trustees or any of them, or of authorized officers, agents, or representatives of the Trust, for moneys or other consideration, shall be binding upon the Trust. 7.9 Reliance. The Trustees and officers may consult with counsel (which may be a firm in which one or more of the Trustees or officers is or are members) and the advice or opinion of such counsel shall be full and complete personal protection to all of the Trustees and officers in respect of any action taken or suffered by them in good faith and in reliance on or in accordance with such advice or opinion. In discharging their duties, Trustees and officers, when acting in good faith, may rely upon financial statements of the Trust represented to them to be correct by the President or the officer of the Trust having charge of its books of account, or stated in a written report by an independent certified public accountant fairly to present the financial position of the Trust. The Trustees may rely, and shall be personally protected in acting, upon any instrument or other document believed by them to be genuine. - 25 - ARTICLE 8 Duration, Amendment, Termination And Qualification Of Trust 8.1 Duration of Trust. Unless terminated as provided herein, the Trust created hereby shall have perpetual existence; provided, however, anything herein to the contrary notwithstanding, if at any time prior to the first date on which the Shares of the Trust shall be owned beneficially by more than 100 Persons all of the Trustees named in Section 9.9 shall have ceased to be living, the Trust created hereby shall terminate immediately upon the death of the last survivor of such Trustees. 8.2 Termination of Trust. (1) The Trust may be terminated by the vote or consent of the holders of two-thirds of the outstanding Shares entitled to vote thereon. Upon the termination of the Trust: (i) The Trust shall carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust Estate to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, Securities or other property of any kind, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business; provided that any sale, conveyance, assignment, exchange, transfer or other disposition of substantially all of the Trust Estate as a whole shall require approval of the principal terms of the transaction and the nature and amount of the consideration by vote or consent of the holders of a majority of the outstanding Shares entitled to vote thereon. (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements, as they deem necessary for their protection, the Trustees shall, subject to the provisions of any Preferred Shares which may then be outstanding, distribute the remaining Trust Estate, in cash or in kind or partly each, among the Shareholders pro rata according to the number of Common Shares held by each. (2) After termination of the Trust and distribution to the Shareholders as herein provided, the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further - 26 - liabilities and duties hereunder and the rights and interests of all Shareholders hereunder shall thereupon cease. 8.3 Amendment Procedure. (1) This Declaration may be amended by the vote or consent of the holders of a majority of the outstanding Shares entitled to vote thereon, except that Section 7.2 and the prohibition against assessment upon Shareholders in Section 6.1 shall be amended only by the vote or consent of the holders of all outstanding Shares entitled to vote thereon. The Trustees may also amend this Declaration without the vote or consent of Shareholders if they deem it necessary to conform this Declaration to the requirements of the REIT Provisions of the Internal Revenue Code or to other applicable federal laws or regulations, but the Trustees shall not be liable for failing to do so. (2) A certification in recordable form signed by a majority of the Trustees setting forth an amendment and reciting that it was duly adopted by the Shareholders or by the Trustees as aforesaid or a copy of the Declaration, as amended, in recordable form, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust. ARTICLE 9 Miscellaneous 9.1 Applicable Law. This Declaration and the rights of all parties and the construction and effect of every provision hereof shall be subject to and construed according to the statutes and laws of Maryland. 9.2 Index and Headings for Reference Only. The index and headings preceding the text, articles and sections hereof have been inserted for convenience and reference only and shall not be construed to affect the meaning, construction or effect of this Declaration. 9.3 Successors in Interest. This Declaration and the By-Laws shall be binding upon and inure to the benefit of the undersigned Trustees and their successors, assigns, heirs, distributees and legal representatives, and every Shareholder and his successors, assigns, heirs, distributees and legal representatives. 9.4 Counterparts. This Declaration may be simultaneously executed in several counterparts, each of which when so executed shall be deemed to be an original and such counterparts together shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart. 9.5 Provisions of the Trust in Conflict with Law or Regulations. (1) The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any one or more of - 27 - such provisions (the "Conflicting Provisions") would have the effect of preventing the Trust from qualifying as a "real estate investment trust" under the REIT Provisions of the Internal Revenue Code or are in conflict with other applicable federal laws and regulations, the Conflicting Provisions shall be deemed never to have constituted a part of the Declaration; provided, however, that such determination by the Trustees shall not affect or impair any of the remaining provisions of this Declaration or render invalid or improper any action taken or omitted (including but not limited to the election of Trustees) prior to such determination. A certification in recordable form signed by a majority of the Trustees setting forth any such determination and reciting that it was duly adopted by the Trustees, or a copy of this Declaration, with the Conflicting Provisions removed pursuant to such a determination, in recordable form, signed by a majority of the Trustees, shall be conclusive evidence of such determination when lodged in the records of the Trust. The Trustees shall not be liable for failure to make any determination under this Section 9.5(1). Nothing in this Section 9.5(1) shall in any way limit or affect the right of the Trustees to amend this Declaration provided in Section 8.3(1). (2) If any provision of this Declaration shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other provision of this Declaration, and this Declaration shall be carried out as if any such invalid or unenforceable provision were not contained herein. 9.6 Certifications. The following certifications shall be final and conclusive as to any persons dealing with the Trust: (1) A certification of a vacancy among the Trustees by reason of resignation, removal, increase in the number of Trustees, incapacity, death or otherwise, when made in writing by a majority of the remaining Trustees; (2) A certification as to the persons holding office as Trustees or officers at any particular time, when made in writing by the Secretary of the Trust or by any Trustee; (3) A certification that a copy of this Declaration or of the By-Laws is a true and correct copy thereof as then in force, when made in writing by the Secretary of the Trust or by any Trustee; (4) The certifications referred to in Sections 8.3(2) and 9.5(1) hereof; (5) A certification as to any action by Trustees, other than those referred to in paragraph (4) above, or the Shareholders when made in writing by the Secretary of the Trust or by any Trustee. - 28 - 9.7 Recording and Filing. A copy of this instrument and any amendments to the Declaration shall be filed with the Department of Assessments and Taxation of Maryland. This Declaration and any amendments may also be filed or recorded in such other places as the Trustees deem appropriate. 9.8 Resident Agent. The name and post office address of the resident agent of the Trust in the State of Maryland is The Corporation Trust, Incorporated, 32 South Street, Baltimore, Maryland 21202. Said resident is a citizen of the State of Maryland actually residing therein. The resident agent may be removed and a vacancy existing in such office for any reason may be filled by a majority of the Trustees. 9.9 Names and Addresses of Trustees and Officers. The names and addresses of the Trustees and officers of the Trust are as follows: - 29 - Name Address ---- ------- Trustees: G. Morris Dorrance, Jr. 1240 Arrowmink Road Villanova, PA 19085 Victor H. Schlesinger 250 S. 18th Street Philadelphia, PA 19103 Hayward L. Elliott 4200 Cedros Avenue Sherman Oaks, CA 91403 Jeffrey M. Bucher 1117 Chain Bridge Road McLean, VA 22101 James A. Gassaway The Strath Haven #924 Yale and Harvard Avenues Swarthmore, PA 19081 John E. Krout 241 Curwen Road Rosemont, PA 19010 Gerhard N. Rostvold #7 Wild Brook Irvine, CA 92714 Edward L. Stanley 6110 Ensley Drive Flourtown, PA 19301 C. W. Strong, Jr. 2222 Waverly Way East Seattle, WA 98112 Officers: Chairman: Edward L. Stanley 6110 Ensley Drive Flourtown, PA 19301 Vice Chairman: Victor H. Schlesinger 250 S. 18th Street Philadelphia, PA 19103 President: Hayward L. Elliott 4200 Cedros Avenue Sherman Oaks, CA 91403 Secretary: Joseph K. Gordon 441 Glyn Wynne Road Haverford, PA 19041 - 30 - Treasurer: James F. Lowery 203 Deepdale Road Strafford, PA 19087 Assistant Secretary: Claire M. Adams 830 1/2 North Gardner Street Los Angeles, CA 90046 - 31 - MORTGAGE AND REALTY TRUST ARTICLES OF AMENDMENT OF DECLARATION OF TRUST MORTGAGE AND REALTY TRUST, a Maryland real estate investment trust (hereinafter called the "Trust"), having its principal office in the State of Maryland in Baltimore City, Maryland, hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Declaration of Trust of the Trust is hereby amended as follows: (a) Subsection (3) of Section 1.04 is hereby amended to read as follows: (3) Appraisal. "Appraisal" shall mean a determination of the --------- market value, as of the date of such determination, of Real Property in its existing state or in the state to be created, taking into consideration existing or available financing where appropriate, (i) by any disinterested independent appraiser who in the judgment of the Trustees is properly qualified to make such a determination, or (ii) by an employee of the Adviser or of an Affiliate of the Adviser if such employee has no economic interest in such Real Property and (A) if such determination is relied upon by the permanent lender (other than the Trust) on the same property or (B) if such employee's appraisal are customarily accepted by institutional customers of the Adviser or any Affiliate of the Adviser which is engaged in the mortgage banking business or (C) if the property to be appraised is a one-to-four family residential property. For purposes of clause (i) above, no person who is a director, officer or employee of the Adviser or of any Affiliate of the Adviser shall be deemed to be a disinterested independent appraiser. (b) Subsection (5) of Section 1.04 (defining "Bank" to mean The Philadelphia National Bank) is hereby deleted; (c) Subsection (9) of Section 1.04 (defining "Colonial" to mean Colonial Mortgage Service Company collectively with its affiliate, Colonial Mortgage Service Co. of California) is hereby deleted; (d) The subsections of Section 1.04 are hereby renumbered to reflect the subsections deleted; (e) Subsection (11) of Section 3.02 is hereby amended to read as follows: 3.02 Specific Powers and Authorities. Subject only to the ------------------------------- express limitations contained in this Declaration or in the provisions of any series of Preferred Shares which may be outstanding, and in addition to any powers and authorities conferred by this Declaration or which the Trustees may have by virtue of any present or future statute or rule of law, the Trustees without any action or consent by the Shareholders shall have and may exercise at any time and from time to time the following powers and authorities which may or may not be exercised by them in their sole judgment and discretion and in such manner and upon such terms and conditions as they may from time to time deem proper: * * * (11) To deposit funds of the Trust in banks, trust companies, savings and loan associations and other depositories, whether or not such deposits will draw interest, the same to be subject to withdrawal on such terms and in such manner and by such Person or Persons (including any one or more Trustees, officers, agents or representatives) as the Trustees may determine. (f) Subsection (4) of Section 5.05 is hereby amended to read as follows: 5.05 Prohibited Investments and Activities. The Trustee shall ------------------------------------- not engage in any of the following investment practices or activities: - 2 - (4) Make warehousing loans secured by the pledge of First Mortgage loans to the Adviser or any Affiliate of the Adviser; (g) The fifth sentence of Section 6.01 is hereby amended to read as follows: The number of Common Shares which may be issued is limited to 20,000,000 and the number of Preferred Shares which may be issued is limited to 3,500,000. (h) Section 7.04 is hereby amended to read in its entirety as follows: 7.04 Indemnification of Trustees and Officers. The Trust shall ---------------------------------------- indemnify the Trustees and officers of the Trust to the full extent permitted by the general laws of the State of Maryland now or hereafter in force with respect to the indemnification of directors of a Maryland corporation, including the advance of expenses under the procedures provided by such laws. Any reference in such laws to directors shall be deemed to refer to Trustees of the Trust and to the corporation shall be deemed to refer to the Trust. The foregoing shall not limit the authority of the Trust to indemnify officers who are not Trustees and other employees and agents of the Trust consistent with law. SECOND: A majority of the Trustees of the Trust at a meeting duly convened and held on November 20, 1985, adopted resolutions declaring advisable the amendments to the Declaration of Trust as set forth in the preceding paragraph. THIRD: Notice setting forth the amendments to the Declaration of Trust and stating that the purpose of the meeting of shareholders of the Trust would be to take action thereon was given by the Trust in the manner required by law to each shareholder entitled to vote on the proposed amendments. - 3 - FOURTH: The amendments to the Declaration of Trust as set forth in the first paragraph hereof were approved by the shareholders of the Trust at a meeting held on February 19, 1986. Such approval was by affirmative vote of more than a majority of all votes entitled to be cast thereon in accordance with Section 8-202(c) of Title 8 of the Annotated Code of Maryland. FIFTH: The amendments of the Declaration of Trust as set forth in the first paragraph hereof have been duly advised by the Trustees and approved by the shareholders of the Trust. SIXTH: (a) As of immediately prior to the amendments to the Declaration of Trust, the total number of shares which the Trust is authorized to issue is 18,500,000, of which 15,000,000 are Common Shares ($1.00 par value) and 3,500,000 are Preferred Shares ($1.00 par value). (b) As amended, the total number of shares which the Trust is authorized to issue is 23,500,000, of which 20,000,000 are Common Shares ($1.00 par value) and 3,500,000 are Preferred Shares ($1.00 par value). (c) The aggregate par value of all shares having par value is 18,500,000 before the amendment and 23,500,000 as amended. - 4 - IN WITNESS WHEREOF, each of the Trustees of Mortgage and Realty Trust has caused these presents to be signed as of February 19, 1986. WITNESS: MORTGAGE AND REALTY TRUST /s/ Claire M. Adams By /s/ Jeffrey M. Bucher - ---------------------- -------------------------------- Secretary Jeffrey M. Bucher By /s/ Hayward L. Elliott -------------------------------- Hayward L. Elliott By /s/ James M. Gassaway -------------------------------- James M. Gassaway By /s/ Terrance G. Hodel -------------------------------- Terrance G. Hodel By /s/ John E. Krout -------------------------------- John E. Krout By /s/ Robert F. Murphy -------------------------------- Robert F. Murphy By /s/ Gerhard N. Rostvold -------------------------------- Gerhard N. Rostvold By /s/ Victor H. Schlesinger -------------------------------- Victor H. Schlesinger By /s/ Edward L. Stanley -------------------------------- Edward L. Stanley By /s/ C. W. Strong, Jr. -------------------------------- C. W. Strong, Jr. - 5 - THE UNDERSIGNED, being all of the Trustees of Mortgage and Realty Trust, who execute the foregoing Articles of Amendment of Declaration of Trust of which this certificate is made a part hereby acknowledge the foregoing Articles of Amendment of Declaration of Trust to be the act of said Trust and hereby certify that to the best of their knowledge, information and belief the matters and facts set forth therein are true in all material respects under the penalties of perjury. /s/ Jeffrey M. Bucher /s/ Robert F. Murphy - --------------------------- --------------------------- Jeffrey M. Bucher Robert F. Murphy /s/ Hayward L. Elliott /s/ Gerhard N. Rostvold - --------------------------- --------------------------- Hayward L. Elliott Gerhard N. Rostvold /s/ James M. Gassaway /s/ Victor H. Schlesinger - --------------------------- --------------------------- James M. Gassaway Victor H. Schlesinger /s/ Terrance G. Hodel /s/ Edward L. Stanley - --------------------------- --------------------------- Terrance G. Hodel Edward L. Stanley /s/ John E. Krout /s/ C. W. Strong, Jr. - --------------------------- --------------------------- John E. Krout C. W. Strong, Jr. - 6 - MORTGAGE AND REALTY TRUST AMENDMENT TO DECLARATION OF TRUST EFFECTIVE FEBRUARY 27, 1991 ----------------------------------- The Plan of Reorganization confirmed by the United States Bankruptcy Court for the Central District of California effective on February 27, 1991 amended the Declaration of Trust to prohibit the issuance of non-voting equity securities. - 7 - MORTGAGE AND REALTY TRUST ARTICLES OF AMENDMENT OF DECLARATION OF TRUST MORTGAGE AND REALTY TRUST, a Maryland real estate investment trust (hereinafter called the "Trust"), having its principal office in the State of Maryland in Baltimore City, Maryland, hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Section 7.01 of the Declaration of Trust of the Trust is hereby amended in its entirety to read as follows: 7.01 Exculpation of Trustees and Officers. ------------------------------------ (a) No Trustee or officer of the Trust shall be liable to the Trust or to any Trustee for any act or omission of any other Trustee, Shareholder, officer or agent of the Trust or be held to any person liability whatsoever in tort, contract or otherwise in connection with the affairs of the Trust except only that arising from his own willful misfeasance, bad faith, gross negligence or reckless disregard of duty. (b) To the maximum extent that the laws of the State of Maryland in effect from time to time permit limitation of the liability of Trustees and officers, no Trustee or officer of the Trust shall be liable to the Trust or its Shareholders for money damages. Neither the amendment nor repeal of this Section, nor the adoption or amendment of any other provision of the Declaration of Trust or By- laws inconsistent with this Section, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. (c) The provisions of subsection (a) shall be applicable to any act or omission by a Trustee or officer of the Trust occurring prior to the filing of Articles of Amendment adopting subsections (b) and (c) hereof with the State Department of Assessments and Taxation of Maryland (the "Effective Date"). For acts - 8 - or omissions occurring on and after the Effective Date, the provisions of subsection (b) shall also be applicable. SECOND: A majority of the Trustees of the Trust at a meeting duly convened and held on November 18, 1992, adopted resolutions declaring advisable the amendments to the Declaration of Trust set forth in the preceding paragraph. THIRD: Notice setting forth the amendment to the Declaration of Trust and stating that one purpose of the annual meeting of shareholders of the Trust would be to take action thereon was given by the Trust in the manner required by law to each shareholder entitled to vote on the proposed amendments. FOURTH: The amendment to the Declaration of Trust as set forth in the first paragraph was approved by the shareholders of the Trust at a meeting held on February 10, 1993. Such approval was by affirmative vote of more than a majority of all votes entitled to the cast thereon in accordance with Section 8- 202(c) of Title 8 of the Annotated Code of Maryland. FIFTH: The amendment to the Declaration of Trust as set forth in the first paragraph hereof has been duly advised by the Trustees and approved by the shareholders of the Trust. - 9 - IN WITNESS WHEREOF, each of the Trustees of Mortgage and Realty Trust has caused these presents to be signed as of February 10, 1993. WITNESS: MORTGAGE AND REALTY TRUST /s/ Claire M. Adams By /s/ Jeffrey M. Bucher - ------------------------- --------------------------- Secretary Jeffrey M. Bucher By /s/ Kent L. Colwell --------------------------- Kent L. Colwell By /s/ James M. Gassaway --------------------------- James M. Gassaway By /s/ John E. Krout --------------------------- John E. Krout By /s/ Gerhard N. Rostvold --------------------------- Gerhard N. Rostvold By /s/ Victor H. Schlesinger --------------------------- Victor H. Schlesinger By /s/ C. W. Strong, Jr. --------------------------- C. W. Strong, Jr. - 10 - THE UNDERSIGNED, being all of the Trustees of Mortgage and Realty Trust, who execute the foregoing Articles of Amendment of Declaration of Trust of which this certificate is made a part hereby acknowledge the foregoing Articles of Amendment of Declaration of Trust to be the act of said Trust and hereby certify that to the best of their knowledge, information and belief the matters and facts set forth therein are true in all material respects under the penalties of perjury. /s/ Jeffrey M. Bucher /s/ Kent L. Colwell - ------------------------- ------------------------- Jeffrey M. Bucher Kent L. Colwell /s/ James M. Gassaway /s/ John E. Krout - ------------------------- ------------------------- James M. Gassaway John E. Krout /s/ Gerhard N. Rostvold /s/ Victor H. Schlesinger - ------------------------- ------------------------- Gerhard N. Rostvold Victor H. Schlesinger /s/ C. W. Strong, Jr. - ------------------------- C. W. Strong, Jr. - 11 - MORTGAGE AND REALTY TRUST ARTICLES OF AMENDMENT OF DECLARATION OF TRUST MORTGAGE AND REALTY TRUST, a Maryland real estate investment trust (the "Trust"), having its principal office in the State of Maryland in Baltimore City, hereby certifies to the State Department of Assessments and Taxation of Maryland that: A. On April 12, 1990, the Trust filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court"). B. Pursuant to Section 1121 of the Bankruptcy Code, the Trust, the Statutory Committee of Unsecured Creditors and the Statutory Committee of Equity Security Holders filed with the Bankruptcy Court a Joint Plan of Reorganization Proposed By Debtor, Creditors' Committee and Equity Security Holders Committee, dated November 19, 1990 (the "Plan"). C. A hearing to consider the Plan was held before the Bankruptcy Court on February 21, 1991 and on February 27, 1991, the Bankruptcy Court entered an order (the "Order") confirming the Plan. D. Section 19.3 of the Plan requires that the Trust's Declaration of Trust be amended as of the Effective Date (as hereinafter defined) to prohibit the issuance of non-voting equity securities. The Plan defines "Effective Date" as the date of the Order unless a stay of the Order is in effect on such date, in which case the "Effective Date" means the first business day after such stay is vacated. On the date of the Order, there was no stay in effect and, therefore, the Effective Date is the date of the Order. E. In order to comply with the Order, the Trustees of the Trust submit these Articles of Amendment to amend Article VI of the Trust's Declaration of Trust by adding the following provision: "6.15. Non-voting Equity Securities. Effective February 27, --------------------------- 1991, the Trust shall not issue non-voting equity securities." - 12 - IN WITNESS WHEREOF, each of the Trustees of Mortgage and Realty Trust has caused these presents to be signed as of June 19, 1991. WITNESS: MORTGAGE AND REALTY TRUST /s/ Claire M. Adams By /s/ Jeffrey M. Bucher - ------------------------- --------------------------- Secretary Jeffrey M. Bucher By /s/ Kent L. Colwell --------------------------- Kent L. Colwell By /s/ Hayward L. Elliott --------------------------- Hayward L. Elliott By /s/ James M. Gassaway --------------------------- James M. Gassaway By /s/ John E. Krout --------------------------- John E. Krout By /s/ Gerhard N. Rostvold --------------------------- Gerhard N. Rostvold By /s/ Victor H. Schlesinger --------------------------- Victor H. Schlesinger By /s/ C. W. Strong, Jr. --------------------------- C. W. Strong, Jr. - 13 - THE UNDERSIGNED, being all of the Trustees of Mortgage and Realty Trust, who execute the foregoing Articles of Amendment of Declaration of Trust of which this certificate is made a part hereby acknowledge the foregoing Articles of Amendment of Declaration of Trust to be the act of said Trust and hereby certify that to the best of their knowledge, information and belief the matters and facts set forth therein are true in all material respects under the penalties of perjury. /s/ Jeffrey M. Bucher /s/ Kent L. Colwell - ------------------------- ------------------------- Jeffrey M. Bucher Kent L. Colwell /s/ Hayward L. Elliott /s/ James M. Gassaway - ------------------------- ------------------------- Hayward L. Elliott James M. Gassaway /s/ John E. Krout /s/ Gerhard N. Rostvold - ------------------------- ------------------------- John E. Krout Gerhard N. Rostvold /s/ Victor H. Schlesinger /s/ C. W. Strong, Jr. - ------------------------- ------------------------- Victor H. Schlesinger C. W. Strong, Jr. - 14 - EX-99.T3B 3 BY-LAWS OF MRT Exhibit T3B BY-LAWS OF MORTGAGE AND REALTY TRUST (A Maryland Real Estate Investment Trust) As Amended Through June 20, 1984 INDEX TO BY-LAWS ---------------- -------------------- Page ---- ARTICLE 1 Meetings of Shareholders...................................... 1 Section 1.1 Place of meeting........................................... 1 Section 1.2 Annual Meeting............................................. 1 Section 1.3 Special Meetings........................................... 1 Section 1.4 Notice of Meetings......................................... 2 Section 1.5 Quorum, Manner of Acting and Adjournment................... 2 Section 1.6 Organization............................................... 3 Section 1.7 Voting..................................................... 3 Section 1.8 Judges of Election......................................... 3 Section 1.9 Determination of Shareholders of Record.................... 4 ARTICLE 2 Trustees...................................................... 5 Section 2.1 Number and Term of Office.................................. 5 Section 2.2 Organization............................................... 5 Section 2.3 Place of Meeting........................................... 5 Section 2.4 Organization Meeting....................................... 5 Section 2.5 Regular Meetings........................................... 5 Section 2.6 Special Meetings........................................... 5 Section 2.7 Quorum, Manner of Acting, and Adjournment.................. 6 Section 2.8 Executive and Other Committees............................. 6 ARTICLE 3 Investment Policy............................................. 7 Section 3.1 General Investment Policy and Prohibited Investments and Activities................................. 7 Section 3.2 Additional Limitations..................................... 7 ARTICLE 4 Notice-Waivers-Meetings....................................... 8 Section 4.1 Notice, What Constitutes................................... 8 Section 4.2 Waivers of Notice.......................................... 8 Section 4.3 Conference Telephone Meetings.............................. 8 ARTICLE 5 Officers...................................................... 9 Section 5.1 Number, Qualifications and Designation..................... 9 Section 5.2 Election and Term of Office................................ 9 Section 5.3 Subordinate Officers, Committees and Agents................ 9 Section 5.4 Resignations............................................... 9 Section 5.5 Removal.................................................... 9 Section 5.6 Vacancies.................................................. 10 Section 5.7 Powers..................................................... 10 Section 5.8 The Chairman............................................... 10 Section 5.9 The President.............................................. 10 (i) Section 5.10 The Vice Presidents....................................... 10 Section 5.11 The Secretary............................................. 10 Section 5.12 The Treasurer............................................. 11 Section 5.13 Officers' Bonds........................................... 11 Section 5.14 Salaries.................................................. 11 ARTICLE 6 Share Certificates, Transfer, Etc............................. 11 Section 6.1 Issuance................................................... 11 Section 6.2 Transfer................................................... 12 Section 6.3 Share Certificates......................................... 12 Section 6.4 Lost, Destroyed or Mutilated Certificates.................. 12 ARTICLE 7 Miscellaneous................................................. 12 Section 7.1 Seal....................................................... 12 Section 7.2 Checks..................................................... 12 Section 7.3 Contracts.................................................. 12 Section 7.4 Deposits................................................... 13 Section 7.5 Amendment of By-Laws....................................... 13 (ii) BY-LAWS OF MORTGAGE AND REALTY TRUST (A Maryland Real Estate Investment Trust) As Amended Through June 20, 1984 ARTICLE 1 Meetings of Shareholders Section 1.1 Place of meeting. All meetings of the shareholders of the Trust shall be held at the registered office of the Trust unless another place is designated by the Trustees in the notice of such meeting. Section 1.2 Annual Meeting. The Trustees may fix the date and time of the annual meeting of the Shareholders, but if no such date and time if fixed by the Trustees the meeting for any calendar year commencing on and after January 1, 1973 shall be held on the third Wednesday of February in such year, if not a legal holiday under the laws of Maryland, and, if a legal holiday, then on the next succeeding business day, not a Saturday, at 10 o'clock A.M., and at said meeting the Shareholders then entitled to vote shall elect Trustees and shall transact such other business as may properly be brought before the meeting. If the annual meeting shall not have been called and held within six months after the end of the Trust's fiscal year, any Shareholder may call such meeting at any time thereafter. Section 1.3 Special Meetings. Special meetings of the Shareholders of the Trust for any purpose or purposes may be called at any time by the chairman, by the Trustees, or by Shareholders entitled to cast at least 25% of the votes which all shareholders are entitled to cast at the particular meeting. At any time, upon written request of any person or persons who have duly called a special meeting, which written request shall state the object of the meeting, it shall be the duty of the secretary to fix the date of the meeting to be held at such date and time as the secretary may fix, not less than five nor more than 60 days after the receipt of the request, and to give due notice thereof. If the secretary shall neglect or refuse to fix the date and time of such meeting and give notice thereof, the person or persons calling the meeting may do so. - 1 - Section 1.4 Notice of Meetings. Written notice of every meeting of the Shareholders, whether annual or special, shall be given to each Shareholder of record entitled to vote at the meeting, at least ten days prior to the day named for the meeting. Every notice of a special meeting shall state briefly the purpose or purposes thereof, and no business, other than that specified in such notice and matters germane thereto, shall be transacted at any special meeting without further notice to Shareholders not present in person or by proxy. Whenever the language of a proposed resolution is included in a written notice of a meeting of Shareholders the resolution may be adopted at such meeting with such clarifying or other amendments as do not enlarge its original purpose without further notice to Shareholders not present in person or by proxy. Section 1.5 Quorum, Manner of Acting and Adjournment. The presence in person or by proxy of Shareholders entitled to cast a majority of the votes which all Shareholders are entitled to cast on the particular matter shall constitute a quorum for the purpose of considering such matter. Treasury shares shall not be counted in determining the total number of outstanding shares for voting purposes at any given time. The Shareholders present in person or by proxy at a duly organized meeting can continue to do business until adjournment, notwithstanding withdrawal of enough Shareholders to leave less than a quorum. If a meeting cannot be organized because a quorum has not attended, the Shareholders entitled to vote and present in person or represented by proxy may adjourn the meeting to such time and place as they may determine. At any such adjourned meeting at which a quorum may be present such business may be transacted as might have been transacted at the meeting as originally called, No notice of any adjourned meeting of the Shareholders shall be required to be given, except by announcement at the meeting. In case of any meeting called for the election of Trustees, those who attend the second of such adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing Trustees. Any meeting at which Trustees are to be elected may be adjourned from day to day, or for such longer periods, as may be directed by Shareholders who are present in person or by proxy and who are entitled to cast at least a majority of the votes which all such Shareholders would be entitled to cast at an election of Trustees, until such Trustees are elected. Except as otherwise specified in the Declaration of Trust or these by-laws or provided by statute, the acts, at a duly organized meeting, of the Shareholders present, in person or by proxy, entitled to cast at least a majority of the votes which - 2 - all Shareholders present in person or by proxy are entitled to cast shall be the acts of the Shareholders. Section 1.6 Organization. At every meeting of the Shareholders, the presiding officers shall be one of the following persons present in the order stated: the chairman, the president, or a chairman appointed by the Trustees, or a chairman chosen by the Shareholders entitled to cast a majority of the votes which all Shareholders present in person or by proxy are entitled to cast. The Secretary, or, in his absence, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the chairman of the meeting, shall act as secretary. Section 1.7 Voting. Every Shareholder entitled to vote at a meeting of Shareholders or to express consent to action in writing without a meeting may authorize another person or persons to act for him by proxy. Every proxy shall be executed in writing by the Shareholder or by his duly authorized attorney in fact and filed with the secretary of the Trust. Each proxy solicited by the management of the Trust shall be effective only with respect to the meeting of Shareholders or adjournment thereof with respect to which the proxy is given or to the specific action for which consent in writing without a meeting relates. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the secretary of the Trust. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of such death or incapacity is given to the secretary of the Trust. A Shareholder shall not sell his vote or execute a proxy to any person for any sum of money or anything of value. A proxy coupled with an interest shall include an unrevoked proxy in favor of a creditor of a Shareholder and such a proxy shall be valid as long as the debt owed by him to the creditor remains unpaid. Section 1.8 Judges of Election. The vote upon any matter, including the election of Trustees, need not be by ballot. In advance of any meeting of Shareholders the Trustees may appoint judges of election, who need not be Shareholders, to act at such meeting or any adjournment thereof. If judges of election are not so appointed, the chairman of any such meeting may, and upon the demand of any Shareholder or his proxy at the meeting and before voting begins shall, appoint judges of election. The number of judges shall be either one or three, as determined by the Trustees or the chairman or, in the case of judges appointed upon demand of a Shareholder, by Shareholders present entitled to - 3 - cast a majority of the votes which all Shareholders present are entitled to cast thereon. No person who is a candidate for office shall act as a judge. In case any person appointed as judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Trustees in advance of the convening of the meeting, or at the meeting by the chairman of the meeting. If judges of election are appointed as aforesaid, they shall determine the number of Shares outstanding and the voting power of each, the Shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result, and do such acts as may be proper to conduct the election or vote with fairness to all Shareholders. If there be three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. On request of the chairman of the meeting or of any Shareholder or his proxy, the judges shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Section 1.9 Determination of Shareholders of Record. The Trustees may fix a date, not less than ten days nor more than 60 days preceding the date of any meeting of Shareholders, or the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of Shares will be made or go into effect, as a record date for the determination of the Shareholders entitled to notice of, or to vote at, any such meetings, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of Shares; and in such case, if otherwise entitled, all Shareholders of record on the date so fixed, and no others, shall be entitled to notice of, or to vote at, such meeting, or to receive payment of such dividend or distribution or to receive such allotment of rights, or exercise such rights, as the case may be, notwithstanding any transfer of any Shares on the books of the Trust after any such record date fixed as aforesaid. Unless a record date is fixed by the Trustees for such purpose, transferees of Shares which are transferred on the books within ten days next preceding the date of such meeting shall not be entitled to notice of, or to vote at, such meeting. - 4 - ARTICLE 2 Trustees Section 2.1 Number and Term of Office. There shall be not less than three nor more than twelve Trustees, as may be determined from time to time by resolution of the Trustees. Each Trustee shall serve until the next annual meeting of the Shareholders and until his successor shall have been elected and qualified, except in the event of his death, resignation or removal. Section 2.2 Organization. At every meeting of the Trustees, the presiding officer shall be one of the following persons present in the order stated: the chairman, the president, or a chairman chosen by a majority of the Trustees present. The secretary, or, in his absence, an assistant secretary, or in the absence of the secretary and the assistant secretaries, any person appointed by the chairman of the meeting, shall act as secretary. Section 2.3 Place of Meeting. The Trustees may hold their meetings at such place or places within Maryland, or elsewhere as the Trustees may from time to time appoint, or as may be designated in the notice calling the meeting. Section 2.4 Organization Meeting. Immediately after each annual election of Trustees or other meeting at which all the Trustees are elected, the newly elected Trustees shall meet for the purpose of organization, election of officers, and the transaction of other business, at the place where said election of Trustees was held. Notice of such meeting need not be given. Such organization meeting may be held at any other time or place which shall be specified in a notice given as hereinafter provided for special meetings of the Trustees. Section 2.5 Regular Meetings. Regular meetings of the Trustees shall be held at such time and place as shall be designated from time to time by resolution of the Trustees. If the date fixed for any such regular meeting by a legal holiday under the laws of the State where such meeting is to be held, then the same shall be held on the next succeeding business day, not a Saturday, or at such other time as may be determined by resolution of the Trustees. At such meetings, the Trustees shall transact such business as may properly be brought before the meeting. Notice of regular meetings need not be given. Section 2.6 Special Meetings. Special meetings of the Trustees shall be held whenever called by the chairman, the president or by two or more of the Trustees. Notice of each such - 5 - meeting shall be given to each Trustee by telephone or in writing at least 24 hours (in the case of notice by telephone) or 48 hours (in the case of notice by telegram) or five days (in the case of notice by mail) before the time at which the meeting is to be held. Every such notice shall state the time and place of the meeting. Notice of any special meeting of the Trustees during any emergency resulting from warlike damage or an attack on the United States or any nuclear or atomic disaster shall be given only to such of the Trustees as it may be feasible to reach at the time and by such means as may be feasible at the time, including publication or radio. Section 2.7 Quorum, Manner of Acting, and Adjournment. A majority of the Trustees in office shall be present at each meeting in order to constitute a quorum for the transaction of business. Except as otherwise specified in the Declaration of Trust or these by-laws or provided by statute, the acts of a majority of the Trustees present at a meeting at which a quorum is present shall be the acts of the Trustees. In the absence of a quorum, a majority of the Trustees present may adjourn the meeting from time to time until a quorum be present, and no notice of any adjourned meeting need be given, other than by announcement at the meeting. The Trustees shall act only as a board and the individual Trustees shall have no power as such, provided, however, that any action which may be taken at a meeting of the Trustees may be taken without a meeting if a consent or consents in writing setting forth the action so taken shall be signed by all of the Trustees and shall be filed with the secretary of the Trust. To the extent required to constitute a quorum at any meeting of the Trustees during any emergency resulting from warlike damage or an attack on the United States or any nuclear or atomic disaster the officers of the Trust who are present shall be deemed in order of rank and within the same rank in order of seniority, Trustees for such meeting. Section 2.8 Executive and Other Committees. The Trustees, by resolution adopted by a majority of the whole board, shall designate an audit and a nominating committee and may designate an Executive Committee and one or more other committees, each committee to consist of two or more Trustees. The Trustees may designate one or more Trustees as alternate members of any committee, who may replace any absent or disqualified member of any meeting of the committee. In the absence or disqualification of a member, and the alternate or alternates, if any, designated for such member, of any committee the member or members thereof present at any meeting and not disqualified from voting, whether - 6 - or not he or they constitute a quorum, may unanimously appoint another Trustee to act at the meeting in the place of any such absent or disqualified member. Except as otherwise provided in this section, the Executive Committee shall have and exercise all of the authority of the Trustees in the management of the business and affairs of the Trust and any other committee shall have and exercise the authority of the Trustees to the extent provided in the resolution designating the committee. No such committee of the Trustees shall have the authority of the Trustees in reference to: (1) Amending the by-laws of the Trust; (2) Declaring any dividend; (3) Issuing any authorized but unissued Shares; or (4) Recommending to the Shareholders any plan for the sale, lease or exchange of all or substantially all of the property and assets of the Trust or any amendment or termination of the Declaration of Trust. A majority of the Trustees in office designated to a committee, or Trustees designated to replace them as provided in this section, shall be present at each meeting to constitute a quorum for the transaction of business and the acts of a majority of the Trustees in office designated to a committee or their replacements shall be the acts of the committee, Each committee shall keep regular minutes of its proceedings and report such proceedings periodically to the Trustees, Sections 2.5, 2.6 and 2.7 shall be applicable to committees of the Trustees. ARTICLE 3 Investment Policy Section 3.1 General Investment Policy and Prohibited Investments and Activities. The general investment policy of Trust, including certain prohibited investments and activities, shall be as Set forth in Article V of the Declaration of Trust. Section 3.2 Additional Limitations. In carrying out such general policy, the Trustees shall adopt and observe such - 7 - additional limitations as they in their judgment deem necessary or appropriate for the prudent investment of the Trust's assets. ARTICLE 4 Notice-Waivers-Meetings Section 4.1 Notice, What Constitutes. Whenever written notice is required to be given to any person under the provisions of the Declaration of Trust, these by-laws, or otherwise, it may be given to such person, either personally or by sending a copy thereof through the mail, or by telegraph, charges prepaid, to his address appearing on the books of the Trust, or supplied by him to the Trust for the purpose of notice. If the notice is sent by mail or by telegraph, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office for transmission to such person. A notice of a meeting shall specify the place, day and hour of the meeting. Section 4.2 Waivers of Notice. Whenever any written notice is required to be given under the provisions of the Declaration of Trust, these by-laws, or otherwise, 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. Except in the case of a special meeting of Shareholders, neither the business to be transacted at, nor the purpose of, the meeting need be specified in the waiver of notice of such meeting. Attendance of a person, either in person or by proxy, at any meeting, shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. Section 4.3 Conference Telephone Meetings. One or more Trustees may participate in a meeting of the Trustees or of a committee of the Trustees by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at such meeting. - 8 - ARTICLE 5 Officers Section 5.1 Number, Qualifications and Designation. The officers of the Trust shall be a chairman, a president, a secretary, a treasurer and such other officers as may be elected in accordance with the provisions of Section 5.2 of this Article. One person may hold more than one office. Officers may but need not be Trustees or Shareholders. The president and secretary shall be natural persons of full age; the treasurer, however may be a corporation, but if a natural person shall be of full age. Section 5.2 Election and Term of Office. The officers of the Trust except those elected by delegated authority pursuant to Section 5.3 of this Article, shall be elected annually by the Trustees, and each such officer shall hold his office until the next annual organization meeting of Trustees and until his successor shall have been duly chosen and qualified, or until his death, resignation, or removal. Section 5.3 Subordinate Officers, Committees and Agents. The Trustees may from time to time elect such other officers and appoint such committees, employees or other agents as the business of the Trust may require, including one or more vice presidents, one or more assistant secretaries, and one or more assistant treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these by-laws, or as the Trustees may from time to time determine. The Trustees may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof, and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents. Section 5.4 Resignations. Any officer or agent may resign at any time by giving written notice to the Trustees, or to the president or the secretary of the Trust. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5.5 Removal. Any officer, committee, employee or other agent of the Trust may be removed, either for or without cause, by the Trustees or other authority which elected or appointed such officer, committee or other agent whenever in the judgment of such authority the best interests of the Trust will be served thereby. - 9 - Section 5.6 Vacancies. A vacancy in any office because of death, resignation, removal, disqualifications or, any other cause, shall be filled by the Trustees or by the officer or committee to which the power to fill such office has been delegated pursuant to Section 5.3 of this Article, as the case may be, and if the office is one for which these by-laws prescribe a term, shall be filled for the unexpired portion of the term. Section 5.7 Powers. The Trustees shall by resolution designate and appoint one of the officers of the Trust to be the chief executive officer of the Trust and may by resolution designate and appoint the same or another officer of the Trust to be the chief operating officer of the Trust. The chief executive officer of the Trust shall supervise the execution of the policies of the Trust as approved by the Board of Trustees and shall have general supervision over the business of the Trust, subject, however, to the control of the Trustees. The chief operating officer of the Trust, if any is appointed, shall have general supervision over the operations of the Trust, subject, however, to the control of the chief executive officer and the Trustees. All officers of the Trust as between themselves and the Trust, shall, respectively, have such authority and perform such duties in the management of the property and affairs of the Trust as may be determined by resolution of the Trustees, or in the absence of controlling provisions in a resolution of the Trustees, as may be provided in these by-laws. Section 5.8 The Chairman. The chairman shall preside at all meetings of the shareholders and of the Trustees and shall perform such other duties as may from time to time be requested by him by the Trustees. Section 5.9 The President. The president shall perform the duties of the chairman in his absence and shall perform such other duties as may from time to time be assigned to him by the Trustees. Section 5.10 The Vice Presidents. The vice presidents shall perform the duties of the president in his absence and such other duties as may from time to time be assigned to them by the Trustees or by the president. Section 5.11 The Secretary. The secretary or an assistant secretary shall attend all meetings of the Shareholders and of the Trustees and shall record all the votes of the Shareholders and of the Trustees and the minutes of the meetings of the Shareholders and of the Trustees and of committees of the Trustees in a book or books to be kept for that purpose; shall see that notices are given and records and reports properly kept - 10 - and filed by the Trust as required by law; shall be the custodian of the seal of the Trust and see that it is affixed to all documents to be executed on behalf of the Trust under its seal; and, in general, shall perform all duties incident to the office of secretary, and such other duties as may from time to time be assigned to him by the Trustees or the president. Section 5.12 The Treasurer. The treasurer or an assistant treasurer shall have or provide for the custody of the funds or other property of the Trust and shall keep a separate book account of the same to his credit as treasurer; shall collect and receive or provide for the collection and receipt of moneys earned by or in any manner due to or received by the Trust; shall deposit all funds in his custody as a treasurer in such banks or other places of deposit as the Trustees may from time to time designate; shall, whenever so required by the Trustees, render an account showing his transactions as treasurer, and the financial condition of the Trust; and, in general, shall discharge such other duties as may from time to time be assigned to him by the Trustees or the president. Section 5.13 Officers' Bonds. Any officer shall give a bond for the faithful discharge of his duties in such sum, if any, and with such surety or sureties as the Trustees shall require. Section 5.14 Salaries. The salaries of the officers elected by the Trustees shall be fixed from time to time by the Trustees or by such officer as may be designated by resolution of the Trustees. The salaries or other compensation of any other officers, employees and other agents shall be fixed from time to time by the officer or committee to which the power to elect such officers or to retain or appoint such employees or other agents has been delegated pursuant to Section 5.3 of this Article. No officer shall be prevented from receiving such salary or other compensation by reason of the fact that he is also a Trustee. ARTICLE 6 Share Certificates, Transfer, Etc. Section 6.1 Issuance. The Share certificates of the Trust shall be numbered and registered in the share ledger and transfer books of the Trust as they are issued. They shall be signed by the chairman, president or a vice president and by the secretary or an assistant secretary or the treasurer or an assistant treasurer, and shall bear the Trust's seal, which may be a facsimile, engraved or printed, but where such certificate is signed by a transfer agent or a registrar the signature of any - 11 - Trust officer upon such certificate may be a facsimile, engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon any Share certificate shall have ceased to be such officer because of death, resignation or otherwise, before the certificate is issued, it may be issued with the same effect as if the officer had not ceased to be such at the date of its issue. Section 6.2 Transfer. Transfers of Shares shall be made on the books of the Trust upon surrender of the certificate therefor, endorsed by the person named in the certificate or by attorney lawfully constituted in writing, No transfer shall be made inconsistent with the provisions of the Uniform commercial code and its amendments and supplements. Section 6.3 Share Certificates. Certificates for Shares of the Trust shall be in such form as provided by the Trustees. The share record books and the blank share certificate books shall be kept by the secretary or by any agency designated by the Trustees for that purpose. Every certificate exchanged or returned to the Trust shall be marked "Cancelled", with the date of cancellation. Section 6.4 Lost, Destroyed or Mutilated Certificates. The holder of any Shares of the Trust shall immediately notify the Trustees of any loss, destruction or mutilation of the certificate therefor, and the Trustees may, in their discretion, cause a new certificate or certificates to be issued to him, in case of mutilation of the certificate, upon the surrender of the mutilated certificate, or, in case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction, and, if the Trustees shall so determine, the deposit of a bond in such form and in such sum, and with such surety or sureties, as it may direct. ARTICLE 7 Miscellaneous Section 7.1 Seal. The Trust shall have a seal in the form of a circle containing the name of the Trust, the year of organization and such other details as may be approved by the Trustees. Section 7.2 Checks. All checks, notes, bills of exchange or other orders in writing shall be signed by such person or persons as the Trustees may from time to time designate. Section 7.3 Contracts. The chairman or the president shall sign, execute and acknowledge in the name of the Trust, deeds, - 12 - mortgages, bonds, contracts or other instruments, authorized by the Trustees, except that the Trustees may authorize any other officer or officers, agent or agents, to enter into any contract or to executed or deliver any instrument on behalf of the Trust, and such authority may be general or confined to specific instances. Section 7.4 Deposits. All funds of the Trust shall be deposited from time to time to the credit of the Trust in such banks, trust companies, or other depositories as the Trustees may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees as the Trustees shall from time to time determine. Section 7.5 Amendment of By-Laws. These by-laws may be amended or repealed, or new by-laws may be adopted by vote of a majority of the Trustees in office at any regular or special meeting of Trustees. It shall not be necessary to set forth such proposed amendments, repeal or new by-laws, or a summary thereof, in any notice of such meeting, whether regular or special. - 13 - EX-99.T3C 4 AMENDED & RESTATED INDENTURE EXHIBIT T3C ================================================================================ MORTGAGE AND REALTY TRUST $110,000,000 11-1/8% SENIOR SECURED NOTES DUE 2002 _________________________________ ___________ AMENDED AND RESTATED INDENTURE Dated as of ________ __, 1995 ___________ ___________ WILMINGTON TRUST COMPANY ___________ as Trustee ================================================================================ CROSS-REFERENCE TABLE*
Trust Indenture Act Section Indenture Section 310(a)(1)...............................................................7.10 (a)(2)...............................................................7.10 (a)(3)...............................................................N.A. (a)(4)...............................................................N.A. (a)(5)...............................................................7.10 (b)..................................................................7.10 (c)..................................................................N.A. 311(a)..................................................................7.11 (b)..................................................................7.11 (c)..................................................................N.A. 312(a)..................................................................2.05 (b).................................................................12.03 (c).................................................................12.03 313(a)..................................................................7.06 (b)(1).........................................................7.06,10.03 (b)(2)...............................................................7.06 (c)............................................................7.06,12.02 (d)..................................................................7.06 314(a)............................................................4.09,12.02 (b)...........................................................10.02,12.02 (c)(1)..............................................................12.04 (c)(2)..............................................................12.04 (c)(3)...............................................................N.A. (d)...........................................................10.03,10.04 (e).................................................................12.05 (f)..................................................................N.A. 315(a)..................................................................7.01 (b)............................................................7.05,12.02 (c)..................................................................7.01 (d)..................................................................7.01 (e)..................................................................6.11 316(a)(last sentence)...................................................2.09 (a)(1)(A)............................................................6.05 (a)(1)(B)............................................................6.04
Trust Indenture Act Section Indenture Section (a)(2)...............................................................N.A. (b)..................................................................6.07 (c)..................................................................2.13 317(a)(1)...............................................................6.08 (a)(2)...............................................................6.09 (b)..................................................................2.04 318(a).................................................................12.01 (b)..................................................................N.A. (c).................................................................11.01
N.A. means not applicable. * This Cross-Reference Table is not part of the Indenture. TABLE OF CONTENTS
Page ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE............... 1 SECTION 1.01. DEFINITIONS........................................... 1 SECTION 1.02. OTHER DEFINITIONS..................................... 14 SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT................................ 14 SECTION 1.04. RULES OF CONSTRUCTION................................. 15 ARTICLE 2 THE NOTES.............................. 15 SECTION 2.01. FORM AND DATING....................................... 15 SECTION 2.02. EXECUTION AND AUTHENTICATION.......................... 15 SECTION 2.03. REGISTRAR AND PAYING AGENT............................ 16 SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST................... 17 SECTION 2.05. LISTS OF HOLDERS OF THE NOTES......................... 17 SECTION 2.06. TRANSFER AND EXCHANGE................................. 17 SECTION 2.07. REPLACEMENT NOTES..................................... 18 SECTION 2.08. OUTSTANDING NOTES..................................... 19 SECTION 2.09. TREASURY NOTES........................................ 19 SECTION 2.10. TEMPORARY NOTES....................................... 20 SECTION 2.11. CANCELLATION.......................................... 20 SECTION 2.12. DEFAULTED INTEREST.................................... 20 SECTION 2.13. RECORD DATE........................................... 21 SECTION 2.14. CUSIP NUMBER.......................................... 21 ARTICLE 3 REDEMPTION.............................. 21 SECTION 3.01. NOTICES TO TRUSTEE.................................... 21 SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED..................... 21 SECTION 3.03. NOTICE OF REDEMPTION.................................. 22 SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION........................ 23 SECTION 3.05. DEPOSIT OF REDEMPTION PRICE........................... 23 SECTION 3.06. NOTES REDEEMED IN PART................................ 24 SECTION 3.07. OPTIONAL REDEMPTION................................... 24
Page ---- SECTION 3.08. MANDATORY REDEMPTION.................................. 24 SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF ASSET SALE PROCEEDS.............................. 24 ARTICLE 4 COVENANTS.............................. 27 SECTION 4.01. PAYMENT OF PRINCIPAL AND INTEREST..................... 27 SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY....................... 27 SECTION 4.03. OFFICERS' AND ACCOUNTANTS' CERTIFICATES AS TO COMPLIANCE.................................... 28 SECTION 4.04. CONDUCT OF BUSINESS................................... 28 SECTION 4.05. PAYMENT OF TAXES, ETC................................. 29 SECTION 4.06. MAINTENANCE OF INSURANCE.............................. 29 SECTION 4.07. PRESERVATION OF EXISTENCE, ETC........................ 29 SECTION 4.08. MAINTENANCE OF PROPERTIES, ETC........................ 30 SECTION 4.09. FINANCIAL STATEMENTS.................................. 30 SECTION 4.10. NEW REAL ESTATE, ETC.................................. 32 SECTION 4.11. DEPOSIT OF ASSET SALE PROCEEDS........................ 32 SECTION 4.12. LIMITATION ON INVESTMENTS............................. 33 SECTION 4.13. LIENS, ETC............................................ 33 SECTION 4.14. INDEBTEDNESS.......................................... 35 SECTION 4.15. LEASE OBLIGATIONS..................................... 36 SECTION 4.16. RESTRICTED PAYMENTS................................... 36 SECTION 4.17. TRANSACTIONS WITH AFFILIATES.......................... 37 SECTION 4.18. NEW SUBSIDIARIES...................................... 37 SECTION 4.19. OFFER TO REPURCHASE UPON CHANGE OF CONTROL.................................. 38 ARTICLE 5 SUCCESSORS.............................. 39 SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS.............. 39 SECTION 5.02. SUCCESSOR ENTITY SUBSTITUTED.......................... 40 ARTICLE 6
Page ---- DEFAULTS AND REMEDIES........................ 41 SECTION 6.01. EVENTS OF DEFAULT..................................... 41 SECTION 6.02. ACCELERATION.......................................... 42 SECTION 6.03. OTHER REMEDIES........................................ 43 SECTION 6.04. WAIVER OF PAST DEFAULTS............................... 43 SECTION 6.05. DIRECTION BY REQUIRED HOLDERS......................... 44 SECTION 6.06. LIMITATION ON SUITS................................... 44 SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT........................... 45 SECTION 6.08. COLLECTION SUIT....................................... 45 SECTION 6.09. PROOFS OF CLAIM....................................... 45 SECTION 6.10. PRIORITIES............................................ 46 SECTION 6.11. UNDERTAKING FOR COSTS................................. 46 ARTICLE 7 TRUSTEE AND COLLATERAL AGENT..................... 47 SECTION 7.01. DUTIES OF TRUSTEE..................................... 47 SECTION 7.02. RIGHTS OF TRUSTEE..................................... 49 SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE AND COLLATERAL AGENT............................... 50 SECTION 7.04. DISCLAIMER............................................ 50 SECTION 7.05. NOTICE OF DEFAULTS.................................... 50 SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES............ 51 SECTION 7.07. COMPENSATION AND INDEMNITY............................ 51 SECTION 7.08. REPLACEMENT OF TRUSTEE................................ 52 SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC...................... 54 SECTION 7.10. ELIGIBILITY; DISQUALIFICATION......................... 54 SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST ISSUER.............................. 54 ARTICLE 8 DEFEASANCE.............................. 54
Page ---- SECTION 8.01. OPTION TO EFFECT DEFEASANCE........................... 54 SECTION 8.02. DEFEASANCE AND DISCHARGE.............................. 55 SECTION 8.03. CONDITIONS TO DEFEASANCE.............................. 55 SECTION 8.04. DEPOSITED MONEY AND GOVERNMENTAL SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS..................... 57 SECTION 8.05. REPAYMENT TO ISSUER................................... 57 SECTION 8.06. REINSTATEMENT......................................... 58 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER................... 58 SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES................... 58 SECTION 8.02. WITH CONSENT OF HOLDERS OF NOTES...................... 59 SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT................... 61 SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS..................... 61 SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES...................... 61 SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC....................... 62 ARTICLE 10 COLLATERAL AND SECURITY....................... 62 SECTION 10.01. COLLATERAL DOCUMENTS................................. 62 SECTION 10.02. RECORDING AND OPINIONS............................... 63 SECTION 10.03. RELEASE OF COLLATERAL................................ 64 SECTION 10.04. CERTIFICATES OF THE ISSUER........................... 65 SECTION 10.06. AUTHORIZATION OF RECEIPT OF FUNDS BY THE TRUSTEE UNDER THE COLLATERAL DOCUMENTS.............. 66 SECTION 10.07. TERMINATION OF SECURITY INTEREST..................... 66 SECTION 10.08. COLLATERAL AGENT'S DUTIES............................ 66 ARTICLE 11 GUARANTEE OF NOTES......................... 66 SECTION 11.01. UNCONDITIONAL GUARANTEE.............................. 66 SECTION 11.02. CONTRIBUTION......................................... 67
Page ---- SECTION 11.03. "TRUSTEE" TO INCLUDE PAYING AGENT.................... 67 SECTION 11.04. RELEASE OF A GUARANTOR............................... 68 SECTION 11.05. EXECUTION OF GUARANTEES.............................. 68 ARTICLE 12 MISCELLANEOUS............................. 69 SECTION 12.01. TRUST INDENTURE ACT CONTROLS......................... 69 SECTION 12.02. NOTICES.............................................. 69 SECTION 12.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES........................ 70 SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITION PRECEDENT.... 70 SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION......................................... 71 SECTION 12.06. RULES BY TRUSTEE AND AGENTS.......................... 71 SECTION 12.07. NO PERSONAL LIABILITY OF TRUSTEES, OFFICERS, EMPLOYEES AND EQUITYHOLDERS.............. 72 SECTION 12.08. GOVERNING LAW........................................ 72 SECTION 12.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS................................ 72 SECTION 12.10. SUCCESSORS........................................... 72 SECTION 12.11. SEVERABILITY......................................... 73 SECTION 12.12. COUNTERPART ORIGINALS................................ 73 SECTION 12.13. TABLE OF CONTENTS, HEADINGS, ETC..................... 73 SECTION 12.14. AMENDMENT AND RESTATEMENT............................ 73 SECTION 12.15. SATISFACTION AND DISCHARGE........................... 73
EXHIBITS Exhibit A Form of Note Exhibit B Form of Assignment of Lease Exhibit C Form of Collateral Assignment of Lease Exhibit C-1 Form of Collateral Assignment of Mortgage Exhibit D Form of Mortgage Exhibit D-1 Form of Amendment to Mortgage Exhibit E Form of Pledge Agreement Exhibit F Form of Amended and Restated Collateral and Security Agreement SCHEDULES Schedule 1 Real Estate AMENDED AND RESTATED INDENTURE dated as of ________ __, 1995 between Mortgage and Realty Trust, a real estate investment trust formed under the laws of Maryland (the "Issuer"), and Wilmington Trust Company, as trustee (the "Trustee"). The Issuer and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Issuer's 11- 1/8% Senior Secured Notes due 2002 (the "Notes"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. ----------- "Adjusted Net Assets" of a Guarantor at the date of any claim for ------------------- contribution pursuant to Section 11.02 hereof means the lesser of the amount by which (x) the fair value of the property of such Guarantor exceeds the total amount of liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities under the related Guarantee, of such Guarantor at such date and (y) the present fair salable value of the assets of such Guarantor at such date exceeds the amount that will be required to pay the probable liability of such Guarantor on its debts (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date and after giving effect to any collection from any other Subsidiary of the Issuer in respect of the obligations of such Subsidiary under the related Guarantee), excluding debt in respect of the related Guarantee, as they become absolute and matured. "Affiliate" of any specified Person means any other Person directly or --------- indirectly controlling or controlled by or under direct or indirect common control with such specified Person and includes each officer, director, trustee or general partner of such Person, and each owner of 5% or more of any class of voting stock or interests of such Person. For purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent" means any Registrar, Paying Agent or co-registrar. ----- "Asset Sale" means any sale or other disposition, or series of sales ---------- or other dispositions, made on or after the Effective Date by the Issuer or any Subsidiary to any Person of any Collateral. For the purposes hereof, any prepayment or payment at maturity of an Underlying Promissory Note shall be deemed to be an "Asset Sale." "Asset Sale Account" means that trust account (account no. ________) ------------------ maintained at ________ in the name of the Collateral Agent, under the sole dominion and control of the Collateral Agent, and administered pursuant to the Collateral Documents. "Asset Sale Proceeds" means payments in Cash or other property ------------------- (including securities) received by the Issuer or any Subsidiary (including, without limitation, any Cash payments received by way of deferred payment of principal pursuant a note or receivable or otherwise, but only as and when received) from any Asset Sale (after repayment of any Indebtedness required to be paid by reason of such Asset Sale), in each case net of the amount of (a) reasonable brokers' and advisors' fees and commissions actually paid other than to an Affiliate of the Issuer, (b) all foreign, federal, state and local taxes actually payable by the Issuer as a direct consequence of such Asset Sale, (c) the reasonable fees and expenses attributable to such Asset Sale, to the extent not included in clause (a) above, except to the extent paid to any Affiliate of the Issuer, and (d) any proportionate share of the proceeds required to be paid to any Person owning a beneficial interest in the property or assets sold pursuant to such Asset Sale. "Assignments of Leases" means each Assignment of Lease, in the form --------------------- attached hereto as Exhibit B made by the Issuer or a Subsidiary, executed heretofore, concurrently herewith or hereafter in favor of the Collateral Agent on behalf of the Trustee, the Collateral Agent and the Holders, assigning a Lease, as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced in accordance with the terms thereof. "Available Cash" means, as at any date of determination, all Cash and -------------- Cash Equivalents held by the Issuer, any Subsidiary or the Trustee, including, without limitation, Cash and Cash Equivalents held in the Asset Sale Account. "Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as amended, --------------- and as codified in title 11 of the United States Code. "Bankruptcy Law" means the Bankruptcy Code or any similar federal or -------------- state law for the relief of debtors. "Business Day" means any day other than a Legal Holiday. ------------ "Capital Expenditures" means, for any Person for any period, the -------------------- aggregate of all expenditures by such Person and its consolidated Subsidiaries, except interest capitalized during construction, during such period for property, plant or equipment, including, without limitation, renewals, improvements, replacements and capitalized repairs, that would be reflected as additions to property, plant or equipment on a consolidated balance sheet of such Person and its Subsidiaries prepared in accordance with GAAP and includes without limitation payments, other than those attributable to interest, on capitalized leases and other Indebtedness incurred to finance such property, plant and equipment. For the purpose of this definition, the purchase price of equipment which is acquired simultaneously with the trade-in of existing equipment owned by such Person or any of its Subsidiaries or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount of such purchase price less the credit granted by the seller of such equipment being traded in at such time or the amount of such proceeds, as the case may be. "Cash" means legal tender accepted in the United States of America for ---- the payment of public and private debts currently United States Dollars. "Cash Equivalents" means, collectively, (a) securities with maturities ---------------- of 90 days or less from the date of acquisition issued or fully guaranteed or insured by the United States government or any agency thereof, (b) certificates of deposit, overnight bank deposits and banker acceptances of any commercial bank (including Wilmington Trust Company) having combined capital and surplus of at least $200,000,000, a short term deposit rating of A1/P1 or better and organized under the laws of the United States of America having maturities of 90 days or less from the date of acquisition and (c) commercial paper with maturities of 90 days or less having a rating of A1/P1 or better. "Change of Control" means (i) the sale of all or substantially all of ----------------- the Issuer's and the Subsidiaries' assets (taken as a whole), in one or in a series of transactions, to any "person" or "group" (as such terms are used in or defined in Section 13(d)(3) of the Exchange Act), (ii) an event or series of events (whether a stock purchase, merger, consolidation or other business combination or otherwise) by which any Person or group (other than the Holders existing on the date hereof, including any Person becoming a Holder prior to the date hereof and who is a Holder on the date hereof) is or becomes the "Beneficial Owner" (as defined under Rule 13d-3 under the Exchange Act) directly or indirectly of more than 50% of the combined voting power of the then outstanding securities of the Issuer ordinarily (and apart from rights accruing after the happening of a contingency) having the right to vote in the election of trustees or (iii) after the Issue Date, the replacement of a majority of the Board of Trustees of the Issuer over a two-year period from the trustees who constituted the Board of Trustees at the beginning of such period other than by (a) trustees whose nomination for election by the equityholders of the Issuer was approved by such Board of Trustees, (b) trustees elected by such Board of Trustees or (c) trustees nominated or elected by trustees approved as set forth in (a) or (b) above. "Collateral" means all the assets of the Issuer defined as ---------- "Collateral" in the Collateral Documents. "Collateral Agent" means the collective reference to Wilmington Trust ------------------ Company and William S. Wade or such other collateral agent as may be appointed from time to time pursuant to the Security Agreement. "Collateral Assignments of Leases" means each Collateral Assignment of -------------------------------- Lease, in the form attached hereto as Exhibit C made by the Issuer or a Subsidiary, executed heretofore, concurrently herewith or hereafter in favor of the Collateral Agent on behalf of the Trustee, the Collateral Agent and the Holders, assigning the related underlying assignment of lease, as the same may hereafter be amended, modified, supplemented, extended, renewal, restated or replaced in accordance with the terms thereof. "Collateral Assignments of Mortgages" means each Collateral Assignment ----------------------------------- of Mortgage or Collateral Assignment of Deed of Trust, in the form attached hereto as Exhibit C-1, made by the Issuer or a Subsidiary, executed heretofore, concurrently herewith or hereafter in favor of the Collateral Agent on behalf of the Trustee, the Collateral Agent and the Holders, assigning the Underlying Mortgages, as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced in accordance with the terms thereof. "Collateral Documents" mean the Security Agreement, the Pledge -------------------- Agreement, the Mortgages, the Assignments of Leases, the Collateral Assignments of Mortgages and the Collateral Assignment of Leases, and, with respect to any of the foregoing that may have been granted prior to the date hereof, amendments or restatements of such documents, together with all related filings, assignments, instruments, mortgages and other papers entered into or delivered in connection with any of the foregoing, as such agreements, filings, assignments, instruments, mortgages or papers or documents may from time to time be amended, supplemented or otherwise modified in accordance with the terms hereof and thereof. "Common Shares" shall mean the Common Shares of beneficial interests ------------- in the Issuer, par value $1.00 per share, as authorized by the declaration of trust of the Issuer. "Company Request" or "Company Order" means a written request or order --------------- ------------- signed in the name of the Issuer by its President, its Executive Vice President, a Senior Vice President, a Vice President, its Treasurer or Controller, or, if authorized by a power of attorney executed by any of such officers, by such other person as may be authorized in such power of attorney, and delivered to the Trustee. "Consolidated Net Worth" means, with respect to any Person, the sum of ---------------------- (i) the consolidated equity of the common equityholders of such Person and its consolidated Subsidiaries plus (ii) the respective amounts reported on such Person's most recent balance sheet with respect to any series of preferred equity that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred equity, after eliminating inter-company items, including appropriate deductions for any minority interest in such Person's Subsidiaries, less (x) all write-ups (other than write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the Issue Date in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person and (y) all unamortized debt discount and expense and unamortized deferred charges, all of the foregoing determined in accordance with GAAP. "Contaminant" means any waste, pollutant, hazardous substance, toxic ----------- substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste, or any constituent of such substance or waste, including, without limitation, any substance regulated under any Environmental Law. "Contingent Obligation" means with reference to any Person, any direct --------------------- or indirect liability, contingent or otherwise, of such Person with respect to any Indebtedness or contractual obligation of another Person, if the purpose or intent of such Person in incurring the Contingent Obligation is to provide assurance to the obligee of such Indebtedness or Contractual Obligation that such Indebtedness or contractual obligation will be paid or discharged, or that any agreement relating thereto will be complied with, or that any holder of such Indebtedness or contractual obligation will be protected (in whole or in part) against loss in respect thereof. "Corporate Trust Office of the Trustee" shall be at the address of the ------------------------------------- Trustee specified in Section 12.02 hereof or such other address as to which the Trustee may give notice to the Issuer. "Custodian" means any receiver, trustee or similar official under any --------- Bankruptcy Law. "Default" means any event that is or with the passage of time or the ------- giving of notice or both would be an Event of Default. "Disclosure Statement" means the Disclosure Statement and Proxy -------------------- Statement-Prospectus for the Solicitation of Votes for the Prepackaged Plan of Reorganization of the Issuer dated __________ __, 1995. "Effective Date" means the "Effective Date" as defined in the Plan. -------------- "Environmental Laws" means all applicable federal, state and local ------------------ laws, statutes, rules, ordinances, judicial decisions, permits, licenses, regulations and other governmental restrictions relating to pollution or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata), including, without limitation, laws, statutes, rules, ordinances, judicial decisions, permits, licenses, regulations and other governmental restrictions relating to emissions, discharges, releases or threatened releases of Hazardous Substances, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the cleanup or other remediation thereof. "Environmental Liabilities and Costs" means with reference to any ----------------------------------- Person, all liabilities, obligations, responsibilities, liabilities resulting from Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including, without limitation, all reasonable fees, disbursements and expenses of counsel, expert and consulting fees, and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand by any other Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, including, without limitation, any thereof arising under any Environmental Law, permit, order or agreement with any Governmental Authority or other Person, and which relate to any environmental, health or safety condition, or a Release or threatened Release, and result from the past, present or future operations of such Person. "Environmental Lien" means any Lien in favor of any Governmental ------------------ Authority for Environmental Liabilities and Costs. "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "First Lien Debt" means Indebtedness of __________ under [the Imperial --------------- Bank Loan Agreement] in an aggregate principal amount at any time outstanding not to exceed $_________ (plus interest, fees, costs and expenses). "Fiscal Quarter" means each of the four consecutive three-month -------------- periods during any Fiscal Year, which begin October 1, January 1, April 1 and July 1, respectively. "Fiscal Year" means the Issuer's fiscal year ending September 30. ----------- "GAAP" means generally accepted accounting principles in the United ---- States of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other Person as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination. "Governmental Authority" means any nation or government, any state or ---------------------- other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Governmental Securities" means direct obligations of, or obligations ----------------------- guaranteed by, the United States of America, to the payment of which the full faith and credit of the United States is pledged. "Guarantee" means the guarantee of each of the Guarantors set forth in --------- Article 11 hereof. "Guarantor" means each of the Subsidiaries of the Issuer listed as --------- guarantors in this Indenture or any other guarantor of the Obligations under this Indenture. "Hazardous Substance" means any toxic or hazardous waste, pollutants, ------------------- or substances, including, without limitation, friable asbestos, PCBs above 50 p.p.m., petroleum products and byproducts regulated as hazardous waste, substances defined or listed as: "hazardous substances" or "toxic substances" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") as amended, 42 U.S.C. (S)9601, et seq., "hazardous materials" in the ------- Hazardous Transportation Act, 49 U.S.C. (S)1802, et seq., "hazardous waste" in ------- the Resource Conservation and Recovery Act, 42 U.S.C. (S)6901, et seq., any ------- chemical substance or mixture regulated under the Toxic Substance Control Act of 1976, as amended, 15 U.S.C. (S)2601, et seq., and any hazardous or toxic ------- substance or pollutant regulated under any other applicable federal, state or local Environmental Laws. "Holder" means a Person in whose name a Note is registered. ------ "Indebtedness" means with reference to any Person (a) all indebtedness ------------ of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letter of credit and bankers' acceptances, whether or not matured) or for the deferred purchase price of property or services (other than normal trade accounts payable incurred in the ordinary course of business), (b) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (c) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (d) all capitalized lease obligations of such Person, (e) all Contingent Obligations of such Person, (f) all obligations of such Person under interest rate contracts, (g) all indebtedness of the type referred to in clause (a), (b), (c), (d), (e) or (f) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien against property or an interest in property owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness, and (h) in the case of the Issuer, the Notes. "Indenture" means this Indenture, as amended or supplemented from time --------- to time. "Internal Revenue Code" means the Internal Revenue Code of 1986, as --------------------- amended. "Investment" means any advance, loan, extension of credit or capital ---------- contribution to, or purchase of any stocks, bonds, notes, debentures or other securities of, or interest in, any Person, any purchase of any interest in Real Estate (other than by foreclosure, deed in lieu of foreclosure or other method of realizing on security), any commitment or other obligation, whether contingent or absolute, to do any of the foregoing, which commitment or other obligation does not constitute a Contingent Obligation and any Capital Expenditures. "Issue Date" means the date of first issuance of the Notes hereunder. ---------- "Lease" means each underlying lease of Real Estate. ----- "Legal Holiday" means a Saturday, a Sunday or a day on which banking ------------- institutions in the City of New York, Los Angeles, California, Philadelphia, Pennsylvania, Wilmington, Delaware or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "Liens" means any mortgage, deed of trust, pledge, hypothecation, ----- assignment, deposit arrangement, encumbrance, lien (statutory or other), security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a capitalized lease obligation, any financing lease having substantially the same economic effect as any of the foregoing, the filing, under the Uniform Commercial Code or comparable law of any jurisdiction, of any financing statement naming the owner of the assets to which such Lien relates as debtor, and any agreement to grant a Lien. "Material Adverse Change" means a material adverse change in any of ----------------------- (a) the financial condition, business, performance, operations, results of operations or the aggregate net book value of the properties of the Issuer, (b) the legality, validity or enforceability of this Indenture, (c) the perfection or priority of the Liens granted pursuant to this Indenture or the Collateral Documents caused by the action or lack of action of the Issuer or any Subsidiary, (d) the ability of the Issuer to pay any installment due under the Notes or the Plan or to perform its obligations under this Indenture or the Plan or the ability of the Issuer or the Subsidiaries to perform their respective obligations under the Collateral Documents, or (e) the rights and remedies of the Holders or the Trustee under this Indenture. "Material Adverse Effect" means an effect that would result in a ----------------------- Material Adverse Change. "Material Subsidiary" means each Subsidiary of the Issuer that, as at ------------------- any time, has at such time capital equal to more than 10% of the Consolidated Net Worth of the Issuer. "Mortgages" means each Mortgage, Security Agreement and Financing --------- Statement or Deed of Trust, Security Agreement and Financing Statement, substantially in the forms attached hereto as Exhibit D, and each Amendment to Mortgage, Security Agreement and Financing Statement or Amendment to Deed of Trust, Security Agreement and Financing Statement, substantially in the forms attached hereto as Exhibit D-1, in each case made by the Issuer or a Subsidiary, executed concurrently herewith or hereafter in favor of the Collateral Agent on behalf of the Trustee, the Collateral Agent and the Holders, encumbering the Real Estate, as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced in accordance with the terms thereof. "Notes" means the notes described above issued under this Indenture. ----- "Obligations" means any principal, interest, penalties, fees, ----------- indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means, with respect to any Person, the Chairman of the ------- Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, Controller, Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the --------------------- Issuer by two Officers of the Issuer, one of whom must be the President or the Executive Vice President, and the other must be the Treasurer, an Assistant Treasurer, the Controller, the Secretary, an Assistant Secretary, a Senior Vice President or a Vice President of the Issuer. "Opinion of Counsel" means an opinion from legal counsel (including at ------------------ the option of the Trustee and/or the Collateral Agent, local legal counsel in each state where the relevant Collateral is located) who is reasonably acceptable to the Trustee and/or the Collateral Agent, as applicable. "Person" means any individual, corporation, partnership, joint ------ venture, entity, association, joint-stock company, trust or unincorporated organization (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "Plan" means the Plan of Reorganization in the Chapter 11 case of the ---- Issuer confirmed by the Honorable ___________, United States Bankruptcy Judge, in Case No. _____, by order entered ________ __, 1995, as such plan has been amended prior to the Effective Date. "Pledge Agreement" means that certain Pledge Agreement, dated as of ---------------- the date hereof, in the form attached hereto as Exhibit E, made by the Issuer, executed concurrently herewith in favor of Wilmington Trust Company, as collateral agent, on behalf of the Trustee and the Holders, as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced in accordance with the terms thereof. "Preferred Stock", as applied to the Stock of any Person, means Stock --------------- of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Stock of any other class of such Person. "Real Estate" means any interest in all plots, pieces or parcels of ----------- land owned in any capacity, whether as a joint venturer, participant, partner or otherwise, or in which the Issuer may have a security interest, or leased as at the date hereof or acquired or leased hereafter by the Issuer or any Subsidiary, including, without limitation, those listed on Schedule 1 hereto and described in the Mortgages, together with all of the buildings and other improvements now or hereafter erected on the Real Estate, and any fixtures appurtenant thereto. "REIT" means a Person satisfying the conditions of being a "real ---- estate investment trust" under Sections 856 through 860 of the Internal Revenue Code and under other applicable law. "Release" means with reference to any Person, any release, spill, ------- emission, leaking, pumping, injection, deposit, disposal, discharge, disbursal, leaching or migration into the indoor or outdoor environment or into or out of any property owned by such Person, including, without limitation, the movement of Contaminants through or in the air, soil, surface water, ground water or property. "Remedial Action" means all actions required to (a) clean up, remove, --------------- treat or in any other way address Contaminants in the indoor or outdoor environment, (b) prevent the Release or threat of Release or minimize the further Release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, or (c) perform pre-remedial studies and investigations and post-remedial monitoring and care. "Required Holders" means the Holders of a majority in principal amount ---------------- of the Notes outstanding on the date of determination. "Requirement of Law" means with reference to any Person, the charter ------------------ and bylaws or other organizational or governing documents or such Person (including, with particular reference to the Issuer, a declaration of trust), and all federal, state and local laws, rules and regulations, including, without limitation, Environmental Laws, and all orders, judgments, decrees or other determinations of any Governmental Authority or arbitrator, applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer," when used with respect to the Trustee or the ------------------- Collateral Agent, means any trust officer or vice president within the Corporate Trust Division of the Trustee or the Collateral Agent (or any successor group of the Trustee or the Collateral Agent) or any other officer of the Trustee or the Collateral Agent customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject. "SEC" means the Securities and Exchange Commission. --- "Securities Act" means the Securities Act of 1933, as amended. -------------- "Security Agreement" means that certain Amended and Restated ------------------ Collateral and Security Agreement, dated as of the date hereof, in the form attached hereto as Exhibit F, made by the Issuer and the Subsidiaries, executed concurrently herewith or hereafter in favor of the Collateral Agent on behalf of the Trustee, the Collateral Agent and the Holders, as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced in accordance with the terms thereof. "Stock" means shares of capital stock, beneficial or partnership ----- interests, participations or other equivalents (regardless of how designated) of or in any Person, whether voting or non-voting. "Stock Equivalents" means all securities convertible into or ----------------- exchangeable for Stock and all warrants, options or other rights to purchase or subscribe for any stock, whether or not presently convertible, exchangeable or exercisable. "Subsidiary" means with respect to any Person, any corporation, ---------- partnership or other business entity of which an aggregate of 50% or more of the outstanding Stock having ordinary voting power to elect a majority of the board of directors, managers, trustees or other controlling Persons is, at the time, directly or indirectly, owned by such Person and/or one or more Subsidiaries of such Person (irrespective of whether, at the time, Stock of any other class or classes of such entity shall have or might have voting power by reason of the happening of any contingency). Unless the context otherwise requires, as used herein "Subsidiary" shall mean a Subsidiary of the Issuer. "Termination Date" means that date on which all Notes are paid in full ---------------- and all amounts due and owing under this Indenture and the Plan are paid in full. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa- --- 77bbbb) as in effect on the date on which this Indenture is qualified under the TIA. "Trustee" means the party named as such above until a successor ------- replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "Underlying Loan Documents" means collectively, the Underlying ------------------------- Promissory Notes, the Underlying Mortgages, underlying assignments of leases and rents and any guarantees, instruments, agreements or other documents existing on the effective date of the Plan and executed by any Person to or for the benefit of the Issuer or any Subsidiary in connection with any loan made by the Issuer or any Subsidiary to or for the benefit of such Person, as the same may have been amended, modified or supplemented. "Underlying Mortgages" means collectively, the mortgages or deeds of -------------------- trust granted by any Person to or for the benefit of the Issuer or any Subsidiary securing an Underlying Promissory Note or other obligation of such Person, as the same may have been or hereafter may be amended, modified or supplemented. "Underlying Promissory Notes" means the promissory notes or other --------------------------- instruments evidencing the Indebtedness of any Person to the Issuer or any Subsidiary other than (a) promissory notes or other instruments constituting Cash Equivalents and (b) promissory notes or other instruments evidencing indebtedness of any Person to the Issuer or any Subsidiary in connection with residential loans made by the Issuer or any Subsidiary to such Person for the purpose of purchasing a condominium unit. SECTION 1.02. OTHER DEFINITIONS. -----------------
Defined in Term Section ---- ---------- "Asset Sale Offer".................... 3.09 "Change of Control Offer"............. 4.19 "Change of Control Payment"........... 4.19 "Change of Control Payment Date"...... 4.19 "Defeasance".......................... 8.02 "Event of Default".................... 6.01 "Foreclosure Action".................. 7.02 "Funding Guarantor"................... 11.02 "Offer Amount"........................ 3.09 "Offer Period"........................ 3.09 "Paying Agent"........................ 2.03 "Purchase Date"....................... 3.09 "Registrar"........................... 2.03 "Standing Instruction"................ 3.09
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. ------------------------------------------------------------------ Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; -------------------- "indenture security holder" means a Holder of a Note; ------------------------- "indenture to be qualified" means this Indenture; ------------------------- "indenture trustee" or "institutional trustee" means the Trustee; and ----------------- --------------------- "obligor" on the Notes means the Issuer, any Guarantor and any ------- successor obligor upon the Notes. All other terms used in this Indenture that are defined by the TIA, deemed by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04. RULES OF CONSTRUCTION. --------------------- Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; and (5) provisions apply to successive events and transactions. ARTICLE 2 THE NOTES SECTION 2.01. FORM AND DATING. --------------- The Notes, the notation thereon relating to the Guarantee and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto, the terms of which are incorporated in and made a part of this Indenture. The Notes may have notations, legends or endorsements approved as to form by the Issuer and required by law, stock exchange rule, agreements to which the Issuer is subject or usage. Each Note shall be dated the date of its authentication. The Notes shall be issuable only in denominations of $1,000 and integral multiples thereof. SECTION 2.02. EXECUTION AND AUTHENTICATION. ---------------------------- An Officer of the Issuer shall sign the Notes for the Issuer by manual or facsimile signature. One Officer of each Guarantor shall sign the Guarantee on behalf of such Guarantor by facsimile or manual signature. The Issuer's seal shall be reproduced on the Notes and may be in facsimile form. If an Officer whose signature is on a Note no longer holds that office at the time the Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall, upon a written order of the Issuer signed by two Officers of the Issuer, authenticate Notes for original issue of up to the aggregate principal amount stated in paragraph 4 of the Notes. The aggregate principal amount of Notes outstanding at any time shall not exceed the amount set forth herein. The Trustee may appoint an authenticating agent acceptable to the Issuer to authenticate Notes. Unless limited by the terms of such appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Issuer or an Affiliate of the Issuer. SECTION 2.03. REGISTRAR AND PAYING AGENT. -------------------------- The Issuer shall maintain (i) an office or agency where Notes may be presented for registration of transfer or for exchange (including any co- registrar, the "Registrar") and (ii) an office or agency where Notes may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Issuer may appoint one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Issuer may change any Paying Agent, Registrar or co-registrar without prior notice to any Holder of a Note. The Issuer shall notify the Trustee and the Trustee shall notify the Holders of the Notes of the name and address of any Agent not a party to this Indenture. The Issuer may act as Paying Agent, Registrar or co-registrar. The Issuer shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which shall incorporate the provisions of the TIA. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Issuer shall notify the Trustee of the name and address of any such Agent. If the Issuer fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such, and shall be entitled to appropriate compensation in accordance with Section 7.07 hereof. The Issuer initially appoints the Trustee as Registrar, Paying Agent and agent for service of notices and demands in connection with the Notes. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. ----------------------------------- The Issuer shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent shall hold in trust for the benefit of the Holders of the Notes or the Trustee all money held by the Paying Agent for the payment of principal of and interest on the Notes, and shall notify the Trustee of any Default by the Issuer in making any such payment. While any such Default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee and to account to the Trustee for any funds disbursed. The Issuer at any time may require a Paying Agent to pay all money held by it to the Trustee and to account to the Trustee for any funds disbursed. Upon payment over to the Trustee, the Paying Agent (if other than the Issuer) shall have no further liability for the funds disbursed to the Trustee. If the Issuer acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders of the Notes all money held by it as Paying Agent. SECTION 2.05. LISTS OF HOLDERS OF THE NOTES. ----------------------------- The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders of the Notes and shall otherwise comply with TIA (S)312(a). If the Trustee is not the Registrar, the Issuer shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders of the Notes, including the aggregate principal amount of the Notes held by each thereof, and the Issuer shall otherwise comply with TIA (S)312(a). SECTION 2.06. TRANSFER AND EXCHANGE. --------------------- When Notes are presented to the Registrar with a request to register the transfer or to exchange them for an equal principal amount of Notes of other denominations, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met; provided, however, that any Note -------- ------- presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar and the Trustee duly executed by the Holder thereof or by his attorney duly authorized in writing. To permit registrations of transfer and exchanges, the Issuer shall issue and the Trustee shall authenticate Notes at the Registrar's request, subject to such rules as the Trustee may reasonably require. Neither the Issuer nor the Registrar shall be required to (i) issue, register the transfer of or exchange Notes during a period beginning at the opening of business on a Business Day 15 days before the day of any selection of Notes for redemption under Section 3.02 hereof or (ii) register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. No service charge shall be made to any Holder of a Note for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Issuer may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than such transfer tax or similar governmental charge payable upon exchanges pursuant to Section 2.10, 3.06 or 9.05 hereof, which shall be paid by the Issuer). Prior to due presentment to the Trustee for registration of the transfer of any Note, the Trustee, any Agent and the Issuer may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of, premium, if any, and interest on such Note and for all other purposes whatsoever, whether or not such Note is overdue, and neither the Trustee, any Agent nor the Issuer shall be affected by notice to the contrary. SECTION 2.07. REPLACEMENT NOTES. ----------------- If any mutilated Note is surrendered to the Trustee, or the Issuer and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, the Issuer shall issue and the Trustee, upon the written order of the Issuer signed by two Officers of the Issuer, shall authenticate a replacement Note if the Trustee's requirements for replacements of Notes are met. If required by the Trustee or the Issuer in connection with any loss, theft or destruction of a Note, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Issuer to protect the Issuer, the Trustee, any Agent or any authenticating agent from any loss which any of them may suffer if a Note is replaced; provided, however, that any -------- ------- institutional Holder may satisfy such requirement for an indemnity bond by delivering its unsecured indemnity agreement. Each of the Issuer and the Trustee may charge for its expenses in replacing a Note. SECTION 2.08. OUTSTANDING NOTES. ----------------- The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section 2.08 as not outstanding. If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. Subject to Section 2.09 hereof, a Note does not cease to be outstanding because the Issuer, a Subsidiary of the Issuer or an Affiliate of the Issuer holds the Note. SECTION 2.09. TREASURY NOTES. -------------- In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Issuer, any Subsidiary or any Affiliate of the Issuer shall be considered as though not outstanding, except that for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes which a Responsible Officer knows to be so owned shall be so considered. Notwithstanding the foregoing, Notes that are to be acquired by the Issuer, any Subsidiary or an Affiliate of the Issuer pursuant to an exchange offer, tender offer or other agreement shall not be deemed to be owned by the Issuer, such Subsidiary or such Affiliate, until legal title to such Notes passes to the Issuer, such Subsidiary or such Affiliate, as the case may be. SECTION 2.10. TEMPORARY NOTES. --------------- Until definitive Notes are ready for delivery, the Issuer may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have variations that the Issuer and the Trustee consider appropriate for temporary Notes. Without unreasonable delay, the Issuer shall prepare and the Trustee, upon receipt of the written order of the Issuer signed by two Officers of the Issuer, shall authenticate definitive Notes in exchange for temporary Notes. Until such exchange, temporary Notes shall be entitled to the same rights, benefits and privileges as definitive Notes. SECTION 2.11. CANCELLATION. ------------ The Issuer at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy cancelled Notes (subject to the record retention requirement of the Exchange Act), unless the Issuer directs cancelled Notes to be returned to it. The Issuer may not issue new Notes to replace Notes that it has redeemed or paid or that have been delivered to the Trustee for cancellation. All cancelled Notes held by the Trustee shall be destroyed and certification of their destruction delivered to the Issuer, unless by a written order, signed by two Officers of the Issuer, the Issuer shall direct that cancelled Notes be returned to it. SECTION 2.12. DEFAULTED INTEREST. ------------------ If the Issuer defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders of the Notes on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least five Business Days prior to the next payment date, in each case at the rate provided in the Notes. The Issuer shall fix or cause to be fixed each such special record date and payment date, and shall, promptly thereafter, notify the Trustee of any such date. At least 15 days before the special record date, the Issuer (or the Trustee, in the name of and at the expense of the Issuer) shall mail to Holders of the Notes a notice that states the special record date, the related payment date and the amount of such interest to be paid. SECTION 2.13. RECORD DATE. ----------- The record date for purposes of determining the identity of Holders of the Notes entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture shall be determined as provided for in TIA (S)316(c). SECTION 2.14. CUSIP NUMBER. ------------ The Issuer in issuing the Notes may use a "CUSIP" number and, if it does so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided, however, that any such notice -------- ------- may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Notes and that reliance may be placed only on the other identification numbers printed on the Notes. The Issuer will promptly notify the Trustee of any change in the CUSIP number. ARTICLE 3 REDEMPTION SECTION 3.01. NOTICES TO TRUSTEE. ------------------ If the Issuer elects to redeem Notes pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 45 days but not more than 75 days before a redemption date, written notice setting forth (i) the redemption date, (ii) the principal amount of Notes to be redeemed and (iii) the redemption price. SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED. --------------------------------- If less than all of the Notes are to be redeemed, the Trustee shall select the Notes to be redeemed among the Holders of the Notes in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by lot or in accordance with any other method the Trustee considers fair and appropriate (and in such manner as complies with applicable legal and stock exchange requirements, if any), provided that no Notes of $1,000 or less shall be redeemed in part. In the event of partial redemption by lot, the particular Notes to be redeemed shall be selected, unless otherwise provided herein, not less than 30 nor more than 60 days prior to the redemption date by the Trustee from the outstanding Notes not previously called for redemption. The Trustee shall promptly notify the Issuer in writing of the Notes selected for redemption and, in the case of any Note selected for partial redemption, the principal amount thereof to be redeemed. Notes and portions of them selected shall be in amounts of $1,000 or whole multiples of $1,000; except that if all of the Notes of a Holder are to be redeemed, the entire outstanding amount of Notes held by such Holder, even if not a multiple of $1,000, shall be redeemed. Except as provided in the preceding sentence, provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. SECTION 3.03. NOTICE OF REDEMPTION. -------------------- Subject to the provisions of Section 3.09 hereof, at least 30 days but not more than 60 days before a redemption date, the Issuer shall mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed at its registered address. The notice shall identify the Notes to be redeemed and shall state: (a) the redemption date; (b) the redemption price; (c) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the redemption date upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion shall be issued; (d) the name and address of the Paying Agent; (e) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (f) that, unless the Issuer defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date; (g) the aggregate principal amount of the Notes that are being redeemed; and (h) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. At the Issuer's written request, the Trustee shall give the notice of redemption in the Issuer's name and at its expense. SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. ------------------------------ Once notice of redemption is mailed in accordance with Section 3.03 hereof, Notes called for redemption become due and payable on the redemption date at the redemption price. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. --------------------------- On or prior to one Business Day before any redemption date, the Issuer shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of and accrued interest on all Notes to be redeemed on that date. The Trustee or the Paying Agent shall promptly return to the Issuer any money deposited with the Trustee or the Paying Agent by the Issuer in excess of the amounts necessary to pay the redemption price of, and accrued interest on, all Notes to be redeemed. On and after the redemption date, interest shall cease to accrue on the Notes or the portions of Notes called for redemption. If a Note is redeemed on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest shall be paid on such interest payment date to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption shall not be so paid upon surrender for redemption, because of the failure of the Issuer to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Notes. SECTION 3.06. NOTES REDEEMED IN PART. ---------------------- Upon surrender of a Note that is redeemed in part, the Issuer shall issue and the Trustee shall authenticate for the Holder of the Notes at the expense of the Issuer a new Note equal in principal amount to the unredeemed portion of the Note surrendered. SECTION 3.07. OPTIONAL REDEMPTION. ------------------- The Issuer shall have the option to redeem the Notes, in whole or in part, upon not less than 30 nor more than 60 days' notice, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest, if any, thereon to the applicable redemption date. SECTION 3.08. MANDATORY REDEMPTION. -------------------- Except as set forth under Section 3.09 or Section 4.19 hereof, the Issuer shall not be required to make mandatory redemption payments or sinking fund payments with respect to the Notes. SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF ASSET SALE PROCEEDS. ------------------------------------------------------------- If at any time the aggregate amount of Asset Sale Proceeds and the net cash proceeds of Indebtedness incurred pursuant to Section 4.14(i) that have not been applied in accordance with this Section 3.09 (exclusive of any Asset Sale Proceeds or net cash proceeds which remain after the completion of any prior Asset Sale Offer) exceeds $10 million, the Issuer shall make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Notes that, together with accrued and unpaid interest thereon, may be purchased with 80% of any such Asset Sale Proceeds or 100% of the net cash proceeds of such Indebtedness, at an offer price in cash in an amount equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest, if any, to the date fixed for the closing of such offer, in accordance with the procedures specified below. The Asset Sale Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five Business Days after the termination of the Offer Period (the "Purchase Date"), the Issuer shall purchase the maximum principal amount of Notes that may be purchased with 80% of such Asset Sale Proceeds or 100% of the net cash proceeds of such Indebtedness (the "Offer Amount"), or, if less than the Offer Amount has been tendered, all Notes tendered in response to the Asset Sale Offer. If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued interest shall be paid to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest shall be payable to Holders who tender Notes pursuant to the Asset Sale Offer. Upon the commencement of any Asset Sale Offer the Issuer shall send, by first class mail, a notice to the Trustee and each of the Holders of the Notes, with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to the Asset Sale Offer. The notice, which shall govern the terms of the Asset Sale Offer shall state: (a) that such Asset Sale Offer is being made pursuant to this Section 3.09 and the length of time such Asset Sale Offer shall remain open; (b) the Offer Amount, the purchase price and the Purchase Date; (c) that any Note not tendered or accepted for payment shall continue to accrue interest in accordance with its terms; (d) that any Note accepted for payment pursuant to such Asset Sale Offer shall cease to accrue interest after the Purchase Date; (e) that Holders electing to have a Note purchased pursuant to such Asset Sale Offer shall be required to surrender the Note at least three Business Days before the Purchase Date with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Issuer, a depositary, if appointed by the Issuer, or a Paying Agent at the address specified in the notice; (f) that Holders shall be entitled to withdraw their election if the Issuer, depositary or Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note the Holder delivered for purchase and a statement that such Holder is withdrawing his or her election to have the Note purchased; (g) that, if the aggregate principal amount of Notes surrendered by Holders exceeds the Offer Amount, the Issuer shall select the Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Issuer so that only Notes in denominations of $1,000, or integral multiples thereof, shall be purchased); and (h) that Holders whose Notes were purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered. Any Holder may at any time elect to deliver to the Trustee written instructions (each a "Standing Instruction") stating that such Holder desires to participate in any Asset Sale Offer by tendering the maximum permitted number of such Holder's Notes for repurchase in such Asset Sale Offer. Upon receipt of such Standing Instruction, the Trustee shall deem the maximum permitted number of such Holder's Notes tendered upon the commencement of any Asset Sale Offer. The issuing Holder may withdraw such Standing Instruction at any time prior to the expiration of an Offer Period by so notifying the Trustee in writing. Each Holder electing not to deliver a Standing Instruction shall respond to the notice of an Asset Sale Offer, as set forth in this Section 3.09, prior to the termination of the Offer Period. On or before the Purchase Date, the Issuer shall, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Notes or portions thereof tendered pursuant to the Asset Sale Offer, or, if less than the Offer Amount has been tendered, all Notes, and deliver to the Trustee an Officers' Certificate stating that such Notes or portions thereof were accepted for payment by the Issuer in accordance with the terms of this Section 3.09. The Issuer, depositary or Paying Agent, as the case may be, shall promptly (but in any case not later than five days after the Purchase Date) mail or deliver (or wire, if requested by a Holder in advance) to each tendering Holder an amount equal to the purchase price of the Note tendered by such Holder and accepted by the Issuer for purchase, and the Issuer shall promptly issue a new Note, and the Trustee shall authenticate and mail or deliver such new Note to such Holder equal in principal amount to any unpurchased portion of the Note surrendered. Any Note not so accepted shall be promptly mailed or delivered by the Issuer to the Holder thereof. The Issuer shall publicly announce the results of the Asset Sale Offer on the Purchase Date. In the event that the aggregate amount of Asset Sale Proceeds or net cash proceeds of Indebtedness incurred pursuant to Section 4.14(i) exceeds the aggregate principal amount of Notes surrendered by Holders thereof pursuant to such Asset Sale Offer the Issuer may use the remaining Asset Sale Proceeds or net cash proceeds of Indebtedness in accordance with the terms of this Indenture. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Asset Sale Proceeds or net cash proceeds of Indebtedness incurred pursuant to Section 4.14(i), the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of an Asset Sale Offer, the amount of Asset Sale Proceeds or net cash proceeds of Indebtedness shall be deemed to be reset at zero. Other than as specifically provided in this Section 3.09, any purchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. Whenever any Asset Sale Proceeds or net cash proceeds of Indebtedness incurred pursuant to Section 4.14(i) are received by the Issuer such Asset Sale Proceeds or net cash proceeds of Indebtedness will be set aside in the Asset Sale Account pending allocation of such Asset Sale Proceeds or net cash proceeds of Indebtedness pursuant to this Section 3.09. ARTICLE 4 COVENANTS SECTION 4.01. PAYMENT OF PRINCIPAL AND INTEREST. --------------------------------- The Issuer shall pay the principal of and interest on the Notes in accordance with the terms, and on the dates set forth in, this Indenture and the Notes. SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. ------------------------------- The Issuer shall maintain in the City of Philadelphia, Pennsylvania an office or agency where Notes may be presented for registration of transfer or exchange of Notes and where notices and demands to or upon the Issuer in respect of the Notes and this Indenture may be served. The Issuer will give prompt written notice to the Trustee of any change in the location of such office or agency. If at any time the Issuer shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and, in such event, the Trustee shall act as the Issuer's agent to receive all such presentations, notices and demands. The Issuer may also from time to time designate one or more other offices or agencies (in or outside the City of Philadelphia, Pennsylvania) where the Notes may be presented for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or -------- ------- rescission shall in any manner relieve the Issuer of its obligation to maintain an office or agency in the City of Philadelphia, Pennsylvania for the purposes set forth in Section 2.03 and for such other purposes. The Issuer will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 4.03. OFFICERS' AND ACCOUNTANTS' CERTIFICATES AS TO COMPLIANCE. ------------------------------------------------------------------ To the extent not otherwise required pursuant to Section 4.09, the Issuer shall deliver to the Trustee, within 90 days after the end of each Fiscal Year commencing with the 1995 Fiscal Year an Officers' Certificate stating that in the course of the performance by each signer of such signer's duties as an Officer of the Issuer such signer would normally have knowledge of the Issuer's and the Subsidiaries' compliance with the covenants contained in Sections 4.01 and 4.02 and 4.04 to 4.19 and the other covenants and conditions applicable to the Issuer or any Subsidiary set forth in this Indenture, stating whether or not such signer has knowledge of any Default in such compliance (such compliance having been determined without regard to any period of grace or requirement of notice provided under this Indenture) and, if so, specifying each such Default of which such signer has knowledge and the nature thereof and what action the Issuer proposes to take in connection thereto. For purposes of this Section 4.03, one of the signatories of such Officers' Certificate shall be one of the principal executive officer, the principal financial officer or the principal accounting officer of the Issuer. The Issuer will also deliver to the Trustee the certificates of accountants required pursuant to Section 4.09. SECTION 4.04. CONDUCT OF BUSINESS. ------------------- Subject to the terms and conditions hereof the Issuer and each Subsidiary shall (a) conduct its business in a manner consistent with the terms and provisions of the Plan and this Indenture; (b) use its reasonable efforts, in the ordinary course and consistent with past practice, to (i) preserve its business and the goodwill and (ii) keep available the services and goodwill of its present employees; and (c) preserve all registered patents, trademarks, trade names, copyrights and service marks with respect to its business. SECTION 4.05. PAYMENT OF TAXES, ETC. ---------------------- (a) The Issuer and each Subsidiary shall pay and discharge before the same shall become delinquent, all lawful claims, taxes, assessments and governmental charges or levies, except where contested in good faith, by proper proceedings, and where adequate reserves therefor have been established on the books of the Issuer or such Subsidiary in conformity with GAAP. (b) In connection with this Indenture, the Issuer and each Subsidiary shall comply with all withholding and reporting requirements imposed by federal, state and local tax authorities and all distributions under this Indenture shall be subject to such withholding and reporting requirements. SECTION 4.06. MAINTENANCE OF INSURANCE. ------------------------ The Issuer and each Subsidiary shall maintain insurance with responsible and reputable insurance companies or associa tions in such amounts and covering such risks as is usually and customarily carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Issuer or such Subsidiary operates; provided, however, that -------- ------- the Issuer or such Subsidiary shall not be required to maintain earthquake insurance. If requested by the Required Holders or the Trustee, the Issuer or such Subsidiary shall have all such insurance policies name the Collateral Agent as additional insured or loss payee. The Issuer or such Subsidiary will furnish to the Trustee or the Collateral Agent from time to time such information as may be reasonably requested as to such insurance by the Trustee or the Collateral Agent. SECTION 4.07. PRESERVATION OF EXISTENCE, ETC. ------------------------------- The Issuer and each Subsidiary shall preserve and maintain its existence, rights and franchises, except as permitted under Article 5, if the failure to so preserve or maintain, either individually or in the aggregate, would cause a Material Adverse Effect. SECTION 4.08. MAINTENANCE OF PROPERTIES, ETC. ------------------------------- The Issuer and each Subsidiary shall maintain and preserve (i) in good working order and condition all of its properties which are used or useful or necessary in the conduct of its business, and (ii) all rights, remedies, permits, licenses, guaranties, collateral, insurance, approvals and privileges which are used or useful or necessary in the conduct of its business, if the failure to maintain and preserve such rights, remedies, permits, licenses, guaranties, collateral, insurance, approvals and privileges, either individually or in the aggregate, would cause a Material Adverse Effect. SECTION 4.09. FINANCIAL STATEMENTS. -------------------- To the extent not otherwise required by Section 4.03, the Issuer shall furnish to the Holders and the Trustee in the case of clauses (a) through (c) below, and to any prospective purchaser of the Notes in the case of clause (d) below: (a) as soon as available and in any event within 45 days after the end of each of the first three Fiscal Quarters in each Fiscal Year, a consolidated income statement, a consolidated statement of shareholders' equity, a consolidated statement of cash flows, a consolidated statement of deferred and capitalized interest for the period from the beginning of the current Fiscal Year to the end of such Fiscal Quarter, and a consolidated balance sheet as at the end of such Fiscal Quarter, setting forth in each case in comparative form figures for the corresponding period in the preceding Fiscal Year, certified by the chief financial officer of the Issuer, together with (i) a certificate of said officer stating that no Default or Event of Default has occurred and is continuing or, if a Default or an Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which the Issuer proposes to take with respect thereto, (ii) a schedule of the computations used by the Issuer in determining compliance with Section 4.12, (iii) a written discussion and analysis by the management of the Issuer of the consolidated financial statements furnished in respect of such Fiscal Quarter, and (iv) a certificate demonstrating the calculation of Available Cash, including, without limitation, the minimum dividend distribution required to maintain the status of the Issuer as a REIT; (b) as soon as available and in any event within 90 days after the end of each Fiscal Year, a consolidated balance sheet of the Issuer as of the end of such year and a consolidated statement of income, retained earnings and cash flows of the Issuer and its Subsidiaries all of which are prepared in accordance with GAAP and certified without qualifications as to the scope of the audit or otherwise and without any disclaimer by Ernst & Young or other independent certified public accountants of recognized national standing acceptable to the Trustee, together with (i) a certificate of such accounting firm stating that in the course of the regular audit of the business of the Issuer and the Subsidiaries, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default or Event of Default has occurred and is continuing, or, if in the opinion of such accounting firm a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof, (ii) a schedule in form satisfactory to the Trustee of the computations used by such accounting firm in determining, as of the end of such Fiscal Year, the Issuer's compliance with Section 4.12, (iii) a certificate of the chief financial officer stating deferred and capitalized interest for the Fiscal Year and an "Agreed Upon Procedures" report by the Issuer's independent public accounting firm stating that such accounting firm has no knowledge of any material error in the information set forth in the certificate, and (iv) a written discussion and analysis by the management of the Issuer of the consolidated financial statements furnished in respect of such Fiscal Year; (c) as soon as available and, in any event, within 120 days from and after the end of a Fiscal Year, a copy of the management letter required to be provided to the Issuer by its independent certified public accountants which refers in whole or in part to any inadequacy, defect, problem, qualification or other lack of fully satisfactory accounting controls utilized by the Issuer; and (d) upon the request of the Required Holders, to any prospective purchaser of any Notes, all information that may be required to be delivered to such purchaser to enable any Holder to sell to such purchaser its Notes without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144A under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC subject to receipt of an appropriate confidentiality agreement from such prospective purchasers in form and substance reasonably satisfactory to the Issuer (with appropriate exceptions to permit resale); provided, however, upon the request of the Required Holders, the Issuer -------- ------- shall deliver to the Required Holders a written statement as to whether it has complied with such requirements. SECTION 4.10. NEW REAL ESTATE, ETC. --------------------- If the Issuer or any Subsidiary acquires any Real Estate, Underlying Promissory Notes, Underlying Mortgages or underlying leases through foreclosure or otherwise, not subject to a Lien in favor of the Trustee or the Collateral Agent, the Issuer or such Subsidiary shall, as a condition to the effectiveness of any such acquisition, execute, deliver and record a first priority or the next highest available priority Mortgage or equivalent security instrument, in favor of the Collateral Agent on behalf and for the ratable benefit of the Holders, covering such Real Estate, Underlying Promissory Notes, Underlying Mortgages or underlying leases, in form and substance satisfactory to the Trustee and the Collateral Agent, and provide the Collateral Agent with financing statements, and, upon the acquisition of Real Estate or an Underlying Mortgage, a title insurance policy in an amount equal to the acquisition price of such Real Estate or Underlying Mortgage insuring (a) the Issuer's or such Subsidiary's fee title to such Real Estate and including a current ALTA survey thereof, if required, with a surveyor's certificate in form and substance satisfactory to the Trustee and the Collateral Agent or (b) the enforceability and validity of such Underlying Mortgage according to the terms and conditions of an ALTA Lender's policy. Notwithstanding the foregoing, prior to the acquisition or obtaining control of any Real Estate, the Issuer or such Subsidiary shall obtain an appropriate environ mental audit or environmental survey. SECTION 4.11. DEPOSIT OF ASSET SALE PROCEEDS. ------------------------------ All Cash Asset Sale Proceeds shall be deposited in the Asset Sales Account immediately upon receipt by the Issuer or any Subsidiary or their agent. All non-Cash Asset Sale Proceeds shall be delivered immediately to the Collateral Agent upon receipt by the Issuer or any Subsidiary or their agent and shall be pledged to the Collateral Agent for the ratable benefit of the Holders to secure the Obligations of the Issuer under this Indenture and the Notes pursuant to a pledge agreement in form and substance satisfactory to the Trustee. When the aggregate amount of Asset Sale Proceeds exceeds $10 million, the Issuer will be required to apply all such Asset Sale Proceeds to an Asset Sale Offer in accordance with the procedures set forth in Section 3.09 hereof. The Cash Asset Sale Proceeds shall be distributed to the Holders in accordance with Section 3.09. Any Cash Asset Sale Proceeds not so distributed to Holders shall be returned to the Issuer. SECTION 4.12. LIMITATION ON INVESTMENTS. ------------------------- The Issuer shall not, nor shall it permit any Subsidiary to, directly or indirectly, make any Investment from and after the Effective Date except: (a) Investments which constitute leasing commissions and tenant improvements, related to the ownership and maintenance of a parcel or parcels of Real Estate in an amount not to exceed by more than 10% the amount of such commissions or improvements set forth in a budget approved by the Board of Trustees of the Issuer (as the same may be amended from time to time with the consent of the Board of Trustees of the Issuer); (b) with any Asset Sale Proceeds that are not applied to the then outstanding Notes in accordance with Section 3.09 hereof, new loans to non- Affiliates or new equity Investments, in each case approved by the Board of Trustees; (c) Investments approved by the Board of Trustees of the Issuer of Available Cash in Cash Equivalents; (d) Investments approved by the Board of Trustees of the Issuer created by the Issuer or any Subsidiary as a result of any sale, refinancing or disposition of assets when the Issuer or such Subsidiary accepts in partial payment of an outstanding obligation a new mortgage or equity interest in the same property; and (e) Investments approved by the Board of Trustees of the Issuer in Subsidiaries formed or maintained pursuant to Section 4.18; provided, however, -------- ------- that the Stock of any such new Subsidiary is pledged to the Collateral Agent for the ratable benefit of the Holders in accordance with Section 4.18. SECTION 4.13. LIENS, ETC. ----------- The Issuer shall not, nor shall it permit any Subsidiary to, create or suffer to exist any Lien upon or with respect to any of its properties, whether owned by the Issuer or such Subsidiary as at the Effective Date or thereafter acquired, or assign any right to receive income, except: (a) Liens directly or indirectly created in favor of the Holders pursuant to this Indenture, the Plan and the Collateral Documents; (b) any Lien securing the renewal, extension or refunding of any Indebtedness or other obligation secured by any Lien permitted by subsection (a) of this Section 4.13 without any increase in the amount secured thereby or in the assets subject to such Liens; (c) Liens arising by operation of law in favor of materialmen, mechanics, warehousemen, carriers, lessors or other similar Persons incurred by the Issuer or such Subsidiary in the ordinary course of business which secure its obligations to such Person; provided, however, that the Issuer or such -------- ------- Subsidiary (i) is not in default in respect of such payment obligation to such Person or (ii) is in default with respect to such payment obligation but is, in good faith and by appropriate proceedings, diligently contesting such obligation and adequate provision is made for the payment thereof and such default, either individually or in the aggregate, would not cause a Material Adverse Effect; (d) Liens (excluding Environmental Liens) secur ing taxes, assessments or governmental charges or levies; provided, however, that the -------- ------- Issuer or such Subsidiary (i) is not in default in respect of any payment obligation with respect thereto or (ii) is in default in respect of such payment obligation but is in good faith and by appropriate proceedings diligently contesting such obligation and adequate provision is made for the payment thereof and such default, either individu ally or in the aggregate, would not cause a Material Adverse Effect; (e) Liens incurred or pledges and deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, old-age pensions and other social security benefits; (f) Liens securing the performance of operating leases, contracts (other than for the repayment of borrowed money), statutory obligations, and other obligations of like nature, incurred as an incident to and in the ordinary course of business, and judgment liens which do not cause individually or in the aggregate, a Material Adverse Effect, and do not constitute a Default or an Event of Default; (g) zoning restrictions, easements, licenses, reservations, restrictions on the use of real property or minor irregularities incident thereto which do not cause, individually or in the aggregate, a Material Adverse Effect; (h) Liens in favor of landlords securing operating leases permitted by Section 4.15; (i) Liens existing on the Effective Date; (j) Environmental Liens which do not cause, individually or in the aggregate, a Material Adverse Effect; (k) Liens relating to Indebtedness incurred to finance the purchase price of property but only to the extent (x) of the value of the property acquired and (y) such Lien does not extend to or cover any other property other than such property, improvements thereon and any proceeds therefrom; and (l) Liens securing Indebtedness permitted by Section 4.14(i). SECTION 4.14. INDEBTEDNESS. ------------ The Issuer shall not, directly or indirectly, and will not, directly or indirectly, permit any Subsidiary to, incur, create, assume or suffer to exist any Indebtedness, except: (a) Indebtedness represented by the Notes; (b) Contingent Obligations constituting endorse ments for collection or deposit in the ordinary course of business; (c) current liabilities in respect of taxes, assessments and governmental charges or levies incurred, or claims for labor, materials, inventory, services, supplies and rentals incurred, or for goods or services purchased, in the ordinary course of business consistent with the past practice of the Issuer or such Subsidiary; (d) Indebtedness arising under any performance bond reimbursement obligation entered into in the ordinary course of business of the Issuer or such Subsidiary consistent with the past practice of the Issuer or such Subsidiary; (e) unimpaired indemnification claims under the declaration of trust of the Issuer; (f) Indebtedness arising in connection with Subsidiaries formed or maintained pursuant to Section 4.18; (g) the First Lien Debt; (h) Indebtedness incurred to finance the purchase price of property; provided, however, that such Indebtedness shall be non-recourse to the - -------- -------- Issuer or such Subsidiary; and (i) additional secured Indebtedness of the Issuer; provided, -------- however that (i) 100% of the net cash proceeds of such Indebtedness, after - ------ deducting all expenses related thereto, shall be applied to the repayment of the Notes in accordance with Section 3.09, and (ii) the interest rate payable in respect of such Indebtedness shall be lower than the interest rate then payable in respect of the Notes; and, provided, further, that if such interest rate is -------- ------- not a fixed rate of interest, the Issuer shall have entered into an interest rate agreement or other contractual arrangement concurrently with the incurrence of such Indebtedness the economic effect of which shall be that such floating interest rate over the life of such Indebtedness shall be lower than the interest rate then payable in respect of the Notes. SECTION 4.15. LEASE OBLIGATIONS. ----------------- (a) The Issuer shall not, nor shall it permit any Subsidiary to, create or suffer to exist any obligations as lessee (i) for the rental or hire of real or personal property in connection with any sale and leaseback transaction, or (ii) for the rental or hire of real or personal property of any kind under other leases or agreements to lease having an original term of one year or more which would cause the direct or contingent liabilities of the Issuer or such Subsidiary in respect of all such obligations to be increased by more than $________ payable in any period of 12 consecutive months over the amount existing on the Effective Date. (b) The Issuer shall not, nor shall it permit any Subsidiary to, become or remain liable as lessee or guarantor or other surety with respect to any lease, whether an operating lease or a capitalized lease, of any property (whether real or personal or mixed), whether owned as at the Effective Date or acquired thereafter, which the Issuer or such Subsidiary has sold or transferred as of the Effective Date or thereafter. SECTION 4.16. RESTRICTED PAYMENTS. ------------------- The Issuer shall not (a) declare or make any dividend payment or other distribution of assets, properties, Cash, rights, obligations or securities on account of or in respect of any of its Common Shares or any Preferred Stock which may be issued by the Issuer, other than such declaration and making of dividend payments that the Issuer deems necessary to preserve its status as a REIT, unless the Consolidated Net Worth of the Issuer at the time of such payment and after giving effect thereto is at least $50 million; provided, -------- however, that the Issuer shall in no event declare or make any such dividend - ------- payment or other distribution if a Default or Event of Default has occurred and is continuing, or (b) purchase, redeem or otherwise acquire for value its Common Shares or any Preferred Stock of the Issuer, whether outstanding on the Effective Date or thereafter issued and outstanding, unless the Consolidated Net Worth of the Issuer at the time of such purchase, redemption or other acquisition and after giving effect thereto is at least $50 million; provided, -------- however, that the Issuer shall in no event make any such purchase, redemption or - ------- other acquisition if a Default or Event of Default has occurred and is continuing. SECTION 4.17. TRANSACTIONS WITH AFFILIATES. ---------------------------- The Issuer shall not, nor shall it permit any Subsidiary to: (a) make any Investment in an Affiliate; (b) transfer, sell, lease, assign or otherwise dispose of any assets to any such Affiliate; (c) merge into or consolidate with or purchase or acquire assets from any Affiliate; (d) repay any Indebtedness to any Affiliate (except under existing retirement or deferred compensation plans); or (e) enter into any other transaction directly or indirectly with or for the benefit of any such Affiliate (including, without limitation, guaranties and assumptions of obligations of any such Affiliate) except for (i) transactions in the ordinary course of business on a basis no less favorable to the Issuer or such Subsidiary as would be obtained in a comparable arm's length transaction with a Person which is not an Affiliate, (ii) compensation to trustees commensurate with current compensation levels, (iii) salaries and other employee compensation and benefits to officers of the Issuer or such Subsidiary commensurate with the compensation levels in effect as of the date hereof as may reasonably be adjusted over time but in no event to exceed 10% annually in the aggregate, (iv) any transaction required or otherwise permitted by the Plan or this Indenture, and (v) transactions with respect to Subsidiaries pursuant to Section 4.12, 4.14 or 4.18 hereof. SECTION 4.18. NEW SUBSIDIARIES. ---------------- The Issuer shall not incorporate or otherwise organize any Subsidiary after the date hereof, except wholly owned Subsidiaries organized for the special purpose of taking title to (i) a mortgage or equivalent security then held by the Issuer or acquired in connection with property held by the Issuer for the purpose of foreclosing upon such mortgage or equivalent security or (ii) Real Estate which is the subject of the lien of a mortgage or equivalent security then held by the Issuer or acquired in connection with property held by the Issuer for the purpose of holding and operating such Real Estate in such Subsidiary; provided, however, that the Issuer complies with the provisions of -------- ------- the Collateral Documents; and, provided, further, that (x) any such Subsidiary -------- ------- shall be subject to and bound by the provisions of Sections 4.04 through 4.18 of this Indenture as if it were a party hereto, and (y) the Stock of any such Subsidiary shall be pledged to Wilmington Trust Company, as the collateral agent for the ratable benefit of the Holders as security for the Obligations of the Issuer under this Indenture and the Notes pursuant to a pledge agreement in form and substance satisfactory to the Trustee. SECTION 4.19. OFFER TO REPURCHASE UPON CHANGE OF CONTROL. ------------------------------------------ (a) Unless waived by the Required Holders, upon the occurrence of a Change of Control, the Issuer shall make an offer (the "Change of Control Offer") to each Holder of Notes to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes at a purchase price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (the "Change of Control Payment"). Within 45 days following any Change of Control, the Issuer shall mail a notice to the Trustee and each Holder stating: (1) that the Change of Control Offer is being made pursuant to this Section and that all Notes tendered will be accepted for payment; (2) the purchase price and the purchase date, which shall be no earlier than 30 days nor later than 45 days from the date such notice is mailed (the "Change of Control Payment Date"); (3) that any Note not tendered shall continue to accrue interest in accordance with its terms; (4) that, unless the Issuer defaults in the payment of the Change of Control Payment, all Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (5) that Holders electing to have any Notes purchased pursuant to a Change of Control Offer will be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have such Notes purchased; and (7) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. The Issuer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes in connection with a Change of Control. (b) On the Change of Control Payment Date, the Issuer shall, to the extent lawful, (1) accept for payment Notes or portions thereof tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the Notes or portions thereof tendered to the Issuer. The Paying Agent shall promptly mail to each Holder of Notes so accepted payment in an amount equal to the purchase price for such Notes, and the Trustee shall promptly authenticate and mail to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided, however, that each such new -------- ------- Note shall be in a principal amount of $1,000 or an integral multiple thereof. The Issuer will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (c) The Trustee shall be under no obligation to ascertain the occurrence of a Change in Control or to give notice with respect thereto other than upon receipt of the written notice of Change in Control from the Issuer. The Trustee may conclusively assume, in the absence of written notice to the contrary from the Issuer or any Holder, that no Change in Control has occurred. (d) Except as described above with respect to a Change of Control, the Issuer shall not be required to repurchase or redeem the Notes from the Holders of the Notes in the event of a takeover, recapitalization or similar transaction. ARTICLE 5 SUCCESSORS SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS. ---------------------------------------- The Issuer shall not consolidate or merge with or into (whether or not the Issuer is the surviving entity), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions to, another Person unless (a) the Issuer is the surviving entity, or the Person formed by or surviving any such consolidation or merger (if other than the Issuer) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia, (b) the Person formed by or surviving any such consolidation or merger (if other than the Issuer), or the Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made, assumes, pursuant to a supplemental indenture and appropriate collateral documents in forms reasonably satisfactory to the Trustee, all of the obligations of the Issuer under the Notes and this Indenture and all the obligations of the Issuer under the Collateral Documents, (c) immediately before and immediately after giving effect to such transaction no Default or Event of Default exists, and (d) the Issuer or the Person formed by or surviving any such consolidation or merger, or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made after giving pro forma effect thereto as of the end of the most recently completed Fiscal Quarter shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Issuer immediately preceding the transaction. The Issuer shall deliver to the Trustee prior to the consummation of the proposed transaction an Officers' Certificate to the foregoing effect and an Opinion of Counsel stating that the proposed transaction and such supplemental indenture comply with this Section 5.01. The Trustee shall be entitled to rely conclusively upon such Officers' Certificate and Opinion of Counsel. SECTION 5.02. SUCCESSOR ENTITY SUBSTITUTED. ---------------------------- Upon any consolidation or merger, or any sale, lease, conveyance or other disposition of all or substantially all of the assets of the Issuer in accordance with Section 5.01 hereof, the successor entity formed by such consolidation or into or with which the Issuer is merged or to which such sale, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture and the Collateral Documents referring to the Issuer shall refer instead to the successor entity and not to the Issuer), and may exercise every right and power of the Issuer under this Indenture and the Collateral Documents with the same effect as if such successor Person has been named as the Issuer, herein and therein, and the Issuer will be discharged from all obligations under this Indenture, the Notes and the Collateral Documents. ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. ----------------- Each of the following events (whatever the reason for such event) constitutes an "Event of Default": (a) The Issuer shall fail to make any payment in respect of principal of the Notes or under Section 3.09 or 4.19 of this Indenture when the same becomes due and payable and such failure continues for a period of 5 Business Days after the due date of such payment, or the Issuer shall fail to make any payment when due of interest on the Notes and such failure continues for a period of 10 days after the due date of such payment; or (b) Any representation or warranty made or deemed made by the Issuer or any Subsidiary (or any of their officers) under the Disclosure Statement or the Collateral Documents shall prove to have been untrue or incorrect in any material respect when made or deemed made; or (c) The Issuer (or the Issuer or any Subsidiary in the case of the Collateral Documents) shall fail to perform or observe (i) any term, covenant or agreement contained in Article 4 (other than Section 4.07) or Article 5 or (ii) any other term, covenant or agreement contained in this Indenture, the Plan or the Collateral Documents, if such failure under this clause (ii) shall remain unremedied for 30 days after the earlier of the date on which (A) an Officer of the Issuer becomes aware of such failure or (B) written notice thereof shall have been given to the Issuer by the Trustee or the Holders; or (d) The Issuer or any Subsidiary shall fail, after any applicable grace period, to pay any principal of or premium, if any, or interest on any of its Indebtedness in an amount exceeding $1,000,000 (excluding the Notes), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise); or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) The Issuer or any Material Subsidiary of the Issuer shall generally not pay its debts as such debts become due except such debts that are the subject of a good faith dispute, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Issuer or such Material Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against the Issuer or such Material Subsidiary (but not instituted by it), either such proceedings shall remain undismissed or unstayed for a period of 30 days or any of the actions sought in such proceedings shall occur; or the Issuer or such Material Subsidiary shall take any action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment or order for the payment of money in excess of $1,000,000 shall be rendered against the Issuer or any Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (ii) there shall be any period of ten consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) Except for releases of Collateral pursuant to Asset Sales effected in accordance with Section 4.11, this Indenture or the Collateral Documents shall, for any reason, cease to create a valid Lien on Collateral having a value of $1,000,000 or more purported to be covered thereby, or such Lien shall cease to have the priority Lien status initially granted and be a perfected Lien as to Collateral having a value of $1,000,000 or more. SECTION 6.02. ACCELERATION. ------------ If an Event of Default (other than an Event of Default specified in clause (e) of Section 6.01 hereof) occurs and is continuing, the Trustee by notice to the Issuer may, or upon written notice from the Required Holders shall, or the Required Holders by written notice to the Issuer and the Trustee may, declare all the Notes to be due and payable immediately. Upon such declaration, the principal of, premium, if any, and interest on the Notes shall be due and payable immediately. If an Event of Default specified in clause (e) of Section 6.01 hereof occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Required Holders by written notice to the Trustee may on behalf of all of the Holders rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal, interest or premium that has become due solely because of the acceleration) have been cured or waived. SECTION 6.03. OTHER REMEDIES. -------------- If an Event of Default occurs and is continuing, the Trustee and/or the Collateral Agent, as applicable, may pursue any available remedy (under this Indenture, the Collateral Documents or otherwise) to collect the payment of principal and interest on the Notes or to enforce the performance of any provision of the Notes, this Indenture or the Collateral Documents. The Trustee or the Collateral Agent may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee, the Collateral Agent or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.04. WAIVER OF PAST DEFAULTS. ----------------------- The Required Holders by notice to the Trustee may on behalf of the Holders of all of the Notes waive an existing Default or Event of Default and its consequences under this Indenture, except a continuing Default or Event of Default in the payment of the principal of or interest on the Notes. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture and the Collateral Documents; but no such waiver shall extend to any subsequent or other Default or Event of Default. SECTION 6.05. DIRECTION BY REQUIRED HOLDERS. ----------------------------- The Required Holders may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee and/or the Collateral Agent or exercising any trust or power conferred on it or them. However, the Trustee and/or the Collateral Agent may refuse to follow any direction that conflicts with the law, this Indenture or the Collateral Documents, that the Trustee and/or the Collateral Agent determines may be unduly prejudicial to the rights of other Holders of Notes or that may involve the Trustee and/or the Collateral Agent in personal liability. SECTION 6.06. LIMITATION ON SUITS. ------------------- A Holder of a Note may pursue a remedy with respect to this Indenture or the Notes only if: (a) the Holder of a Note gives to the Trustee and the Collateral Agent written notice of a continuing Event of Default; (b) the Required Holders make a written request to the Trustee and the Collateral Agent to pursue the remedy; (c) such Holder of a Note or Holders of Notes offer and, if requested, provide to the Trustee and the Collateral Agent indemnity satisfactory to the Trustee and the Collateral Agent against any loss, liability or expense; (d) the Trustee and the Collateral Agent do not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such 60-day period the Required Holders do not give the Trustee and the Collateral Agent a direction inconsistent with the request. A Holder of a Note may not use this Indenture to prejudice the rights of another Holder of a Note or to obtain a preference or priority over another Holder of a Note. SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT. --------------------------------------------- Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal and interest on the Note, on or after the respective due dates expressed in the Note, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder, except that no Holder shall have the right to institute any such suit if and to the extent that the institution or prosecution thereof or the entry of judgment therein would under applicable law result in the surrender, impairment, waiver or loss of the Liens pursuant to the Collateral Documents upon any property subject to such Liens. SECTION 6.08. COLLECTION SUIT. --------------- If an Event of Default specified in Section 6.01(a) hereof occurs and is continuing, the Trustee and/or the Collateral Agent are authorized to recover judgment in its own name and as trustee of an express trust against the Issuer for the whole amount of principal of and interest remaining unpaid on the Notes and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, the Collateral Agent and their respective agents and counsel. SECTION 6.09. PROOFS OF CLAIM. --------------- The Trustee and/or the Collateral Agent are authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Collateral Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, the Collateral Agent, and their respective agents and counsel) and the Holders of the Notes allowed in any judicial proceedings relative to the Issuer (or any other obligor upon the Notes), the Issuer's creditors or the Issuer's property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder of a Note to make such payments to the Trustee and the Collateral Agent, and in the event that the Trustee and the Collateral Agent shall consent to the making of such payments directly to the Holders of the Notes, to pay to the Trustee and the Collateral Agent any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, the Collateral Agent, and their respective agents and counsel, and any other amounts due the Trustee and the Collateral Agent under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, the Collateral Agent, or their respective agents and counsel, and any other amounts due the Trustee and the Collateral Agent under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties which the Holders of the Notes may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee or the Collateral Agent to authorize or consent to or accept or adopt on behalf of any Holder of a Note any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder of a Note thereof, or to authorize the Trustee or the Collateral Agent to vote in respect of the claim of any Holder of a Note in any such proceeding. SECTION 6.10. PRIORITIES. ---------- If the Trustee or the Collateral Agent collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee, the Collateral Agent and their respective ----- agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and/or the Collateral Agent and the costs and expenses of collection; Second: to Holders of Notes for amounts due and unpaid on the Notes ------ for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal and interest, respectively; Third: without duplication, to Holders for any other Obligations ----- owing to the Holders under this Indenture, the Notes or the Collateral Documents; and Fourth: to the Issuer or to such party as a court of competent ------ jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Notes pursuant to this Section 6.10. SECTION 6.11. UNDERTAKING FOR COSTS. --------------------- In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee and/or the Collateral Agent for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant to Section 6.06 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. SECTION 6.12. RESTORATION OF RIGHTS AND REMEDIES. ---------------------------------- If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Issuer, the Trustee and the Holders will, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holder will continue as though no such proceeding had been instituted. ARTICLE 7 TRUSTEE AND COLLATERAL AGENT SECTION 7.01. DUTIES OF TRUSTEE AND COLLATERAL AGENT. -------------------------------------- (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Collateral Documents and the Trustee need perform only those duties that are specifically set forth in this Indenture and the Collateral Documents and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee, and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture if any. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 7.01. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. Each of the Trustee and the Collateral Agent shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders of Notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Issuer. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE AND COLLATERAL AGENT. -------------------------------------- (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel,accountants and other experts and the written advice of such counsel, accountants and other experts or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers conferred upon it by this Indenture or the Collateral Documents. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Issuer shall be sufficient if signed by an Officer of the Issuer. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to each of the Trustee and the Collateral Agent reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. (g) Without limitation and notwithstanding any other provision herein, the Trustee (i) shall not be required to take any action regarding any Real Estate, including, without limitation, foreclosure or other action (collectively, a "Foreclosure Action"), which could result in the Trustee being deemed to be an "operator" under CERCLA (as defined in the definition of "Hazardous Substance"), if in the reasonable judgment of the Trustee by taking such action it would incur unacceptable environmental liability, and (ii) shall have the right, prior to taking any Foreclosure Action with respect to any Real Estate, to obtain a "Phase One" or other environmental report concerning such Real Estate prepared by a consultant of its choice and to be reimbursed for the reasonable cost thereof pursuant to Section 7.07 hereof, if, in its reasonable judgment, such report is necessary in order to assess the matters described in clause (i) hereof. In making an evaluation described under clause (i) of the preceding sentence, the Trustee shall assess its potential liability as compared to the indemnity available pursuant to Section 7.07 hereof, or from any Holder pursuant to Section 7.01(e) and/or 7.02(f) hereof. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE --------------------------------------------------- The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Issuer or any Affiliate of the Issuer with the same rights it would have if it were not the Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof, as specified therein, of this Indenture. SECTION 7.04. DISCLAIMER. ---------- The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or of the Notes, it shall not be accountable for the Issuer's use of the proceeds from the Notes or any money paid to the Issuer or upon the Issuer's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than itself, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. The Trustee makes no representation as to the validity, value or condition of any property covered or intended to be covered by the Lien of the Collateral Documents or any part thereof or as to the title of the Issuer or any Subsidiary to such property or as to the security afforded by the Collateral Documents or hereby. SECTION 7.05. NOTICE OF DEFAULTS. ------------------ If a Default or Event of Default occurs and is continuing and if it is known to a Responsible Officer of the Trustee and/or the Collateral Agent, the Trustee and/or the Collateral Agent shall promptly notify the other, and the Trustee shall mail to Holders of Notes a notice of the Default or Event of Default within 30 days after it occurs. Notwithstanding anything contained in TIA (S)315(b) to the contrary, the Trustee shall not withhold any such notice. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES. ------------------------------------------ Within 60 days after each January 1 beginning with the January 1 following the Issue Date, the Trustee shall mail to the Holders of the Notes a brief report dated as of such reporting date that complies with TIA (S)313(a) (but if no event described in TIA (S)313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee shall, within 90 days thereof, and in compliance with TIA (S)313(b), notify the Holders of the Notes in the event of (1) the release, or release and substitution, of any collateral pursuant to Section 10.03 or 10.04 hereof (and the consideration therefor, if any) the fair value of which equals or exceeds 10% of the principal amount of the Notes outstanding at the time of such release or (2) the character and amount of any advances made by it since the date of the last report transmitted pursuant to TIA (S)313(a) (or if no such report has yet been so transmitted, since the date hereof), for the reimbursement of which it may claim a lien or charge higher than that of the Notes, the aggregate amount of which at any time exceeds 10% of the principal amount of the Notes outstanding at such time. The Trustee also shall comply with TIA (S)313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA (S)313(c). A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Issuer and filed with the SEC and each stock exchange, if any, on which the Notes are listed, in accordance with TIA (S)313(d). The Issuer shall promptly notify the Trustee when the Notes are listed on any stock exchange. SECTION 7.07. COMPENSATION AND INDEMNITY. -------------------------- The Issuer shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuer shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of each of the Trustee's agents and counsel. The Issuer shall indemnify and hold harmless the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture without negligence or bad faith on its part, including, but not limited to, all losses, liabilities or expenses arising in connection with the release or presence of any Hazardous Substance at or from the Real Estate whether foreseeable or unforeseeable, regardless of the source of such release or when such release occurred or such presence is discovered. The foregoing indemnity includes, without limitation, all costs of removal, remediation of any kind, and disposal of such Hazardous Substances (whether or not such Hazardous Substances may be legally allowed to remain in the Real Estate if removal or remediation is prudent), after a foreclosure, the cost of determining whether the Real Estate that was the subject of the foreclosure is in compliance and causing such Real Estate to be in compliance with all applicable Environmental Laws, and the Trustee's reasonable attorneys' and consultants' fees and court costs relating thereto. The Trustee shall notify the Issuer promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Issuer shall not relieve the Issuer of its obligations hereunder. The Issuer shall defend the claim and the Trustee shall cooperate in the defense. The Trustee and may have separate counsel and the Issuer shall pay the reasonable fees and expenses of such counsel. The Issuer need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Issuer under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. To secure the Issuer's payment obligations in this Section, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(e) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 7.08. REPLACEMENT OF TRUSTEE AND COLLATERAL AGENT. ------------------------------------------- A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Issuer. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Issuer in writing. The Issuer may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Issuer shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Issuer. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Issuer, or the Holders of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee after written request by any Holder of a Note who has been a Holder of a Note for at least six months fails to comply with Section 7.10 hereof, such Holder of a Note may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuer. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee or the Trustee shall mail a notice of such succession to Holders of the Notes. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee provided all sums owing to the retiring Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section, the Issuer's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. ----------------------------------------------------------------- If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation or association without any further act shall be the successor Trustee. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. ----------------------------- There shall at all times be a Trustee and a Collateral Agent hereunder which shall be a corporation organized and doing business under the laws of the United States of America or of any state thereof authorized under such laws to exercise corporate trust powers, shall be subject to supervision or examination by federal or state authority and shall have a combined capital and surplus of at least $100 million as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA (S)(S)310(a)(1), (2) and (5). The Trustee is subject to TIA (S)310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST ISSUER. ------------------------------- The Trustee is subject to TIA (S)311(a), excluding any creditor relationship listed in TIA (S)311(b). A Trustee who has resigned or been removed shall be subject to TIA (S)311(a) to the extent indicated therein. ARTICLE 8 DEFEASANCE SECTION 8.01. OPTION TO EFFECT DEFEASANCE. --------------------------- The Issuer may, at the option of its Board of Trustees evidenced by a resolution set forth in an Officers' Certificate, at any time, with respect to the Notes, elect to have Section 8.02 hereof be applied to all outstanding Notes upon compliance with the conditions set forth below in this Article Eight. SECTION 8.02. DEFEASANCE AND DISCHARGE. ------------------------ Upon the Issuer's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Issuer shall be deemed to have been discharged from its obligations with respect to all outstanding Notes on the date the conditions set forth below (including Section 8.03) are satisfied (hereinafter, "Defeasance"). For this purpose, such Defeasance means that the Issuer shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.04 hereof and the other Sections of this Indenture referred to in (a) and (b) of this Section 8.02, and to have satisfied all its other obligations under such Notes and this Indenture (and the Trustee, on demand of and at the expense of the Issuer, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Notes to receive solely from the trust fund described in Section 8.03 hereof, and as more fully set forth in such Section, payments in respect of the principal of and interest on such Notes when such payments are due, (b) the Issuer's obligations with respect to such Notes under Sections 2.04, 2.06, 2.07, 2.10 and 4.02 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Issuer's obligations in connection therewith, and (d) this Article Eight. SECTION 8.03. CONDITIONS TO DEFEASANCE. ------------------------ The following shall be the conditions to the application of Section 8.02 hereof to the outstanding Notes: (a) the Issuer shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10 hereof who shall agree to comply with the provisions of this Article Eight applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Notes, (i) Cash in an amount or (ii) non-callable Governmental Securities which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment under the Notes, Cash in an amount, or (iii) a combination thereof, in such amounts, as will be sufficient to pay and discharge and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge (A) the principal of and interest on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and (B) any mandatory sinking fund payments or analogous payments applicable to the outstanding Notes on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Notes; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such non-callable Governmental Securities to said payments with respect to the Notes; (b) no Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit; (c) such Defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Issuer is a party or by which the Issuer is bound; (d) the Issuer shall have delivered to the Trustee an Officers' Certificate stating that the deposit made by the Issuer pursuant to its election under Section 8.02 hereof was not made by the Issuer with the intent of preferring the Holders over other creditors of the Issuer or with the intent of defeating, hindering, delaying or defrauding creditors of the Issuer or others; (e) the Issuer shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the Defeasance under Section 8.02 have been complied with as contemplated by this Section 8.03; (f) the Issuer shall have delivered to the Trustee an Opinion of Counsel reasonably acceptable to the Trustee confirming that (i) the Issuer has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Defeasance had not occurred; and (g) the Issuer shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit would not constitute a preference as defined in Section 547 of the Bankruptcy Code, and the trust funds would not constitute property included within the estate of the debtor. SECTION 8.04. DEPOSITED MONEY AND GOVERNMENTAL SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. -------------------------------------- Subject to Section 8.05 hereof, all money and Governmental Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.04, the "Trustee") pursuant to Section 8.03 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Issuer acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal and interest, but such money need not be segregated from other funds except to the extent required by law. The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or Governmental Securities deposited pursuant to Section 8.03 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes. Anything in this Article Eight to the contrary notwithstanding, the Trustee shall deliver or pay to the Issuer from time to time upon the request of the Issuer any money or Governmental Securities held by it as provided in Section 8.03 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent Defeasance. SECTION 8.05. REPAYMENT TO ISSUER. ------------------- Any money deposited with the Trustee or any Paying Agent, or then held by the Issuer, in trust for the payment of the principal of or interest on any Note and remaining unclaimed for two years after such principal or interest has become due and payable shall be paid to the Issuer on its request or (if then held by the Issuer) shall be discharged from such trust; and the Holder of such Note shall thereafter, as a general unsecured creditor, look only to the Issuer for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Issuer, as trustees thereof, shall thereupon cease; provided, however, that the Trustee or such -------- ------- Paying Agent, before being required to make any such repayment, may at the expense of the Issuer cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of money then remaining will be repaid to the Issuer. SECTION 8.06. REINSTATEMENT. ------------- If the Trustee or Paying Agent is unable to apply any Cash or Governmental Securities in accordance with Section 8.02 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Issuer's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 hereof, as the case may be; provided, however, that, if the Issuer makes any -------- ------- payment of principal or interest on any Note following the reinstatement of its obligations, the Issuer shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES. ----------------------------------- Notwithstanding Section 9.02 hereof, the Issuer and the Trustee may amend or supplement this Indenture and the Notes without the consent of any Holder of a Note: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes; (c) to provide for (i) the assumption of the Issuer's obligations to the Holders of the Notes in the case of a merger or consolidation pursuant to Article 5 hereof, and (ii) certain amendments to the Collateral Documents expressly called for therein pursuant to Section 10.01 hereof; (d) to execute and deliver any documents necessary or appropriate to release Liens on any Collateral as permitted by Section 10.03 or 10.04 hereof; (e) to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not materially adversely affect the legal rights hereunder of any Holder of the Notes; or (f) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA. Upon the request of the Issuer accompanied by a resolution of the Board of Trustees of the Issuer authorizing the execution of any such amended or supplemental Indenture, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, the Trustee shall join with the Issuer in the execution of any amended or supplemental Indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations which may be therein contained, but the Trustee shall not be obligated to enter into any such amended or supplemental Indenture which affects its own rights, duties or immunities under this Indenture, the Collateral Documents or otherwise. The Issuer shall give the Holders of the Notes notice of the effectiveness of any amendment under this Section 9.01. SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES. -------------------------------- The Issuer and the Trustee may amend or supplement this Indenture, the Notes, or any amended or supplemental Indenture with the written consent of the Required Holders (including consents obtained in connection with a tender offer or exchange offer for the Notes), and any existing Default or Event of Default and its consequences or compliance with any provision of this Indenture or the Notes may be waived with the consent of the Required Holders (including consents obtained in connection with a tender offer or exchange offer for the Notes). Upon the request of the Issuer accompanied by a resolution the Board of Trustees of the Issuer authorizing the execution of any such amended or supplemental Indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Required Holders as aforesaid, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, the Trustee shall join with the Issuer in the execution of such amended or supplemental Indenture unless such amended or supplemental Indenture affects the Trustee's own rights, duties or immunities under this Indenture, or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such amended or supplemental Indenture. After an amendment, supplement or waiver under this Section becomes effective, the Issuer shall mail to the Holders of Notes affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Issuer to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Required Holders may waive compliance in a particular instance by the Issuer with any provision of this Indenture or the Notes. However, without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a nonconsenting Holder of Notes): (a) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Note or reduce the redemption price of the Notes; (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of or interest on the Notes (except a rescission of acceleration of the Notes by the Required Holders and a waiver of the payment default that resulted from such acceleration); (e) make any Note payable in money other than that stated in the Notes; (f) make any change in the provisions of this Indenture relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or interest on the Notes; (g) directly or indirectly release Liens on all or substantially all of the Collateral except in connection with a merger, consolidation or disposition of assets permitted under this Indenture; (h) make any change in the foregoing amendment and waiver provision; or (i) waive a redemption payment with respect to any Note. SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. ----------------------------------- Every amendment or supplement to this Indenture or the Notes shall be set forth in an amended or supplemental Indenture that complies with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. --------------------------------- Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder of a Note and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder of a Note or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder of a Note. The Issuer may fix a record date for determining which Holders of the Notes must consent to such amendment, supplement or waiver. If the Issuer fixes a record date, the record date shall be fixed at (i) the later of 30 days prior to the first solicitation of such consent or the date of the most recent list of Holders of Notes furnished to the Trustee prior to such solicitation pursuant to Section 2.05 hereof or (ii) such other date as the Issuer shall designate. SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES. -------------------------------- The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Issuer in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. -------------------------------- The Trustee shall sign any amended or supplemental Indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Issuer may not sign an amendment or supplemental Indenture until its Board of Trustees approves it. In signing or refusing to sign such amendment or supplemental Indenture, the Trustee shall be entitled to receive, if requested, an indemnity reasonably satisfactory to it and to receive and, subject to Section 7.01 hereof, shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel as conclusive evidence that such amendment or supplemental Indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Issuer in accordance with its terms. ARTICLE 10 COLLATERAL AND SECURITY SECTION 10.01. COLLATERAL DOCUMENTS. -------------------- The due and punctual payment of the principal of and interest on the Notes when and as the same shall be due and payable, whether on an interest payment date or a principal amortization date, at maturity, by acceleration, repurchase, redemption or otherwise, and interest on the overdue principal of and interest (to the extent permitted by law), if any, on the Notes and performance of all other obligations of the Issuer to the Holders of Notes, the Trustee or the Collateral Agent under this Indenture, the Collateral Documents and the Notes, according to the terms hereunder or thereunder, shall be secured as provided in the Collateral Documents which the Issuer and the Subsidiaries have entered into simultaneously with the execution of this Indenture. Each Holder of Notes, by its acceptance thereof, consents and agrees to the terms of the Collateral Documents (including, without limitation, the provisions providing for foreclosure and release of Collateral) as the same may be in effect or may be amended from time to time in accordance with its terms and authorizes and directs the Collateral Agent to enter into the Collateral Documents and to perform its obligations and exercise its rights thereunder in accordance therewith. The Issuer shall deliver to the Trustee copies of all Collateral Documents, and, subject to the provisions of the Collateral Documents, shall do or cause to be done all such acts and things as may be necessary or proper, or as may be required by the provisions of the Collateral Documents, to assure and confirm to the Trustee the security interest in the Collateral contemplated hereby, by the Collateral Documents or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and the Notes secured hereby, according to the intent and purposes herein expressed. The Issuer shall take, or shall cause the Subsidiaries to take, upon request of the Trustee, any and all actions reasonably required to cause the Collateral Documents to create and maintain, as security for the Obligations of the Issuer hereunder, a valid and enforceable perfected first priority Lien in and on all of the Collateral, in favor of the Collateral Agent for the benefit of the Trustee, the Collateral Agent and the Holders of Notes, (a) superior to and prior to the rights of all third Persons other than those holding the First Lien Debt, and (b) subject to no Liens other than the Liens permitted under Section 4.13 hereof. SECTION 10.02. RECORDING AND OPINIONS. ---------------------- (a) The Issuer shall furnish to the Trustee promptly following the execution and delivery of this Indenture, an Opinion of Counsel either (i) stating that in the opinion of such counsel all action has been taken with respect to the recording, registering and filing of this Indenture, the Mortgages, the Assignments of Leases, the Collateral Assignments of Mortgages, the Collateral Assignments of Leases and Uniform Commercial Code financing statements necessary to make effective and perfect the Lien intended to be created by the Collateral Documents, and reciting with respect to the security interests in the Collateral, the details of such action, or (ii) stating that, in the opinion of such counsel, no such action is necessary to make such Lien effective. (b) The Issuer shall furnish to the Trustee and the Collateral Agent within three months after each anniversary of the Issue Date an Opinion of Counsel, dated as of such date, either (i) (A) stating that, in the opinion of such counsel, action has been taken with respect to the recording, registering, filing, re-recording, re-registering and refiling of all supplemental indentures, mortgages, financing statements, continuation statements or other instruments of further assurance as is necessary to maintain the Lien of the Collateral Documents and reciting with respect to the security interests in the Collateral the details of such action or referring to prior Opinions of Counsel in which such details are given, and (B) stating that, based on relevant laws as in effect on the date of such Opinion of Counsel, all financing statements and continuation statements have been executed and filed that are necessary as of such date and during the succeeding 12 months fully to preserve and protect, to the extent such protection and preservation are possible by filing, the rights of the Holders of Notes, the Trustee and the Collateral Agent hereunder and under the Collateral Documents with respect to the security interests in the Collateral, or (ii) stating that, in the opinion of such counsel, no such action is necessary to maintain such Lien and assignment. SECTION 10.03. RELEASE OF COLLATERAL. --------------------- (a) Subject to subsections (b) and (d) of this Section 10.03, Collateral may be released from the Lien and security interest created by the Collateral Documents at any time or from time to time in accordance with the provisions of the Collateral Documents. (b) No Collateral shall be released from the Lien and security interest created by the Collateral Documents pursuant to the provisions of the Collateral Documents or hereof unless the Issuer shall have made an Asset Sale Offer in accordance with Section 3.09 hereof. (c) Notwithstanding any of the terms hereof or of any of the Collateral Documents, at any time when an Event of Default shall have occurred and be continuing and the maturity of the Notes shall have been accelerated (whether by declaration or otherwise), the Collateral Agent shall not, without the consent of the Required Holders, release any Collateral pursuant to the provisions hereof or any of the Collateral Documents. (d) The release of any Collateral from the terms of this Indenture and the Collateral Documents shall not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Collateral is released pursuant to the terms hereof. To the extent applicable, the Issuer shall cause TIA (S)314(d) relating to the release of property or securities from the Lien and security interest of the Collateral Documents and relating to the substitution therefor of any property or securities to be subjected to the Lien and security interest of the Collateral Documents to be complied with. Any certificate or opinion required by TIA (S)314(d) may be made by an Officer of the Issuer except in cases where TIA (S)314(d) requires that such certificate or opinion be made by an independent Person, which Person shall be an independent engineer, appraiser or other expert selected or approved by the Trustee or the Collateral Agent in the exercise of reasonable care. SECTION 10.04. CERTIFICATES OF THE ISSUER. -------------------------- The Issuer shall furnish to the Trustee and the Collateral Agent, prior to each proposed release of Collateral pursuant to the Collateral Documents or this Indenture, (i) all documents required by Section 314(d) of the TIA and (ii) an Opinion of Counsel to the effect that such accompanying documents constitute all documents required by Section 314(d) of the TIA. The Trustee may, to the extent permitted by Sections 7.01 and 7.02 hereof, accept as conclusive evidence of compliance with the foregoing provisions the appropriate statements contained in such documents and such Opinion of Counsel. SECTION 10.05. AUTHORIZATION OF ACTIONS TO BE TAKEN BY THE COLLATERAL AGENT UNDER THE COLLATERAL DOCUMENTS. -------------------------------------------------------------- Subject to the provisions of Sections 7.01 and 7.02 hereof, the Trustee may, in its sole discretion and without the consent of the Holders of Notes, on behalf of the Holders of Notes, direct the Collateral Agent to take all actions it deems necessary or appropriate in order to (a) enforce any of the terms of the Collateral Documents and (b) collect and receive any and all amounts payable in respect of the Obligations of the Issuer hereunder or under the Collateral Documents. The Trustee and the Collateral Agent shall have power to institute and maintain such suits and proceedings and enter into such agreements as either may deem expedient to prevent any impairment of the Collateral by any acts that may be unlawful or in violation of the Collateral Documents or this Indenture, and such suits, proceedings and agreements as the Trustee or the Collateral Agent may deem expedient to preserve or protect its interests and the interests of the Holders of Notes in the Collateral (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or be prejudicial to the interests of the Trustee, the Collateral Agent or the Holders of Notes). SECTION 10.06. AUTHORIZATION OF RECEIPT OF FUNDS BY THE TRUSTEE UNDER THE COLLATERAL DOCUMENTS. -------------------------------------- The Trustee shall cause the Collateral Agent to deliver to the Trustee and the Trustee is authorized to receive any funds for the benefit of the Holders of Notes distributed under the Collateral Documents, and to make further distributions of such funds to the Holders of Notes according to the provisions of this Indenture and the Collateral Documents. SECTION 10.07. TERMINATION OF SECURITY INTEREST. -------------------------------- Upon the full and final payment of all Obligations of the Issuer under this Indenture, the Notes and the Collateral Documents (including an effective defeasance pursuant to Section 8.02 hereof), the Trustee shall, at the request of the Issuer, release the Liens pursuant to this Indenture. If the Trustee or Paying Agent is unable to apply any United States Dollars or Governmental Securities in accordance with Section 8.02 hereof by reason of any order or judgment of any court or Governmental Authority enjoining, restraining or otherwise prohibiting such application, then the Trustee shall cause the Collateral Agent to cause the Liens to be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 hereof. SECTION 10.08. COLLATERAL AGENT'S DUTIES. ------------------------- The Collateral Agent, acting in its capacity as such, shall have only such duties with respect to the Collateral as are set forth in the Collateral Documents. ARTICLE 11 GUARANTEE OF NOTES SECTION 11.01. UNCONDITIONAL GUARANTEE. ----------------------- Subject to the provisions of this Article 11 the Guarantors, jointly and severally, hereby unconditionally guarantee to each Holder of a Note authenticated and delivered by the Trustee, and to the Trustee, the due and punctual payment of the principal of and interest on such Note, when and as the same shall become due and payable, whether by declaration thereof or otherwise, in accordance with the terms of such Note and of this Indenture. The Guarantors hereby agree that their obligations hereunder shall be absolute and unconditional, irrespective of, and shall be unaffected by, any invalidity, irregularity or unenforceability of any such Note or this Indenture, any failure to enforce the provisions of any such Note or this Indenture, any waiver, modification or indulgence granted to the Issuer with respect thereto, by the holder of such Note or the Trustee, or any other circumstances which may otherwise constitute a legal or equitable discharge of a surety or guarantor. The Guarantors hereby waive diligence, presentment, demand of payment, filing of claims with a court in the event of merger or bankruptcy of the Issuer, any right to require a proceeding first against the Issuer, the benefit of discussion, protest or notice with respect to any such Note or the Indebtedness evidenced thereby and all demands whatsoever, and covenant that this Guarantee will not be discharged as to any such Note except by payment in full of the principal of and interest thereon. The Guarantors shall be subrogated to all rights of the Holder of any Notes against the Issuer in respect of any amounts paid to the Holder by the Guarantors pursuant to the provisions of this Guarantee; provided, however, that -------- ------- the Guarantors shall not be entitled to enforce, or to receive any payments arising out of or based upon, such right of subrogation until the principal of and interest on all Notes shall have been paid in full. The Guarantees set forth in this Section 11.01 shall not be valid or become obligatory for any purpose with respect to a Note until the certificate of authentication on such Note shall have been signed by or on behalf of the Trustee. SECTION 11.02. CONTRIBUTION. ------------ If any Guarantor shall have paid more than its pro rata share pursuant to this Article 11, then such Guarantor (a "Funding Guarantor") shall be entitled to a contribution from all other Guarantors in a pro rata amount based --- ---- on the Adjusted Net Assets of each Guarantor (including the Funding Guarantor) for all payments, damages and expenses incurred by such Funding Guarantor in discharging the Issuer's obligations with respect to the Notes or any other Guarantor's obligations with respect to the Guarantees. SECTION 11.03. "TRUSTEE" TO INCLUDE PAYING AGENT. -------------------------------- In case at any time any paying agent other than the Trustee shall have been appointed by the Issuer and be then acting hereunder, the term "Trustee" as used in this Article 11 shall in such case (unless the context shall otherwise require) be construed as extending to and including such paying agent within its meaning as fully for all intents and purposes as if such paying agent were named in this Article 11 in place of the Trustee. SECTION 11.04. RELEASE OF A GUARANTOR. ---------------------- Upon the sale or disposition of any Guarantor by the Issuer in compliance with the terms of this Indenture (including by way of merger or consolidation), such Guarantor shall be deemed released from all obligations under this Article 11 without any further action required on the part of the Trustee or any Holder. All other Guarantors shall remain jointly and severally liable for the full amount of principal of and interest on the Notes as provided in this Article 11. At the request of the Issuer, however, the Trustee shall execute and deliver an appropriate instrument evidencing such release. SECTION 11.05. EXECUTION OF GUARANTEES. ----------------------- To evidence their guarantee to the Holders specified in Section 11.01 hereof, the Guarantors hereby agree to execute the Guarantee substantially in the form above recited to be endorsed on each Note authenticated and delivered by the Trustee. Each such Guarantee shall be signed on behalf of each of the Guarantors by its Chairman of the Board, President or a Vice President prior to the authentication of the Note on which it is endorsed, and the delivery of such Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of such Guarantee on behalf of the Guarantors. Such signatures upon a Guarantee may be manual or facsimile signature of the present, past or any future such officers and may be imprinted or otherwise reproduced on the Guarantees, and in case any such officer who shall have signed any of the Guarantees shall cease to be such officer before the Note on which such Guarantee is endorsed shall have been authenticated and delivered by the Trustee or disposed of by the Issuer, such Note nevertheless may be authenticated and delivered or disposed of as though the person who signed the Guarantee had not ceased to be such officer of such Guarantor. ARTICLE 12 MISCELLANEOUS SECTION 12.01. TRUST INDENTURE ACT CONTROLS. ---------------------------- If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA (S)318(c), the imposed duties shall control. SECTION 12.02. NOTICES. ------- Any notice or communication by the Issuer or the Trustee to any other party hereto is duly given if in writing and delivered in person or mailed by first class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the party's address: If to the Issuer: Mortgage and Realty Trust 8380 Old York Road, Suite 300 Elkins Park, Pennsylvania 19117 Telecopier No.: (215) 881-6483 Attention: Treasurer If to the Trustee: Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, DE 19890 Telecopier No: (302) 651-8882 Attention: Corporate Trust Department The Issuer or the Trustee, by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders of Notes) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder of a Note shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA (S)313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder of a Note or any defect in it shall not affect its sufficiency with respect to other Holders of Notes. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Issuer mails a notice or communication to Holders of Notes, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 12.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES. ---------------------------------------------------------------- Holders of the Notes may communicate pursuant to TIA (S)312(b) with other Holders of Notes with respect to their rights under this Indenture, the Notes and the Collateral Documents. The Trustee shall act in accordance with TIA (S)312(b) with respect to such communications. The Issuer, the Trustee, the Collateral Agent, the Registrar and anyone else shall have the protection of TIA (S)312(c). SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT ------------------------------- Upon any request or application by the Issuer to the Trustee to take any action under this Indenture, the Issuer shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 12.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 12.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants provided for in this Indenture relating to the proposed action have been satisfied. SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. ------------------------------------------------------------- Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA (S)314(a)(4)) shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with. SECTION 12.06. RULES BY TRUSTEE AND AGENTS. --------------------------- The Trustee may make reasonable rules for action by or at a meeting of Holders of Notes. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 12.07. NO PERSONAL LIABILITY OF TRUSTEES, OFFICERS, EMPLOYEES AND EQUITYHOLDERS. -------------------------------------- No trustee, officer, employee or equityholder of the Issuer, as such, shall have any liability for any obligations of the Issuer under the Notes, this Indenture or the Collateral Documents or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. SECTION 12.08. GOVERNING LAW. ------------- The internal law of the State of New York shall govern and be used to construe this Indenture and the Notes. SECTION 12.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. -------------------------------------------------------------- This Indenture and the Notes may not be used to interpret another indenture, loan or debt agreement of the Issuer or the Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. This writing constitutes the entire agreement of the parties with respect to the subject matter hereof. Unless expressly otherwise indicated herein, an action or transaction permitted by one provision hereof must nonetheless comply with all other applicable provisions hereof; and any action or transaction not permitted by any provision of this Indenture will not be permitted regardless of whether any other provisions hereof might permit such action or transaction. SECTION 12.10. SUCCESSORS. ---------- All agreements of the Issuer in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 12.11. SEVERABILITY. ------------ In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 12.12. COUNTERPART ORIGINALS. --------------------- The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 12.13. TABLE OF CONTENTS, HEADINGS, ETC. --------------------------------- The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 12.14. AMENDMENT AND RESTATEMENT. ------------------------- This Indenture amends and restates in its entirety the Indenture, dated as of July 15, 1992, as amended, between the Issuer and Wilmington Trust Company, as trustee, relating to the Issuer's Senior Secured Uncertificated Notes due 1995. SECTION 12.15. SATISFACTION AND DISCHARGE. -------------------------- Upon the indefeasible payment in full of all Obligations of the Issuer hereunder and under the Notes, the Issuer and the Guarantors shall be released from all their respective obligations hereunder and under the Notes and this Indenture shall cease to be of further effect. [Signatures on following page] SIGNATURES Dated as of _______ __, 1995 MORTGAGE AND REALTY TRUST By:____________________________ Name: Title: Attest: ________________________ Name: Title: Dated as of _______ __, 1995 WILMINGTON TRUST COMPANY, as Trustee By:____________________________ Name: Title: Attest: ________________________ Name: Title: Accepted and agreed to, solely with respect to the Guarantees and all express obligations of the Guarantors set forth elsewhere herein. MRT WEST, INC. MRT CREEKSIDE, INC. MRT NEWARK, INC. MRT SANTA MONICA, INC. 150 RITTENHOUSE CIRCLE, INC. Dated as of _________ ___, 1995 By:___________________________ Title: Vice President of the foregoing Attest: _____________________ Name: Title: EXHIBIT A [Face of Note] 11-1/8% Senior Secured Note due 2002 No.___ $____________ Mortgage and Realty Trust promises to pay to ________________________ or its registered assigns the outstanding principal balance on __________ __, 2002. The Interest Payment Dates shall be June 30 and December 31, commencing _________ __, 1995. The Record Dates shall be June 1 and December 1 (whether or not a Business Day). Dated: ________ Mortgage and Realty Trust (SEAL) By:________________________________ Title: This is one of the Notes referred to in the within mentioned Indenture: Wilmington Trust Company, as Trustee By:_________________________________ Authorized Signatory [Back of Note] 11-1/8% Senior Secured Note due 2002 Capitalized terms used herein have the meanings assigned to them in the Indenture (as defined below) unless otherwise indicated. 1. Interest. Mortgage and Realty Trust, a real estate investment trust organized under the laws of Maryland (the "Issuer"), promises to pay interest on the principal amount of this Note at the rate and in the manner specified below. Interest will accrue at 11-1/8% per annum and will be payable semiannually in arrears on each June 30 and December 31, commencing _________ __, 1995 or if any such day is not a Business Day on the next succeeding Business Day (each an "Interest Payment Date") to Holders of record of the Notes at the close of business on the immediately preceding June 1 and December 1, whether or not a Business Day. Interest will be computed on the basis of a 360- day year consisting of twelve 30-day months. Interest shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from ________ __, 1995. The Issuer shall pay interest on overdue principal at the rate equal to 2% per annum in excess of the then applicable interest rate on the Notes to the extent lawful; and it shall pay interest on overdue installments of interest (without regard to any applicable grace periods) at the same rate to the extent lawful. 2. Method of Payment. The Issuer will pay interest on the Notes (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the record date next preceding the Interest Payment Date, even if such Notes are cancelled after such record date and on or before such Interest Payment Date. The Holder hereof must surrender this Note to a Paying Agent to collect principal payments. The Issuer will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Notes will be payable both as to principal and interest at the office or agency of the Issuer maintained for such purpose within the City of Philadelphia, Pennsylvania or, at the option of a Holder, payment of interest may be made by check mailed to such Holder at its address set forth in the register of Holders or by wire to an account designated by such Holder. Unless otherwise designated by the Issuer, the Issuer's office or agency in Philadelphia will be the office or agency of the Trustee maintained for such a purpose. 3. Paying Agent and Registrar. Initially, the Trustee will act as Paying Agent and Registrar. The Issuer may change any Paying Agent, Registrar or co-registrar without prior notice to any Holder of a Note. The Issuer may act in any such capacity. 4. Indenture. The Issuer issued the Notes under an Indenture, dated as of ________ __, 1995 (the "Indenture"), between the Issuer and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S.C. (S)(S) 77aaa-77bbbb), as in effect on the Issue Date. The Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and such act for a statement of such terms. The terms of the Indenture shall govern any inconsistencies between the Indenture and the Notes. The Notes are secured obligations of the Issuer limited to $110,000,000 in aggregate principal amount. 5. Optional Redemption. The Issuer shall have the option to redeem the Notes, in whole or in part, upon not less than 30 nor more than 60 days' notice, at par plus accrued and unpaid interest thereon to the applicable redemption date. 6. Mandatory Redemption. Except as set forth under Sections 3.09 and 4.19 of the Indenture, the Issuer will not be required to make mandatory redemption payments or sinking fund payments with respect to the Notes. 7. Repurchase at Option of Holder. (a) If there is a Change of Control unless waived by the Required Holders, the Issuer shall be required to offer to purchase on the Change of Control Payment Date all outstanding Notes at a purchase price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest to the Change of Control Payment Date. Holders of Notes that are subject to an offer to purchase will receive a Change of Control Offer from the Issuer prior to any related Change of Control Payment Date and may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below. (b) If at any time the aggregate amount of Asset Sale Proceeds or net cash proceeds of Indebtedness incurred pursuant to Section 4.14(i) of the Indenture that have not been applied in accordance with Section 3.09 of the Indenture (exclusive of any Asset Sale Proceeds or net cash proceeds which remain after the completion of any prior Asset Sale Offer) exceeds $10 million, the Issuer shall be required to purchase the maximum principal amount of Notes that, together with accrued and unpaid interest thereon, may be purchased with 80% of any Asset Sale Proceeds or 100% of the net cash proceeds of such Indebtedness, at 100% of the outstanding principal amount thereof plus accrued and unpaid interest, if any, to the date fixed for the closing of such offer. To the extent that the aggregate principal amount of Notes tendered together with accrued and unpaid interest thereon pursuant to any Asset Sale Offer is less than the Asset Sale Proceeds or net cash proceeds of Indebtedness available therefor, the Issuer may use such deficiency in accordance with the terms of the Indenture. If the aggregate principal amount of Notes surrendered by Holders thereof together with accrued and unpaid interest thereon exceeds the amount of Asset Sale Proceeds or net cash proceeds of Indebtedness, the Notes to be redeemed shall be selected on a pro rata basis (with such adjustments as may be deemed appropriate by the Issuer so that only Notes in denominations of $1,000, or integral multiples thereof, shall be purchased). Holders of Notes that are the subject of an offer to purchase will receive an Asset Sale Offer from the Issuer (or the applicable Subsidiary) prior to any related purchase date and may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below. Any Holder may at any time elect to deliver to the Trustee written instructions (each a "Standing Instruction") stating that such Holder desires to participate in any Asset Sale Offer by tendering the maximum permitted number of such Holder's Notes for repurchase in such Asset Sale Offer. Upon receipt of such Standing Instruction, the Trustee shall deem the maximum permitted number of such Holder's Notes tendered upon the commencement of any Asset Sale Offer. The issuing Holder may withdraw such Standing Instruction at any time prior to the expiration of an Offer Period by so notifying the Trustee in writing. Each Holder electing not to deliver a Standing Instruction shall respond to the notice of an Asset Sale Offer, as set forth in Section 3.09 of the Indenture, prior to the termination of the Offer Period. 8. Notice of Redemption. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder of Notes are to be redeemed. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. 9. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder of a Note, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Note or portion of a Note selected for redemption. Also, it need not exchange or register the transfer of any Notes for a period of 15 days before a selection of Notes to be redeemed. 10. Persons Deemed Owners. Prior to due presentment to the Trustee for registration of the transfer of this Note, the Trustee, any Agent and the Issuer may deem and treat the Person in whose name this Note is registered as its absolute owner for the purpose of receiving payment of principal of and interest on this Note and for all other purposes whatsoever, whether or not this Note is overdue, and neither the Trustee, any Agent nor the Issuer shall be affected by notice to the contrary. The Holder shall be treated as its owner for all purposes. 11. Amendments, Supplement and Waivers. Subject to certain exceptions, the Indenture, the Notes and the Collateral Documents may be amended or supplemented with the consent of the Required Holders, and any existing default or compliance with any provision of the Indenture or the Notes may be waived with the consent of the Required Holders. Without the consent of any Holder of a Note, the Indenture, the Notes and the Collateral Documents may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Issuer's obligations to Holders of the Notes in case of a merger or consolidation, to amend the Collateral Documents in case of a merger or consolidation pursuant to the terms thereof, to execute and deliver any documents necessary or appropriate to release Liens on any Collateral as permitted by Section 10.03 of the Indenture, to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not materially adversely affect the legal rights under the Indenture of any such Holder, or to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. 12. Defaults and Remedies. Events of Default include, without limitation: the Issuer shall fail to make any payment in respect of principal of the Notes or under Section 3.09 or 4.19 of the Indenture when the same becomes due and payable and such failure continues for a period of 5 Business Days after the due date of such payment or the Issuer shall fail to make any payment when due of interest on the Notes and such failure continues for a period of 10 days after the due date of such payment; or any representation or warranty made or deemed made by the Issuer or any Subsidiary (or any of their officers) under the Disclosure Statement or the Collateral Documents shall prove to have been untrue or incorrect in any material respect when made or deemed made; or the Issuer (or the Issuer or any Subsidiary in the case of the Collateral Documents) shall fail to perform or observe (i) any term, covenant or agreement contained in Article 4 (other than Section 4.07) or Article 5 of the Indenture or (ii) any other term, covenant or agreement contained in the Indenture, the Plan or the Collateral Documents, if such failure under this clause (ii) shall remain unremedied for 30 days after the earlier of the date on which (A) an Officer of the Issuer becomes aware of such failure or (B) written notice thereof shall have been given to the Issuer by the Trustee or the Holders; or the Issuer or any Subsidiary shall fail, after any applicable grace period, to pay any principal of or premium, if any, or interest on any of its Indebtedness in an amount exceeding $1,000,000 (excluding the Notes), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness, or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or the Issuer or any Material Subsidiary of the Issuer shall generally not pay its debts as such debts become due except such debts that are the subject of a good faith dispute, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Issuer or such Material Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against the Issuer or such Material Subsidiary (but not instituted by it), either such proceedings shall remain undismissed or unstayed for a period of 30 days or any of the actions sought in such proceedings shall occur, or the Issuer or such Material Subsidiary shall take any action to authorize any of the foregoing actions; or any judgment or order for the payment of money in excess of $1,000,000 shall be rendered against the Issuer or any Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (ii) there shall be any period of ten consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or except for releases of Collateral pursuant to Asset Sales in accordance with Section 4.11 of the Indenture, the Indenture or the Collateral Documents shall, for any reason, cease to create a valid Lien on Collateral having a value of $1,000,000 or more purported to be covered thereby, or such Lien shall cease to have the priority Lien status initially granted and be a perfected Lien as to Collateral having a value of $1,000,000 or more. If any Event of Default occurs and is continuing, the Trustee or the Required Holders may declare all the Notes to be due and payable immediately. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, the Required Holders may direct the Trustee in its exercise of any trust or power. The Required Holders, by notice to the Trustee, may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. 13. Trustee Dealings with Issuer. The Trustee under the Indenture, in its individual or other capacity, may make loans to, accept deposits from, and perform services for the Issuer or its Affiliates, and may otherwise deal with the Issuer or its Affiliates, as if it were not Trustee; however, if the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as Trustee or resign. 14. No Personal Liabilities of Trustees, Officers, Employees and Equityholders. No trustee, officer, employee or equityholder of the Issuer or any Guarantor, as such, shall have any liability for any obligations of the Issuer under the Notes, the Indenture or the Collateral Documents or for any obligations of the Guarantors under the Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. 15. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. Abbreviations. Customary abbreviations may be used in the name of a Holder of a Note or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 17. CUSIP Number. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Issuer has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders of Notes. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 18. Collateral Documents. As provided in the Indenture and the Collateral Documents, and subject to certain limitations set forth therein, the Obligations of the Issuer under the Indenture and the Collateral Documents are secured by the Collateral as provided in the Collateral Documents. Each Holder, by accepting a Note, agrees to be bound by all terms and provisions of the Collateral Documents, as the same may be amended from time to time. The Liens created under the Collateral Documents shall be released upon the terms and subject to the conditions set forth in the Indenture and the Collateral Documents. 19. Successor Entity. When a successor Person assumes all the obligations of its predecessor under the Indenture, the Notes and the Collateral Documents, the predecessor Person shall be released from such Obligations. The Issuer will furnish to any Holder of a Note upon written request and without charge a copy of the Indenture or the Collateral Documents. Request may be made to: Mortgage and Realty Trust 8380 Old York Road, Suite 300 Elkins Park, Pennsylvania 19117 Attention: Treasurer ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to _________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ (print or type assignee's name, address and zip code) and irrevocably appoint _________________________________________________ agent to transfer this Note on the books of the Issuer. The Agent may substitute another to act for him. Date: _______________ Your Signature: ___________________________________ (Sign exactly as your name appears on the face of this Note) Signature Guarantee: OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have all or any part of this Note purchased by the Issuer pursuant to Section 3.09 or Section 4.19 of the Indenture, check the appropriate box below: [_] Section 3.09 [_] Section 4.19 If you want to have only part of this Note purchased by the Issuer pursuant to Section 3.09 or Section 4.19 of the Indenture, state the amount you elect to have purchased: $ ________________ Date: _______________ Signature Guarantee: Your Signature:____________________________ (Sign exactly as your name appears on the face of this Note) GUARANTEE For value received, MRT West, Inc., MRT Creekside, Inc., MRT Newark, Inc., MRT Santa Monica, Inc. and 150 Rittenhouse Circle, Inc. (herein called the "Guarantors"), hereby jointly and severally unconditionally guarantee to the Holder of the Note upon which this Guarantee is endorsed the due and punctual payment of the principal of and interest on said Note, when and as the same shall become due and payable, whether by declaration thereof or otherwise, according to the terms thereof and of the Indenture referred to therein. The Guarantors hereby agree that their obligations hereunder shall be joint, absolute and unconditional, irrespective of, and shall be unaffected by, any invalidity, irregularity or unenforceability of said Note or said Indenture, any failure to enforce the provisions of said Note or said Indenture, or any waiver, modification or indulgence granted to the Issuer with respect thereof, by the Holder of said Note or said Trustee or any other circumstances which may otherwise constitute a legal or equitable discharge of a surety or guarantor. The Guarantors hereby waive diligence, presentment, demand of payment, filing of claims with a court in the event of merger or bankruptcy of the Issuer, any right to require a proceeding first against the Issuer, protest or notice with respect to said Note or the indebtedness evidenced thereby and all demands whatsoever, and covenants that this Guarantee will not be discharged except by payment in full of the principal of and interest on said Note. The Guarantors shall be subrogated to all rights of the Holder of said Note against the Issuer in respect of any amounts paid to such holder by the Guarantors pursuant to the provisions of this Guarantee; provided, -------- however, that the Guarantors shall not be entitled to enforce, or to ------- receive any payments arising out of or based upon, such right of subrogation until the principal of and premium, if any, and interest on all Notes issued under said Indenture shall have been paid in full. This Guarantee shall not be valid or become obligatory for any purpose until the certificate of authentication on said Note shall have been signed manually by or on behalf of the Trustee under the Indenture referred to in said Note. This Guarantee shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, each of the Guarantors has caused this Guarantee to be duly executed in facsimile by its duly authorized officer. MRT WEST, INC. MRT CREEKSIDE, INC. MRT NEWARK, INC. MRT SANTA MONICA, INC. 150 RITTENHOUSE CIRCLE, INC. By:_____________________________ Title: Vice President of each of the foregoing Guarantors EXHIBIT E [Form of Pledge Agreement] PLEDGE AGREEMENT, dated as of ____________ __, 1995, made by MORTGAGE AND REALTY TRUST, a real estate investment trust formed under the laws of Maryland (the "Issuer"), in favor of WILMINGTON TRUST COMPANY, as collateral agent for the trustee and the holders under the Amended and Restated Indenture referred to below (in such capacity, the "Collateral Agent"). W I T N E S S E T H: ------------------- WHEREAS, the Issuer has entered into the Amended and Restated Indenture, dated as of __________ __, 1995, with Wilmington Trust Company, as trustee (said Amended and Restated Indenture, as it may be amended or otherwise modified from time to time, being the "Indenture" and capitalized terms not defined herein but defined therein being used herein as therein defined); and WHEREAS, the Issuer is the legal and beneficial owner of the shares of capital stock described in Schedule I hereto and issued by the issuers named therein (the "Pledged Shares"); and WHEREAS, it is a condition precedent under the Plan of Reorganization in the Chapter 11 case of the Issuer that the Issuer shall have made the pledge contemplated by this Agreement; NOW, THEREFORE, in consideration of the premises contained herein and for other good and valuable consideration receipt of which is hereby acknowledged, the Issuer hereby agrees with the Collateral Agent on behalf and for the benefit of the Holders as follows: SECTION 1. Pledge. The Issuer hereby pledges to the Collateral Agent ------ on behalf and for the benefit of the Holders, and grants to the Collateral Agent on behalf and for the benefit of the Holders a security interest in, the following (the "Pledged Collateral"): (i) all of the Pledged Shares; E-1 (ii) all additional shares of stock or other securities of any issuer of the Pledged Shares from time to time acquired by the Issuer in any manner and all shares of stock or other securities of any Person who, after the date of this Agreement, becomes, as a result of any occurrence, a corporate Subsidiary of the Issuer (any such shares being "Additional Shares"); (iii) the certificates representing the shares referred to in clauses (i) and (ii) above; and (iv) all dividends, cash, instruments and other property or proceeds, from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing. SECTION 2. Security for Obligations. This Agreement secures and the ------------------------ Pledged Collateral is security for the full and prompt payment when due (whether at stated maturity, by acceleration or otherwise) of, and the performance of, the Obligations of the Issuer under the Indenture and the Notes, whether now or hereafter existing and whether for principal, interest, fees, expenses or otherwise (the "Secured Obligations"). SECTION 3. Delivery of Pledged Collateral. All certificates or ------------------------------ instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of the Collateral Agent pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Collateral Agent. The Collateral Agent shall have the right, at any time in its discretion and without notice to the Issuer, to transfer to or to register in its name or in the name of any of its nominees any or all of the Pledged Collateral. In addition, the Collateral Agent shall have the right at any time to exchange certificates or instruments representing or evidencing any of the Pledged Collateral for certificates or instruments of smaller or larger denominations. SECTION 4. Representations and Warranties. The Issuer makes the ------------------------------ following representations: E-2 (a) The Pledged Shares (i) have been duly authorized and validly issued; (ii) are fully paid and non-assessable; and (iii) constitute 100% of the issued and outstanding shares of stock of the respective issuers thereof. (b) The Issuer is the legal and beneficial owner of the Pledged Collateral free and clear of any Lien, except for the Lien created by this Agreement and the other Collateral Documents. (c) The pledge and delivery of the Pledged Shares pursuant to this Agreement (and the filing of Uniform Commercial Code ("UCC") financing statements with respect to the Pledged Shares) will create a valid and perfected security interest in the Pledged Collateral, in favor of the Collateral Agent on behalf and for the benefit of the Holders securing the payment of all of the Obligations of the Issuer under the Indenture and the Notes. (d) No consent, authorization, approval, or other action by, and no notice to or filing with, any Governmental Authority is required for the pledge by the Issuer of the Pledged Collateral pursuant to this Agreement or for the due execution, delivery or performance of this Agreement by the Issuer, except for the filing of UCC financing statements with respect to the Pledged Collateral. (e) The issuers listed on Schedule I are the only corporate Subsidiaries of the Issuer. SECTION 5. Further Assurances, Etc. (a) The Issuer agrees that at ----------------------- any time and from time to time, at the cost and expense of the Issuer, the Issuer will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary, or that the Collateral Agent may reasonably request, in order to perfect and protect the Lien granted or purported to be granted hereby or to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. (b) The Issuer agrees to defend the title to the Pledged Collateral and the Lien thereon of the Collateral Agent against the claim of any other Person and to maintain and E-3 preserve such Lien until indefeasible payment in full of all of the Obligations of the Issuer under the Indenture and the Notes. SECTION 6. Voting Rights; Dividends; Etc. ----------------------------- (a) As long as no Default or Event of Default shall have occurred and be continuing (or, in the case of subsection (a)(i) of this Section 6, as long as no notice thereof shall have been given by the Collateral Agent to the Issuer): (i) The Issuer shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement, any other Collateral Document or the Indenture. (ii) The Issuer shall be entitled to receive and retain any and all dividends in respect of the Pledged Collateral, other than any and all (A) dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, (B) dividends and other distributions paid or payable in cash in respect of any Pledged Shares or Additional Pledged Shares in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in redemption of, or in exchange for, any Pledged Collateral, all of which shall be forthwith delivered to the Collateral Agent to hold as Pledged Collateral and shall, if received by the Issuer, be received in trust for the benefit of the Collateral Agent, be segregated from the other property or funds of the Issuer, and be E-4 forthwith delivered to the Collateral Agent as Pledged Collateral in the same form as so received (with any necessary indorsement). (iii) The Collateral Agent shall execute and deliver (or cause to be executed and delivered) to the Issuer all such proxies and other instruments as the Issuer may reasonably request for the purpose of enabling the Issuer to exercise the voting and other rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuance of a Default or an Event of Default: (i) Upon notice by the Collateral Agent to the Issuer, all rights of the Issuer to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 6(a)(i) above shall cease, and all such rights shall thereupon become vested in the Collateral Agent who shall thereupon have the sole right to exercise such voting and other consensual rights. (ii) All rights of the Issuer to receive the dividends which it would otherwise be authorized to receive and retain pursuant to Section 6(a)(ii) above shall cease, and all such rights shall thereupon become vested in the Collateral Agent who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends. (iii) All dividends which are received by the Issuer contrary to the provisions of paragraph (ii) of this Section 6(b) shall be received in trust for the benefit of the Collateral Agent, shall be segregated from other funds of the Issuer and shall be forthwith paid over to the Collateral Agent as Pledged Collateral in the same form as so received (with any necessary indorsement). E-5 (iv) The Issuer shall, if necessary to permit the Collateral Agent to exercise the voting and other rights which it may be entitled to exercise pursuant to Section 6(b)(i) above and to receive all dividends and distributions which it may be entitled to receive under Section 6(b)(ii) above, execute and deliver to the Collateral Agent, from time to time and upon written notice of the Collateral Agent, appropriate proxies, dividend payment orders and other instruments as the Collateral Agent may reasonably request. The foregoing shall not in any way limit the Collateral Agent's power and authority granted pursuant to Section 8 hereof. SECTION 7. Transfers and Other Liens; Additional Shares. (a) The -------------------------------------------- Issuer agrees that it will not (i) sell or otherwise dispose of, or grant any option or warrant with respect to, any of the Pledged Collateral, or (ii) create or permit to exist any Lien upon or with respect to any of the Pledged Collateral, except for the Lien created pursuant to this Agreement. (b) The Issuer agrees that it will (i) cause each issuer of the Pledged Shares not to issue any shares of stock or other securities in addition to or in substitution for the Pledged Shares, except, with the written consent of the Required Holders, to the Issuer, (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all Additional Shares, and (iii) promptly (and in any event within three Business Days) deliver to the Collateral Agent a Pledge Amendment, duly executed by the Issuer, in substantially the form of Schedule II hereto (a "Pledge Amendment"), in respect of the Additional Shares, together with all certificates or other instruments representing or evidencing the same. The Issuer hereby (i) authorizes the Collateral Agent to attach each Pledge Amendment to this Pledge Agreement, (ii) agrees that all Additional Shares listed on any Pledge Amendment delivered to the Collateral Agent shall for all purposes hereunder constitute Pledged Shares, and (iii) is deemed to have made, upon such delivery, the representations and warranties contained in Section 4 hereof with respect to such Pledged Collateral. SECTION 8. Collateral Agent Appointed Attorney-in-Fact and Proxy. ----------------------------------------------------- The Issuer hereby irrevocably constitutes and E-6 appoints the Collateral Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact and proxy with full irrevocable power and authority in the place and stead of the Issuer and in the name of the Issuer or in its own name, from time to time in the Collateral Agent's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute and deliver any and all documents and instruments which the Collateral Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, indorse and collect all instruments made payable to the Issuer representing any dividend or other distribution or payment in respect of the Pledged Collateral or any part thereof, to give full discharge for the same, and to vote or grant any consent in respect of the Pledged Shares authorized by Section 6(b) hereof. The Issuer hereby ratifies, to the extent permitted by law, all that any said attorney shall lawfully do or cause to be done by virtue hereof. This power, being coupled with an interest, is irrevocable until the Secured Obligations are paid in full. SECTION 9. Collateral Agent May Perform. If the Issuer fails to ---------------------------- perform any agreement contained herein, the Collateral Agent may itself perform, or cause performance of, such agreement, and the expenses of the Collateral Agent incurred in connection therewith shall be payable by the Issuer under Section 12 hereof and constitute Secured Obligations secured hereby. SECTION 10. Reasonable Care. The Collateral Agent shall be deemed to --------------- have exercised reasonable care in the custody and preservation of the Pledged Collateral in its possession if the Pledged Collateral is accorded treatment substantially equal to that which the Collateral Agent accords its own property, it being understood that neither the Collateral Agent nor any Holder shall have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Collateral, whether or not the Collateral Agent or any Holder has or is deemed to have knowledge of any such matter, or (ii) taking any necessary steps to preserve rights against any Person with respect to any Pledged Collateral. E-7 SECTION 11. Remedies upon Default. If any Event of Default shall --------------------- have occurred and be continuing: (a) The Collateral Agent may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party after default under the Uniform Commercial Code (the "Code") in effect in the State of New York at that time, and the Collateral Agent may also, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any office of the Collateral Agent or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Collateral Agent may deem commercially reasonable. The Issuer agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Issuer of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Collateral Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Issuer hereby waives any claims against the Collateral Agent arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if the Collateral Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. (b) If the Collateral Agent shall determine to exercise its right to sell all or any of the Pledged Collateral pursuant to this Section 11, the Issuer agrees that, upon request of the Collateral Agent, the Issuer will, at its own cost and expense: (i) execute and deliver, and use its best efforts to cause each issuer of the Pledged Shares and its directors and officers to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts and things, as may be necessary or, E-8 in the opinion of the Collateral Agent, necessary or advisable to register such Pledged Shares under the provisions of the Securities Act of 1933, as from time to time amended (the "Securities Act"), and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of the Collateral Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission ("SEC") applicable thereto; (ii) use its best efforts to qualify the Pledged Collateral under the state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Pledged Collateral, as requested by the Collateral Agent; (iii) make available to its security holders, as soon as practicable, an earning statement which will satisfy the provisions of section 11(a) of the Securities Act; and (iv) do or cause to be done all such other acts and things as may be necessary to make such sale of the Pledged Collateral or any part thereof valid and binding and in compliance with applicable law. The Issuer further acknowledges the impossibility of ascertaining the amount of damages which would be suffered by the Collateral Agent or the Holders by reason of the failure by the Issuer to perform any of the covenants contained in this Section 11 and, consequently, agrees that, if the Issuer shall fail to perform any of such covenants, it shall pay, as liquidated damages and not as a penalty, an amount equal to the value of the Pledged Collateral on the date the Collateral Agent shall demand compliance with this Section. (c) The Issuer recognizes that, by reason of the aforementioned requirements and certain prohibitions contained in the Securities Act and applicable state securities laws, the E-9 Collateral Agent may, at its option, elect not to require the Issuer to register all or any part of the Pledged Collateral and may therefore be compelled, with respect to any sale of all or any part of the Pledged Collateral, to limit purchasers to those who will agree, among other things, to acquire such securities for their own account, for investment, and not with a view to the distribution or resale thereof. The Issuer acknowledges and agrees that any such sale may result in prices and other terms less favorable to the seller than if such sale were a public sale without such restrictions and, notwithstanding such circumstances, agrees that any such sale shall be deemed to have been made in a commercially reasonable manner. The Collateral Agent shall be under no obligation to delay the sale of any of the Pledged Collateral for the period of time necessary to permit the Issuer to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if the Issuer would agree to do so. (d) If the Collateral Agent determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, the Issuer shall, from time to time, furnish to the Collateral Agent all such information as the Collateral Agent may request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by the Collateral Agent as exempt transactions under the Securities Act and rules of the SEC thereunder, as the same are from time to time in effect. (e) Any cash held by the Collateral Agent as Pledged Collateral and all cash proceeds received by the Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied by the Collateral Agent in accordance with the provisions of Section 6.10 of the Indenture. SECTION 12. Expenses. The Issuer will upon demand pay to the -------- Collateral Agent the amount of any and all reasonable expenses, including, without limitation, the reasonable fees and expenses of the Collateral Agent's counsel and of any experts and agents, which the Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, sale of, collection from, or other realization upon, any of the Pledged Collateral, (iii) the exercise or E-10 enforcement of any of the rights and remedies hereunder of the Collateral Agent and the Holders, or (iv) the failure by the Issuer to perform or observe any of the provisions hereof. SECTION 13. Security Interest Absolute. All rights of the Collateral -------------------------- Agent and security interests hereunder, and all obligations of the Issuer hereunder, shall be absolute and unconditional irrespective of: (i) any lack of validity or enforceability of any provision of the Indenture, the Notes or any other Collateral Document or any other agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of, or any increase in the amount of, all or any of the Secured Obligations, or any other amendment or waiver of any term of, or any consent to any departure from any requirement of, the Indenture, the Notes or any other Collateral Document; (iii) any exchange, release or non-perfection of any Lien on any other collateral, or any release or amendment or waiver of any term of any guaranty of, or consent to departure from any requirement of any guaranty of, all or any of the Secured Obligations; or (iv) any other circumstance which might otherwise constitute a defense available to, or a discharge of, a borrower or a pledgor. SECTION 14. Amendments, Etc. No amendment or waiver of any provision --------------- of this Agreement nor consent to any departure by the Issuer herefrom shall in any event be effective unless the same shall be in writing, approved by the Required Holders and signed by the Collateral Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 15. Addresses for Notices. All notices and other --------------------- communications provided for hereunder shall be in writing (including telegraphic, telex, telecopy or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered E-11 by hand, if to the Issuer or the Collateral Agent, addressed to the Issuer or the Collateral Agent, as the case may be, at its address specified in the Indenture, or, as to each party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed, telegraphed, telexed, telecopied, cabled or delivered, be effective when deposited in the mails, delivered to the telegraph company, confirmed by telex answerback, telecopied with confirmation of receipt, delivered to the cable company or delivered by hand to the addressee or its agent, respectively. SECTION 16. Continuing Security Interest; Transfer of Notes or -------------------------------------------------- Obligations. This Pledge Agreement shall create a continuing security interest - ----------- in the Pledged Collateral and shall (i) remain in full force and effect until indefeasible payment in full of the Obligations of the Issuer under the Indenture and the Notes, (ii) be binding upon the Issuer, its successors and assigns, and (iii) inure, together with the rights and remedies of the Collateral Agent hereunder, to the benefit of and be enforceable by the Collateral Agent and the Holders and their respective successors, transferees and assigns. Without limiting the generality of the foregoing clause (iii), any Holder may assign or otherwise transfer any Note held by it or Obligation of the Issuer under the Indenture and the Notes owing to it to any other Person, and such other Person shall thereupon become vested with all the rights in respect thereof granted to such Holder herein or otherwise with respect to such Note or Obligations so transferred or assigned. Upon the payment in full of the Obligations of the Issuer under the Indenture and the Notes, the Issuer shall be entitled to the return, upon its request and at its expense, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 17. Governing Law; Severability; Terms. This Agreement shall ---------------------------------- be governed by, and be construed and interpreted in accordance with, the law of the State of New York. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity and without invalidating the remaining provisions of this Agreement. Unless E-12 otherwise defined herein or in the Indenture, terms defined in Article 9 of the Uniform Commercial Code as in effect in the State of New York are used herein as therein defined. SECTION 18. Waiver of Jury Trial. The Issuer waives any right it may -------------------- have to a trial by jury in respect of any litigation based on, or arising out of, under or in connection with, this Agreement or any other loan document, or any course of conduct, course of dealing, verbal or written statement or other action of any loan party or any secured party. SECTION 19. Section Titles. The Section titles contained in this -------------- Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not part of this Agreement. E-13 IN WITNESS WHEREOF, the Issuer has caused this Agreement to be duly executed and delivered by its duly authorized officer on the date first above written. MORTGAGE AND REALTY TRUST By: -------------------------------------- Title: Accepted and acknowledged: WILMINGTON TRUST COMPANY, as Collateral Agent By: ------------------------------ Title: E-14 SCHEDULE I ---------- PLEDGE AGREEMENT Attached to and forming a part of that certain Pledge Agreement, dated as of ___________ __, 1995, made by Mortgage and Realty Trust in favor of Wilmington Trust Company, as Collateral Agent. Stock Certificate Number Stock Issuer Class of Stock No(s). Par Value of Shares - ------------ -------------- ----------------- --------- --------- MRT West, Inc. MRT Creekside, Inc. MRT Newark, Inc. MRT Santa Monica, Inc. 150 Rittenhouse Circle, Inc. E-15 SCHEDULE II ----------- PLEDGE AMENDMENT ---------------- This Pledge Amendment, dated _________ __, 1995, is delivered pursuant to Section 7 of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Pledge Agreement, dated as of __________ __, 1995, between the undersigned and Wilmington Trust Company, as Collateral Agent on behalf of and for the benefit of the Holders referred to therein and that the Additional Shares listed on this Pledge Amendment shall be and become part of the Pledged Collateral referred to in the Pledge Agreement and shall secure all Secured Obligations of the undersigned. The terms defined in the Pledge Agreement or the Indenture are being used herein as therein defined. MORTGAGE AND REALTY TRUST By: --------------------------------- Title: Stock Certificate Number Issuer Class of Stock No(s). Par Value of Shares - ------ -------------- ---------------- --------- --------- E-16 EXHIBIT F AMENDED AND RESTATED COLLATERAL AND SECURITY AGREEMENT among MORTGAGE AND REALTY TRUST, THE SUBSIDIARIES LISTED ON THE SIGNATURE PAGES HERETO, THE LENDERS LISTED ON THE SIGNATURE PAGES HERETO and WILMINGTON TRUST COMPANY, WILLIAM J. WADE as Collateral Agent Dated as of ___________ __, 1995 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION............................... 2 1.01 Definitions Used in the Indenture....................................... 2 1.02 Definitions Used in this Collateral Agreement........................... 2 1.03 Other Terms............................................................. 4 1.04 Rules of Construction................................................... 4 1.05 Documents in Recordable Form............................................ 4 ARTICLE II GRANT OF SECURITY INTEREST.......................................... 4 2.01 Grant of Security Interest.............................................. 4 2.02 Limitation on Security Interests........................................ 8 ARTICLE III COLLATERAL.......................................................... 8 3.01 Representations......................................................... 8 3.02 Execution of Closing Documents.......................................... 10 3.03 Appointment of the Collateral Agent as Attorney-in-Fact................. 10 3.04 Continuous Perfection................................................... 12 3.05 Collateral Agent's Payment of Claims.................................... 13 3.06 Collateral Agent's Ability to Reject Collateral......................... 14 3.07 Delivery of Title Insurance, Surveys.................................... 14 3.08 Limitation on the Lenders' Duty in Respect of Collateral................ 15 3.09 Further Documentation; Pledge of Instruments............................ 15 3.10 Maintenance of Records.................................................. 16 3.11 Indemnification......................................................... 16 3.12 Compliance with Laws, Etc............................................... 17 3.13 Payment of Obligations.................................................. 17 3.14 Limitation on Liens on Collateral....................................... 17 3.15 Further Identification of Collateral.................................... 18 3.16 Notices................................................................. 18 ARTICLE IV DEPOSIT ACCOUNTS AND ASSET SALE ACCOUNT............................. 18 4.01 Grant of Security Interest in Deposit Accounts.......................... 18 4.02 Use of Cash............................................................. 18 4.03 Asset Sale Account...................................................... 19 4.04 Delivery of Cash Deposited in the Asset Sale Account.................... 19
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Page ---- ARTICLE V RECEIVABLES.......................................................... 19 5.01 Delivery of Underlying Loan Documents and Evidence of Receivables....... 19 5.02 Assignment of Collateral Security and Execution of Additional Documents............................................. 20 5.03 Receivables Subject to Prior Encumbrances............................... 20 ARTICLE VI RELEASE............................................................. 21 6.01 Release by the Collateral Agent Upon Sale or Disposition................ 21 ARTICLE VII REMEDIES............................................................ 21 7.01 Remedies Cumulative..................................................... 21 7.02 No Waiver or Exhaustion................................................. 21 7.03 Remedies................................................................ 22 7.04 Notice of Sale.......................................................... 25 7.05 Waiver of Certain Rights with Respect to Sales by Collateral Agent of Collateral...................................... 25 7.06 Right of Set-off........................................................ 27 ARTICLE VIII THE COLLATERAL AGENT................................................ 27 8.01 Authorization and Action................................................ 27 8.02 Collateral Agent's Reliance, Etc........................................ 28 8.03 If a Lender is also Collateral Agent and Affiliates..................... 28 8.04 Lender Credit Decision.................................................. 29 8.05 Collateral Agent's Fee.................................................. 29 8.06 Successor Collateral Agent.............................................. 29 8.07 Payments to Lenders..................................................... 31 8.08 Other Matters Relating to the Collateral Agent.......................... 31 8.09 Powers of Individual Collateral Agent................................... 31 8.10 Additional Collateral Co-Agents; Separate Collateral Agents............. 32 8.11 Payments to Holders..................................................... 34 8.12 Prior Lien.............................................................. 34 8.13 Services after Event of Default......................................... 34 ARTICLE IX GENERAL PROVISIONS.................................................. 35 9.01 Notices................................................................. 35 9.02 Severability............................................................ 35 9.03 Captions................................................................ 35 9.04 Successors and Assigns.................................................. 35 9.05 Applicable Law and Jurisdiction......................................... 35
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Page ---- 9.06 Defeasance.............................................................. 36 9.07 Attorneys' Fees and Other Costs......................................... 36 9.08 Counterparts............................................................ 36 9.09 Amendments.............................................................. 37 9.10 No Waiver; Remedies..................................................... 37 9.11 Limitation of Liability................................................. 37 9.12 Execution of this Collateral Agreement.................................. 38 9.13 Rights to Deal with Collateral.......................................... 38
Schedules Schedule I Existing Liens Schedule II Filing Offices Schedule III Location of Equipment and Inventory Schedule IV Deposit Accounts -iii- EXHIBIT F AMENDED AND RESTATED COLLATERAL AND SECURITY AGREEMENT THIS AMENDED AND RESTATED COLLATERAL AND SECURITY AGREEMENT (this "Collateral Agreement"), dated as of __________ __, 1995, among MORTGAGE AND - --------------------- REALTY TRUST, a Maryland real estate investment trust ("MRT"), the subsidiaries of MRT listed on the signature pages hereto (the "Subsidiaries"), the lenders ------------ listed on the signature pages hereto (the "Holders"), and WILMINGTON TRUST ------- COMPANY, ("Corporate Collateral Agent") and William J. Wade ("Individual Collateral Agent") for the Trustee and the Holders under the Amended and Restated Indenture, dated as of ______ __, 1995, between MRT and Wilmington Trust Company, as trustee and collateral agent for the Holders (as amended, supplemented or otherwise modified from time to time, the "Indenture"). --------- W I T N E S S E T H: ------------------- WHEREAS, MRT is a debtor and debtor in possession under chapter 11 of title 11 of the United States Code, having commenced a bankruptcy case on ___________ __, 1995; WHEREAS, on __________ __, 1995, MRT submitted to the United States Bankruptcy Court for the Central District of California (the "Court") a Plan of ----- Reorganization, dated _________ __, 1995 (the "Plan"), and on ____________ __, ---- 1995, the Court confirmed the Plan; WHEREAS, the Indenture provides for the grant by MRT and the Subsidiaries to the Collateral Agent of certain rights, including liens and security interests against the Collateral (as defined in the Indenture), and provides that this Collateral Agreement shall set forth the terms and conditions relating to certain of the Collateral; WHEREAS, the Collateral Agent is willing to continue to act on behalf and for the benefit of the Trustee and the Holders in order to effect, and upon the terms and conditions of, the Indenture and this Collateral Agreement; and -1- WHEREAS, by their execution of this Collateral Agreement MRT, the Collateral Agent and the Required Holders have consented to the amendments contained herein; NOW, THEREFORE, in consideration of the premises and in order to induce the Holders to enter into the Indenture, MRT, the Subsidiaries, the Holders and the Collateral Agent hereby agree as follows: ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION 1.01 Definitions Used in the Indenture. Terms capitalized in this --------------------------------- Collateral Agreement without specific definition herein shall have the respective meanings set forth in the Indenture. 1.02 Definitions Used in this Collateral Agreement. The following --------------------------------------------- terms shall have the following respective meanings: "Acceleration" means an acceleration of the maturity of the Notes in ------------ accordance with Article 6 of the Indenture. "Collateral" has the meaning assigned thereto in Section 2.01 hereof. ---------- "Deposit Account" has the meaning given it in Section 4.01 hereof. --------------- "Documents" means, collectively, the Plan, the Indenture, this --------- Collateral Agreement, the Pledge Agreement, the Mortgages, the Assignments of Leases, the Collateral Assignments of Leases and any other agreements, instruments or documents which evidence, create, perfect and enforce the liens on the Collateral, as the same may be amended, modified or otherwise supplemented. "Effective Date" means ______________ __, 1995. -------------- -2- "Event of Default" means an Event of Default under Article 6 of the ---------------- Indenture, or an event of default under any of the other Documents. "Lenders" means the Holders under the terms of the Indenture. ------- "Liabilities" means all Obligations of MRT under the Indenture and the ----------- Notes, and all other obligations of MRT to or for the benefit of the Lenders, the Trustee and the Collateral Agent under or pursuant to this Collateral Agreement and the other Documents. "Proceeds" means "proceeds," as such term is defined in Section 9- -------- 306(1) of the UCC, and, in any event, shall include, without limitation, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to MRT or any Subsidiary from time to time with respect to any of the Collateral, (ii) any and all payments (in any form whatsoever) made or due and payable to MRT or any Subsidiary from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any Governmental Authority (or any Person acting under color of Governmental Authority), and (iii) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "Receivables" means all Indebtedness owed to MRT or any Subsidiary. ----------- "UCC" means the Uniform Commercial Code as the same may, from time to --- time, be in effect in the State of New York; provided, however, in the -------- ------- event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the Collateral Agent's and the Lenders' security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. -3- 1.03 Other Terms. All other terms contained in this Collateral ----------- Agreement, where the context so indicates, shall have the meanings provided by the UCC to the extent the same are used or defined therein. 1.04 Rules of Construction. Except as otherwise specifically --------------------- provided in this Collateral Agreement, the singular of any term shall include the plural and vice-versa; the use of such terms shall be equally applicable to any gender; "or" shall not be exclusive; "including" shall not be limiting; and any reference to any "Article" or "Section" or "Exhibit," where the context so indicates, shall be construed as a reference to the relevant Article, Section or Exhibit of this Collateral Agreement. 1.05 Documents in Recordable Form. All agreements, instruments and ---------------------------- documents required to be executed and delivered pursuant to this Collateral Agreement shall be in recordable form where indicated by applicable law. ARTICLE II GRANT OF SECURITY INTEREST 2.01 Grant of Security Interest. As collateral security for the full -------------------------- and prompt payment when due (whether at stated maturity, by acceleration or otherwise) of, and the performance of, all the Liabilities and to induce the Lenders to enter into the Indenture, MRT and each Subsidiary hereby assigns, conveys, mortgages, pledges, hypothecates and transfers to the Collateral Agent, on behalf and for the ratable benefit of the Lenders, and hereby grants to the Collateral Agent, on behalf and for the ratable benefit of the Lenders, a security interest in, all of MRT's or such Subsidiary's right, title and interest in, to and under the following (all of which being hereinafter collectively called the "Collateral"): (a) all accounts and all rights to the payment of money and all rights in any merchandise, inventory, or goods, now existing or hereafter arising, whether due or to become due, and whether or not earned by performance, including, but not limited to, book debts, accounts receivable, leases, bailments, -4- conditional sale contracts, chattel paper, contracts, contract rights, general intangibles, instruments and receivables, together with all right, title, security, and guarantees with respect to each of the foregoing including any right to stoppage in transit, and all security interests, liens, and pledges, whether voluntary or involuntary; (b) all retail and wholesale inventory and all goods, parts, raw materials, goods in process, and supplies that are or might be used in connection with the manufacture, packing, shipping, advertising, selling or finishing of said goods, together with all additions, accessions, substitutions, and proceeds thereto and therefor, and in every case whether now owned or hereafter acquired in which MRT or such Subsidiary may have or hereafter acquire an interest; (c) all leases, bailments, conditional sale contracts, security agreements, chattel paper, contracts, contract rights, general intangibles, and other agreements for use or purchase of the properties, assets and rights described herein or any part thereof and all renewals and extensions thereof, in every case whether now owned or hereafter acquired, or in which MRT or such Subsidiary may have or hereafter acquire any interest, and all amounts, rents, issues, royalties, profits, and rights and other sums of money due and to become due under such leases, bailments, conditional sale contracts, security agreements, chattel paper, contracts, contract rights, general intangibles, and other agreements for use or purchase of such properties, assets, or rights and all renewals and extensions thereof in every case whether now or hereafter in effect, whether now owned or hereafter acquired or in which MRT or such Subsidiary may have or hereafter acquire any interest; (d) all cash, bank deposits, deposit accounts, checks, certificates of deposit, checking and savings accounts, bankers' acceptances, letters of credit, United States obligations, state and municipal obligations, obligations of foreign governments and subdivisions thereof, commercial paper, notes, instruments (whether negotiable or non-negotiable), drafts, bonds, debentures (excluding debentures convertible into shares of capital stock and other equity securities except as may be specifically set forth hereinbelow) of and claims against corporations, joint ventures, persons, partnerships, whether limited or general, and -5- other entities of every description, and other instruments and the like, in every case whether now owned or hereafter acquired or in which MRT or such Subsidiary may have or hereafter acquire any interest, except those bank accounts relating to MRT's Termination Pay Plan; (e) any interest in any personal property from which any of the properties, assets and rights described above arise, including, but not limited to, repossessed and returned goods, goods stopped in transit by MRT or such Subsidiary and goods covered by chattel paper, in every case whether now existing or hereafter arising; (f) all general intangibles, choses in action or causes of action, including, particularly, rights in or arising under any judgment, statute, or rule and all other properties, assets, and rights of every kind and nature; including, but not limited to, rights to refunds, tax refunds, claims for tax refunds, rights of indemnification, books and records (including, corporate and other business records, customer lists, credit files, computer programs, print- outs and other computer materials and records), inventions, designs, patents, copyrights, trademarks, trade names, trade styles, trade secrets, registrations, licenses, and customer lists and the like, wherever located, whether now owned or hereafter acquired or in which MRT or such Subsidiary may have or hereafter acquire any interest; (g) all equitable rights and interests of whatever kind or nature, whether now existing or hereafter arising; (h) all rights and claims in or under any policy of insurance required or which may be required under the documents evidencing the liens on Collateral, including, but not limited to, insurance for fire, damage, loss, and casualty, whether covering personal property, real property, tangible rights or intangible rights, and all liability, life, key man, and business interruption insurance, together with the proceeds, products, renewals, and replacements thereof, including prepaid or unearned premiums, in every case whether now existing or hereafter arising; provided, however, that proceeds of insurance -------- ------- shall be applied and retained in accordance with the terms of the Indenture and the other Documents; -6- (i) all rights, claims and proceeds under or by reason of the exercise of any public or quasi-public condemnation or eminent domain proceedings, or transfers or dispositions in lieu thereof; (j) all equipment, machinery, tools, furnishings, fixtures, vehicles, motor vehicles, and goods used or bought primarily for use in MRT's or such Subsidiary's business, all whether now owned or hereafter acquired, together with all products and proceeds of the foregoing whether due to voluntary or involuntary disposition; (k) all instruments, documents, and documents of title, including, but not limited to, bills of lading, warehouse receipts and the like, trust receipts and the like, whether now owned or hereafter acquired; (l) (i) any and all Receivables, whether now owned or existing or hereafter acquired or arising, and all proceeds and profits of such Receivables, (ii) all books and records, pertaining to any of the Collateral, whether now owned or existing or hereafter acquired or arising, including all computer hardware and software (and manuals therefor) and all equipment and tangible personal property in which such books and records are kept, and (iii) all proceeds, replacements, substitutions and accessions of or to any Collateral; (m) all partnerships, participations and joint ventures in which MRT or such Subsidiary is a partner, participant or a joint venturer, including all (i) rights of MRT or such Subsidiary as partner, participant or joint venturer, (ii) profits and surplus of the partnership, participation or joint venture, (iii) distributions of, and all rights to receive distributions of, money and property from the partnership, participation or joint venture, (iv) payments or property held by the partnership, participation or joint venture upon dissolution and winding up, (v) accounts, contract rights, general intangibles, chattel paper, instruments, documents, money and other rights or property resulting from any distributions by the partnership, participation or joint venture from the disposition of its assets, and (vi) all cash and non-cash proceeds of any of the foregoing; and -7- (n) without in any way limiting the foregoing, the proceeds of any of the foregoing, whether derived from voluntary or involuntary disposition, products of the foregoing, and all renewals, replacements, substitutions, additions, accession, rents, issues, royalties and profits of any of the foregoing, whether now owned, existing or hereafter acquired or arising. 2.02 Limitation on Security Interests. The grant, assignment and -------------------------------- transfer of a security interest, or other Lien, pursuant to this Collateral Agreement, shall be subject to all provisions of any agreement evidencing the First Lien Debt which limits or qualifies such security interest, which requires the subordination (as to security or payment or both security and payment) of such security interest, or which prohibits the granting of a security interest by or in respect of any partnership, joint venture or property; provided, -------- however, that with respect to any partnership, participation or joint venture - ------- which MRT enters into after the Effective Date, MRT shall require with respect thereto that the Collateral Agent's ability to file and perfect a security interest in such interest shall not be restricted or impaired in any manner. ARTICLE III COLLATERAL 3.01 Representations and Warranties. (a) MRT and each of the ------------------------------ Subsidiaries warrants and represents to the Collateral Agent and the Lenders that (i) it has not granted to any Person other than the Collateral Agent any consensual lien (i.e., a lien existing solely as the result of an affirmative ---- agreement by it expressly granting such lien) on the Real Estate that is not disclosed in the title policies relating to such Real Estate in effect on or prior to the Effective Date or not otherwise disclosed on Schedule I hereto, (ii) to the best of its knowledge, the Real Estate is not subject to any non- consensual lien that is not disclosed in the title policies relating to such Real Estate or not otherwise disclosed on Schedule I hereto, (iii) the Collateral delivered to the Collateral Agent on or prior to the date hereof constitutes all of the Collateral owned by it as of the date hereof, (iv) it has due right, power and authority to execute, acknowledge and deliver this Collateral -8- Agreement and carry out the transactions contemplated hereby, (v) the execution, delivery and performance by MRT and the Subsidiaries of this Collateral Agreement have been duly authorized by all necessary action, do not contravene MRT's and the Subsidiaries' constituent documents, any Requirement of Law or any order or decree of any court, or any contractual obligation of MRT or any Subsidiary, and do not result in or require the creation of any lien (other than pursuant to the Documents) upon or with respect to any of its properties, (vi) no consent, authorization, approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by MRT and the Subsidiaries of this Collateral Agreement, (vii) this Collateral Agreement has been duly executed and delivered by MRT and the Subsidiaries and is the legal, valid and binding obligation of MRT and the Subsidiaries, enforceable against MRT and the Subsidiaries in accordance with its terms, (viii) upon the filing of the appropriate financing statements in the jurisdictions listed on Schedule II hereto, this Collateral Agreement will be effective to create a valid lien on the Collateral, and (ix) MRT's and the Subsidiaries' principal place of business and the place where their records concerning the Collateral are kept and the location of their inventory and equipment are set forth on Schedule III hereto. Upon any acquisition after the date hereof of any Collateral, MRT and each Subsidiary shall, at the time it delivers to the Collateral Agent a security interest in same, be deemed to make the representation and warranty set forth above, as of the date of such delivery with respect to such acquisition and such representation and warranty shall have the same force and effect as if made on such date. (b) Except as set forth in this Collateral Agreement, MRT makes no representations or warranties, express or implied, of any nature whatsoever respecting (i) the title, merchantability, fitness for use, value or condition of any property encumbered by the Mortgages or the Underlying Mortgages, or (ii) the validity, enforceability or collectibility of any amount now or hereafter payable, or purported to be payable, under any promissory note or other item of collateral, including the existence of any defense against the payment thereof or any right of offset or counterclaim with respect thereto. The Lenders and the Collateral Agent understand that the properties encumbered by the Mortgages and the Underlying Mortgages are -9- being encumbered on an as-is, where is basis, and with all faults and liabilities. 3.02 Execution of Closing Documents. On or before the Effective ------------------------------ Date, and as and when required by the Indenture or this Collateral Agreement, MRT and the Subsidiaries shall execute, deliver and, record, all agreements, instruments or documents required for the creation, perfection or enforceability of the liens created or to be created in respect of any Collateral, including Uniform Commercial Code financing statements describing any Collateral. 3.03 Appointment of the Collateral Agent as Attorney-in-Fact. (a) ------------------------------------------------------- MRT and the Subsidiaries hereby irrevocably constitute and appoint the Collateral Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of MRT or any Subsidiary and in the name of MRT or any Subsidiary or in its own name, from time to time in the Collateral Agent's discretion, for the purpose of carrying out the terms of this Collateral Agreement, to take any and all appropriate action and to execute and deliver any and all documents and instruments which the Collateral Agent may deem necessary or desirable to accomplish the purposes of this Collateral Agreement and, without limiting the generality of the foregoing, hereby gives the Collateral Agent the power and right, on behalf of MRT or any Subsidiary, without notice to or assent by MRT or any Subsidiary to do the following: (i) to ask, demand, collect, receive and give acquittances and receipts for any and all moneys due and to become due under any Collateral and, in the name of MRT or any Subsidiary or in its own name or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under any Collateral whenever payable and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the -10- Collateral Agent for the purpose of collecting any and all such moneys due under any Collateral whenever payable; (ii) to pay or discharge taxes, liens, security interests or other encumbrances levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Collateral Agreement and to pay all or any part of the premiums therefor and the costs thereof; and (iii) (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due, and to become due thereunder, directly to the Collateral Agent or as the Collateral Agent shall direct; (B) to receive payment of and receipt for any and all moneys, claims and other amounts due, and to become due at any time, in respect of or arising out of any Collateral; (C) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts and other documents constituting or relating to the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against MRT or any Subsidiary with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as the Collateral Agent may deem appropriate; (G) to license or, to the extent permitted by an applicable license, sublicense, whether general, special or otherwise, and whether on an exclusive or non-exclusive basis, any patent or trademark, for such term or terms, on such conditions, and in such manner, as the Collateral Agent shall in its sole discretion determine; and (H) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and to do, at the Collateral Agent's option and MRT's expense, at any time, or from time to time, all acts and things which the Collateral Agent -11- reasonably deems necessary to protect, preserve or realize upon the Collateral and the Collateral Agent's and the Lenders' lien therein, in order to effect the intent of this Collateral Agreement, all as fully and effectively as MRT might do. (b) MRT and the Subsidiaries hereby ratify, to the extent permitted by law, all that any said attorney shall lawfully do or cause to be done by virtue hereof. The power of attorney granted pursuant to this Section 3.03, being coupled with an interest, shall be irrevocable until the Liabilities are indefeasibly paid in full. (c) The powers conferred on the Collateral Agent hereunder are solely to protect the Collateral Agent's and the Lenders' interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Collateral Agent shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees or agents shall be responsible to MRT or any Subsidiary for any act or failure to act, except for its own gross negligence or willful misconduct. 3.04 Continuous Perfection. Neither MRT nor any Subsidiary will --------------------- change its name, identity or corporate structure in any manner which might make any financing or continuation statement filed in connection herewith seriously misleading within the meaning of Section 9-402(7) of the UCC (or any other then applicable provision of the UCC) unless MRT shall have given the Collateral Agent at least 30 days' prior written notice thereof and shall have taken all action (or made arrangements to take such action substantially simultaneously with such change if it is impossible to take such action in advance) necessary or reasonably requested by the Collateral Agent to amend such financing statement or continuation statement so that it is not seriously misleading. Neither MRT nor any Subsidiary will change its principal place of business or remove its records or change the location of its inventory and equipment, unless it gives the Collateral Agent at least 30 days' prior written notice thereof and has taken such action as is necessary to cause the security interest of the Collateral Agent in the Collateral to continue to be perfected. -12- 3.05 Collateral Agent's Payment of Claims. Without waiving or ------------------------------------ effecting the cure of any Event of Default and whether or not an Event of Default has occurred and is continuing, the Collateral Agent, as and to the extent instructed by the Trustee or the Required Holders and without being obligated to do so and without waiving or releasing any Liabilities may (a) pay, acquire or accept an assignment of any lien, claim or right under any agreement, or any taxes, asserted by any entity against any Collateral, (b) appear in and defend any action or proceeding purporting to affect any Collateral or any of the Collateral Agent's rights or powers under the liens on the Collateral or (c) cure any defense of MRT or the Subsidiaries under any agreement, if the Collateral Agent believes such default may materially and adversely affect the lien created under or pursuant to the Indenture or this Collateral Agreement or any Collateral; provided, however, that the Collateral Agent shall, unless the -------- ------- delay required for such notice would in the Collateral Agent's reasonable judgment result in material harm to the subject Collateral, give MRT and the Subsidiaries prior written notice of its intent to assert any right under this Section, and allow MRT and the Subsidiaries thirty (30) days following such notice to pay such lien, claim, right or tax, to cure such default, to certify in writing that the failure to make such payment or cure such default does not constitute a breach of any covenant in the Indenture, or to obtain to the Collateral Agent's satisfaction the release of such lien, claim, right or tax. For purposes hereof, a default in the payment of a lien, claim or tax shall be deemed cured so long as the same shall be bonded (with a bonding company reasonably satisfactory to the Collateral Agent) in an amount sufficient to cover the amount of the lien, claim or tax plus any interest or penalties that may accrue. All amounts expended by the Collateral Agent pursuant to this Section 3.05 shall be payable, on demand, by MRT to the Collateral Agent. To the extent that MRT fails or refuses to pay such amounts, the Lenders shall advance the same for MRT's account to the Collateral Agent to pay same or to reimburse the Collateral Agent for payment of same, according to each Lender's ratable interest in the Liabilities. Any amounts so paid by a Lender shall be added to, and form part of, the Liabilities owing to such Lender and shall be secured by the Collateral. 3.06 Collateral Agent's Ability to Reject Collateral. ----------------------------------------------- Notwithstanding anything contained herein to the contrary, the -13- Collateral Agent may elect not to accept a lien upon, or any other interest in, any Collateral otherwise required under the Indenture to be delivered to it; provided, however, that such rejection shall not increase MRT's or the - -------- ------- Subsidiaries' obligations with respect to any other Collateral and that MRT and the Subsidiaries shall have no obligations whatsoever with respect to any Collateral rejected by the Collateral Agent. 3.07 Delivery of Title Insurance, Surveys. (a) With respect to ------------------------------------ Underlying Mortgages or Real Estate owned or leased by MRT or any Subsidiary on or before the Effective Date, MRT and the Subsidiaries represent and warrant that they have delivered to the Collateral Agent all available policies of title insurance and surveys received by MRT or any Subsidiary in connection with such Underlying Mortgages and Real Estate. MRT and the Subsidiaries further represent and warrant that they have and agree that they shall continue to use their best efforts to cause the title insurance carriers to provide to the Collateral Agent endorsements insuring the assignments of the Underlying Loan Documents for the ratable benefit of the Lenders. (b) If, after the Effective Date, MRT or any Subsidiary acquires any Real Estate or an Underlying Mortgage, through foreclosure or otherwise, or becomes a mortgagee or trust deed holder under any new mortgage or trust deed, then MRT or such Subsidiary shall deliver to the Collateral Agent upon such event a title insurance policy in an amount equal to the acquisition price of such Real Estate or the amount of such Underlying Mortgage, or mortgage or deed of trust insuring (as the case may be) (i) MRT's or such Subsidiary's fee or leasehold title to such Real Estate, containing such endorsements as the Collateral Agent deems reasonably necessary or desirable and including a current ALTA survey thereof with a surveyor's certificate in form and substance satisfactory to the Collateral Agent or (ii) the enforceability and validity of such Underlying Mortgage according to the terms and conditions of an ALTA Lender's policy or if an ALTA Lender's policy is not available in the jurisdiction in which the Real Estate or property encumbered by the Underlying Mortgage is situated, then the policy most commonly required by commercial lenders making commercial loans in such jurisdiction, in either case, together with either (A) a title insurance policy insuring the lien granted to the Lenders under the related Mortgage, in form, substance and amount -14- reasonably satisfactory to the Collateral Agent, or (B) an endorsement insuring the assignment thereof to the Lenders, in form and substance reasonably satisfactory to the Collateral Agent. (c) With respect to any Collateral which is comprised of an indirect ownership interest in real property (i.e., a joint venture, participation or ---- partnership interest, or stock ownership of a real estate company), any title insurance policy required to be delivered or obtained hereunder shall contain a non-imputation endorsement, if available, at reasonable cost, in form reasonably satisfactory to the Collateral Agent. 3.08 Limitation on the Lenders' Duty in Respect of Collateral. No -------------------------------------------------------- Lender shall have any duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of it or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto, except that each Lender shall use reasonable care with respect to the Collateral in its possession or under its control. 3.09 Further Documentation; Pledge of Instruments. At any time and -------------------------------------------- from time to time, upon the written request of the Collateral Agent, and at the sole expense of MRT and the Subsidiaries, MRT and the Subsidiaries will promptly and duly execute and deliver any and all such further instruments and documents and take such further action as the Collateral Agent may reasonably deem desirable to obtain the full benefits of this Collateral Agreement and of the rights and powers herein granted, including, without limitation, using their best efforts to secure all consents and approvals necessary or appropriate for the assignment to the Collateral Agent of any contract held by MRT or any Subsidiary or in which MRT or any Subsidiary has any rights not heretofore assigned, the filing of any financing or continuation statements under the UCC with respect to the liens and security interests granted hereby, transferring Collateral to the Collateral Agent's possession (if a security interest in such Collateral can be perfected by possession) and placing the interest of the Collateral Agent as lienholder on the certificate of title of any vehicle. MRT and the Subsidiaries also hereby authorize the Collateral Agent to file any such financing or continuation statement without the signature of MRT or any -15- Subsidiary to the extent permitted by applicable law. If any of the Collateral shall be or become evidenced by any instrument, MRT and the Subsidiaries agree to pledge such instrument to the Collateral Agent and shall duly endorse such instrument in a manner satisfactory to the Collateral Agent and deliver the same to the Collateral Agent. 3.10 Maintenance of Records. MRT and the Subsidiaries will keep and ---------------------- maintain at their own cost and expense satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to the Collateral and all other dealings with the Collateral. MRT and the Subsidiaries will mark their books and records pertaining to the Collateral to evidence this Collateral Agreement and the lien and security interests granted hereby. If requested by the Collateral Agent, the security interest of the Collateral Agent shall be noted on the certificate of title of each vehicle. For the Collateral Agent's and the Lenders' further security, MRT and the Subsidiaries agree that the Collateral Agent and the Lenders shall have a special property interest in all of MRT's and the Subsidiaries' books and records pertaining to the Collateral and, upon the occurrence and during the continuance of any Event of Default, MRT and the Subsidiaries shall deliver and turn over any such books and records to the Collateral Agent or to its representatives at any time on demand of the Collateral Agent. Prior to the occurrence of an Event of Default and upon reasonable notice from the Collateral Agent, MRT and the Subsidiaries shall permit any representative of the Collateral Agent to inspect such books and records and will provide photocopies thereof to the Collateral Agent. 3.11 Indemnification. In any suit, proceeding or action brought by --------------- the Collateral Agent or any Lender relating to any account, chattel paper, contract, general intangible or instrument constituting Collateral for any sum owing thereunder, or to enforce any provision of any such account, chattel paper, contract, general intangible or instrument, MRT and the Subsidiaries will save, indemnify and keep each of the Collateral Agent and the Lenders harmless from and against all expense, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction of liability whatsoever of the obligor thereunder, arising out of a breach by MRT and the -16- Subsidiaries of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to, or in favor of, such obligor or its successors from MRT and the Subsidiaries, and all such obligations of MRT and the Subsidiaries shall be and remain enforceable against and only against MRT and the Subsidiaries and shall not be enforceable against the Collateral Agent or the Lenders. 3.12 Compliance with Laws, Etc. MRT and the Subsidiaries will ------------------------- comply, in all material respects, with all acts, rules, regulations, orders, decrees and directions of any Governmental Authority, applicable to the Collateral or any part thereof; provided, however, that MRT and the Subsidiaries -------- ------- may contest any act, regulation, order, decree or direction in any reasonable manner which shall not, in the sole opinion of the Collateral Agent, adversely affect the Collateral Agent's rights hereunder or adversely affect the first priority of its lien on and security interest in the Collateral. 3.13 Payment of Obligations. MRT and the Subsidiaries will pay ---------------------- promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom, except that no such charge need be paid if (i) such non-payment does not involve any danger of the sale, forfeiture or loss of any of the Collateral or any interest therein, and (ii) such charge is adequately reserved against in accordance with and to the extent required by GAAP. 3.14 Limitation on Liens on Collateral. MRT and the Subsidiaries --------------------------------- will not create, permit or suffer to exist, and will defend the Collateral against and take such other action as is necessary to remove, any lien on the Collateral except liens permitted under Section 4.13 of the Indenture, and will defend the right, title and interest of the Collateral Agent and the Lenders in and to any of MRT's or the Subsidiaries' rights under the chattel paper, contracts, documents, general intangibles and instruments and to the equipment and inventory constituting Collateral and in and to the Proceeds thereof against the claims and demands of all Persons whomsoever. 3.15 Further Identification of Collateral. MRT and the Subsidiaries ------------------------------------ will, if so requested by the Collateral Agent, -17- furnish to the Collateral Agent, as often as the Collateral Agent reasonably requests, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail. 3.16 Notices. MRT and the Subsidiaries will advise the Collateral ------- Agent promptly, in reasonable detail, (i) of any material lien or claim made or asserted against any of the Collateral, (ii) of any material change in the composition of the Collateral, and (iii) of the occurrence of any other event which would have a material adverse effect on the aggregate value of the Collateral or in the security interests created hereunder. ARTICLE IV DEPOSIT ACCOUNTS AND ASSET SALE ACCOUNT 4.01 Grant of Security Interest in Deposit Accounts. MRT hereby ---------------------------------------------- grants, assigns and transfers to the Collateral Agent, as security for the Liabilities, a lien and/or security interest in the deposit accounts identified on Schedule IV hereto, as well as any other deposit accounts owned or controlled directly on indirectly by MRT from time to time (the "Deposit Accounts"), except ---------------- any Deposit Accounts relating to MRT's Termination Pay Plan, and any Receivable arising from the investment by MRT of cash balances in such Deposit Accounts. The security interest in the Deposit Accounts hereby also extends to (a) any and all cash proceeds thereof including all Receivables generated from the investment of cash balances in the Deposit Accounts or (b) any Collateral acquired directly or indirectly with such cash proceeds. 4.02 Use of Cash. So long as no Event of Default has occurred and is ----------- continuing, MRT shall have the right to use cash in the Deposit Accounts, provided that nothing herein shall be deemed to permit a use which is in breach or contravention of any provision or covenant in the Indenture or this Collateral Agreement. 4.03 Asset Sale Account. MRT and the Subsidiaries shall deposit all ------------------ Cash Asset Sale Proceeds in the Asset Sale -18- Account upon receipt by MRT or any Subsidiary or their agent, subject to their right to receive and use such proceeds as more fully set forth in Sections 4.11 and 4.12 of the Indenture. MRT and the Subsidiaries hereby grant, assign and transfer to the Collateral Agent, as security for the Liabilities, a lien and security interest in the Asset Sale Account. 4.04 Delivery of Cash Deposited in the Asset Sale Account. If MRT ---------------------------------------------------- satisfies the requirements set forth in Sections 4.11 and 4.12 of the Indenture, the Collateral Agent is authorized to release Cash deposited in the Asset Sale Account to MRT as set forth in the Indenture. ARTICLE V RECEIVABLES 5.01 Delivery of Underlying Loan Documents and Evidence of ----------------------------------------------------- Receivables. On or before the Effective Date, MRT and the Subsidiaries shall - ----------- deliver all Underlying Loan Documents, Underlying Promissory Notes and evidence of Receivables in their possession to the Collateral Agent and MRT and the Subsidiaries shall, as required by the Indenture or this Collateral Agreement, (a) furnish to the Collateral Agent such Underlying Loan Documents and agreements related thereto pledged to the Lenders as the Collateral Agent may request, (b) within five (5) days after their possession of any Underlying Promissory Note or any other Underlying Loan Documents not then subject to a lien in favor of the Collateral Agent deliver such Underlying Promissory Note or Underlying Loan Documents to the Collateral Agent, and (c) furnish to the Collateral Agent all other Receivables as the Collateral Agent may request; provided, however, that the foregoing is not intended to include promissory - -------- ------- notes or other instruments evidencing indebtedness of any Person to MRT in connection with residential end loans made by MRT to such Person for the purpose of purchasing a condominium unit. All Underlying Promissory Notes delivered by MRT or any Subsidiary to the Collateral Agent shall be endorsed to the order of the Collateral Agent. 5.02 Assignment of Collateral Security and Execution of Additional ------------------------------------------------------------- Documents. If with respect to any Receivable which - --------- -19- is Collateral, the Collateral Agent deems it necessary to hold and record in the appropriate recorder's office any additional evidence of the assignment of any deed of trust, mortgage, contract of sale, lease, guaranty or other security instrument that secures or guarantees the performance of such Receivable, then the Collateral Agent shall give written notice thereof to MRT or the applicable Subsidiary, and MRT or such Subsidiary shall promptly execute and deliver such additional assignment or assignments to the Collateral Agent. In the event that MRT or any Subsidiary intends to realize upon, sell or acquire title to any underlying security for, or proceeds of, any Receivable which is Collateral, as a result of enforcing its right to payment of such Receivable, the Collateral Agent, in its sole discretion and as a condition to releasing such Receivable for such purpose, may require that MRT or such Subsidiary (a) execute such additional mortgages, deeds of trust, financing statements or other security agreements and instruments as the Collateral Agent deems appropriate to obtain and maintain a perfected and enforceable lien upon such underlying security or proceeds having the highest available priority and rank except, that, such ------ ---- security interest may be subordinated to any purchase money financing in connection with such sale or transfer, and (b) utilize escrow arrangements for the receipt and holding of such Receivable where requested by the Collateral Agent. 5.03 Receivables Subject to Prior Encumbrances. MRT and the ----------------------------------------- Subsidiaries shall, upon request of the Collateral Agent, execute and deliver to the holder of any lien prior in right to the Collateral Agent's lien or other interest in or to any Receivable which is Collateral such notices, advisements and letters disclosing to such holder the Collateral Agent's right under the Indenture or the other documents evidencing such lien as the Collateral Agent may, in its sole discretion, request. MRT and the Subsidiaries constitute and appoint the Collateral Agent as their agent and attorney-in-fact for such purpose. MRT and the Subsidiaries shall instruct such holder to deliver directly to the Collateral Agent, immediately upon the release by such holder of its lien or other interest, the original of all Underlying Promissory Notes subject to such lien or other interest in the possession of such holder in respect of such lien or other interest. Notwithstanding such duty of MRT and the Subsidiaries, in the event that MRT or any Subsidiary receives possession of any Underlying Promissory Notes, MRT or such -20- Subsidiary shall hold same in trust for the Collateral Agent and shall immediately deliver such Underlying Promissory Notes to the Collateral Agent endorsed to the order of the Collateral Agent. ARTICLE VI RELEASE 6.01 Release by the Collateral Agent Upon Sale or Disposition. So -------------------------------------------------------- long as no Event of Default has occurred and is continuing, the Collateral Agent shall, as soon as practicable upon its receipt of a written request by MRT, execute and deliver any agreement, instrument or document releasing any lien created or continued by or pursuant to the Indenture or this Collateral Agreement, in accordance with the release provisions of the Indenture. ARTICLE VII REMEDIES 7.01 Remedies Cumulative. No remedy conferred in any Document is ------------------- intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to every other remedy under any Document or now or hereafter existing at law or in equity or by statute or otherwise and the Collateral Agent may exercise any such remedies separately, successively or concurrently at its sole and absolute discretion. 7.02 No Waiver or Exhaustion. No waiver by the Collateral Agent of ----------------------- any rights or remedies provided for or referred to in any Document shall be considered a waiver of any other or subsequent right or remedy of the Collateral Agent; no delay or omission in the exercise or enforcement by the Collateral Agent of any rights or remedies shall ever be construed as a waiver of any other right or remedy of the Collateral Agent; and no exercise or enforcement of any such right or remedy shall ever be held to exhaust any right or remedy of the Collateral Agent. -21- 7.03 Remedies. If an Event of Default has occurred and is -------- continuing, the Collateral Agent, upon authorization by the Required Holders, may exercise any of the following remedies: (a) Rights of a Secured Party. In addition to all of the Collateral ------------------------- Agent's other rights and remedies, the Collateral Agent shall have all of the rights and remedies of a secured party under the Uniform Commercial Code of the state in which such rights or remedies are asserted, all of which rights and remedies shall be cumulative and nonexclusive. This Collateral Agreement constitutes a "security agreement," within the meaning of the Uniform Commercial Code, and the Collateral includes personal property and all other rights and interests, tangible and intangible in nature. MRT and the Subsidiaries by executing and delivering this Collateral Agreement have granted to the Collateral Agent as security for the Liabilities, a security interest in the Collateral. If an Event of Default occurs and is continuing, the Collateral Agent, in addition to any other rights and remedies which it may have, shall have and may exercise immediately and without demand, any and all rights and remedies granted to a secured party upon default under the Uniform Commercial Code, including, the right to take possession of the Collateral or any part thereof, and to take such other measures as the Collateral Agent may deem necessary for the care, protection and preservation of the Collateral. (b) Access to Collateral. The Collateral Agent shall have the right, -------------------- without any obligation to pay rent or any other consideration to MRT or any Subsidiary, without prior notice to MRT or such Subsidiary and without being deemed to be a mortgagee in possession, to (i) enter upon the Real Estate now or hereafter owned or leased by MRT or any Subsidiary or any other place or places in which any Collateral is located and kept, through self help and without judicial process, without first obtaining a final judgment or giving MRT or such Subsidiary an opportunity for any hearing; (ii) prepare, assemble or process any Collateral for sale, lease or other disposition, and review, process and assemble any records or evidence of the status or condition of any Collateral, and for such purpose have access, without being liable for any charge or fee, to all data processing and computer programs, disks, peripheral storage devices and other computer hardware and software (and manuals therefor) in the possession or under the control of MRT or any -22- Subsidiary; (iii) remove, for sale or other disposition, any Collateral to the premises of the Collateral Agent or elsewhere for such time as the Collateral Agent may desire; or (iv) require MRT or any Subsidiary to assemble any Collateral, or records or evidence of same, and make the same available to the Collateral Agent at a place to be designated by the Collateral Agent, in its sole discretion. (c) Operation of Collateral. Until the Collateral Agent is able to ----------------------- effect the sale, lease or other disposition of any Collateral, the Collateral Agent shall have the right to use, operate, develop or manage the same, or any part thereof, to the extent that it deems appropriate for the purpose of preserving its value or for any other purpose deemed appropriate by the Collateral Agent. (d) Possession of the Collateral. The Collateral Agent may, if it so ---------------------------- elects, take possession of any Collateral personally, by agent, custodian or by a receiver appointed by a court, without regard to the value of the security, and may procure any orders or writs appropriate to enforce the Collateral Agent's rights under this Collateral Agreement without prior notice or hearing, and MRT and the Subsidiaries consent to the appointment of a receiver hereunder. (e) Collection of Receivables. With respect to any Receivable which ------------------------- is Collateral and without notice to MRT or the applicable Subsidiary, the Collateral Agent, in its sole discretion and in its own name or in MRT's or such Subsidiary's name, may (i) notify account debtors and demand and collect payment and use MRT's or such Subsidiary's stationery for such purpose; (ii) enforce payment by legal proceedings or otherwise; (iii) exercise all of MRT's or such Subsidiary's rights and remedies thereunder; (iv) settle, adjust, compromise, extend or renew any account debtor's obligations thereunder; (v) settle, adjust or compromise any legal proceedings brought or pending in connection therewith; (vi) if permitted by applicable law, sell or assign any such Receivable upon such terms, for such amounts and at such time or times as the Collateral Agent deems advisable; or (vii) grant discharges and make releases. (f) Sale or Other Disposition of Collateral. The Collateral Agent --------------------------------------- shall have the right to sell, lease or otherwise -23- dispose of any Collateral in its then condition, or after any further assembly, manufacturing, development or processing thereof, at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, by parcel or en masse, for cash or on credit, all as the Collateral Agent, in its sole -- ----- discretion, may deem advisable. Such sales may be adjourned and continued from time to time with or without notice. The Collateral Agent shall have the right to conduct such sales on MRT's or any Subsidiary's premises or elsewhere and shall have the right to use such premises without charge for such sales for such time or times as the Collateral Agent may deem necessary in its sole discretion. In advertising for sale, selling or otherwise realizing upon any Collateral, the Collateral Agent is hereby granted a license and a right to use, without charge, MRT's or any Subsidiary's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, advertising matter or any property of a similar nature, as they pertain to any Collateral, and MRT's or such Subsidiary's rights under all licenses and all franchise agreements shall inure to the Collateral Agent's benefit for this purpose. The Collateral Agent or any Lender may purchase all or any Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Liabilities. Except as otherwise provided by law, the proceeds realized from the sale or other disposition of any Collateral shall be applied in the manner set forth in Section 6.10 of the Indenture. If any deficiency shall arise, MRT shall remain liable to the Lenders therefor. (g) Enforcement of Security Interest in Asset Sale Account. The ------------------------------------------------------ Collateral Agent may hold all funds in the Asset Sale Account and may refuse to release all or any such funds to or at the request of MRT. The Collateral Agent may enforce its security interest in the Asset Sale Account after an Event of Default has occurred without notice to MRT or any Subsidiary, by application of funds in the Asset Sale Account to the Liabilities. MRT and the Subsidiaries agree that such application shall constitute a commercially reasonable enforcement of the Collateral Agent's security interest in the Asset Sale Account. 7.04 Notice of Sale. Any notice required to be given by the -------------- Collateral Agent of a sale, lease or other disposition of -24- any personal property Collateral shall constitute commercially reasonable and fair notice thereof to MRT provided such notice is deposited in the United States mail, postage prepaid and addressed to MRT, at the address then provided for notice to MRT in the Indenture, ten (10) days prior to such proposed action, or such longer period, if any, as may be specified by applicable law. 7.05 Waiver of Certain Rights with Respect to Sales by Collateral ------------------------------------------------------------ Agent of Collateral. In consideration for the Lenders' agreement to enter into - ------------------- the Indenture, but only to the extent permitted by applicable law: (a) MRT and each Subsidiary hereby waives any marshalling, equity or other right to inhibit, delay or restrict any sale or other disposition of Collateral by the Collateral Agent pursuant to the Documents, or to direct the order of such sale or sales or other disposition; (b) any power of sale granted to the Collateral Agent in the Documents may be exercised separately with respect to each and every item or parcel of Collateral or with respect to groups and assemblages of Collateral, in the Collateral Agent's sole discretion, and may be exercised on separate days or at separate times or in separate places; the exercise of such power of sale shall not be an action for purposes of any law or statute pertaining to actions to enforce secured transactions; (c) MRT and each Subsidiary waives any statutory right of redemption following any sale or other disposition of Collateral by the Collateral Agent and any right to have Collateral which is sold or otherwise disposed of pursuant to the Documents valued after such sale or disposition, so that the total deficiency then remaining may be bid in any order and in any part by the Collateral Agent at any other sale until all of the Liabilities are satisfied in full or the final deficiency then remaining shall be reducible to judgment against MRT or such Subsidiary by any court of competent jurisdiction; provided, -------- however, that notwithstanding anything to the contrary contained in any - ------- Documents, the value of the Collateral sold or otherwise disposed of by the Collateral Agent pursuant to such document or documents shall, to the extent required by the law of the jurisdiction in which such Collateral is located, be taken into -25- account before entering a deficiency judgment against MRT or such Subsidiary; (d) any defense available to MRT or any Subsidiary with respect to or as a result of a sale or other disposition of any Collateral pursuant to this Article within one state shall not be available to MRT or such Subsidiary with respect to any Collateral located in any other state; and (e) the Collateral Agent shall be entitled to sell or dispose of any Collateral or part thereof pursuant to any Documents in any order and in any state or states, whether privately or by court proceeding for foreclosure, seizure, appointment of receiver or otherwise, without regard to any substantive or procedural defense, pleading bar, sanction or other remedy which would otherwise be available to MRT or any Subsidiary affecting the Collateral Agent's sole discretion to sell or dispose of the Collateral or any part thereof in one transaction, rather than in multiple transactions, en masse rather than by -- ----- parcel, in satisfaction of all the indebtedness then secured by such Collateral rather than of any part of the indebtedness designated by the Collateral Agent in its sole discretion and for that purpose MRT and each Subsidiary hereby disclaims any right and waives any defense under (i) California Code of Civil Procedure, Section 580d, concerning the bar against rendition of a deficiency judgment after foreclosure under a power of sale, and Section 726 thereof, concerning the form of foreclosure proceedings with respect to real property security located in California, and California Civil Code, Section 1479, concerning the application of general performance under several obligations to one creditor, Section 2924g(b) thereof, concerning the conduct of trustee's sales and Section 3433 thereof, concerning the relative rights of different creditors interested in the same property and (ii) any laws or equitable principles in any other states in the United States of America, where such laws or equitable principles are similar in effect to the laws referred to in Section 7.05(e)(i) above. -26- 7.06 Right of Set-off. Upon the occurrence and during the ---------------- continuance of any Event of Default, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of MRT against any and all of the Liabilities now or hereafter existing, irrespective of whether or not such Lender shall have made any demand under this Collateral Agreement or any other Document and although such obligations may be unmatured. Each Lender agrees promptly to notify MRT after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect -------- ------- the validity of such set-off and application. The rights of each Lender under this Section 7.06 are in addition to the other rights and remedies (including, without limitation, other rights of set-off) which such Lender may have. ARTICLE VIII THE COLLATERAL AGENT 8.01 Authorization and Action. Each Lender hereby appoints and ------------------------ authorizes the Collateral Agent to take such action as agent on its behalf and to exercise such powers under this Collateral Agreement and the Documents as are delegated to the Collateral Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Collateral Agreement and the other Documents (including, without limitation, enforcement or collection of the Liabilities), the Collateral Agreement shall not take any action unless directed by the Required Holders, in which case such action shall be binding upon Lenders; provided, however, that the Collateral Agent shall not be required to take any - -------- ------- action which required the Collateral Agent to expend its own funds or which the Collateral Agent in good faith believes exposes it to personal liability or which is contrary to this Collateral Agreement, the other Documents or applicable law, and further provided that the Collateral Agent shall not be liable with respect to any action properly taken or -27- properly omitted by it in accordance with the direction of the Required Holders. 8.02 Collateral Agent's Reliance, Etc. None of the Collateral Agent, --------------------------------- its Affiliates or any of their respective directors, officers, agents, employees or attorneys shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Collateral Agreement or the other Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Collateral Agent (a) may treat for all purposes under the Indenture and this Collateral Agreement as the owner, Lender and Holder with respect to any Note the Person whose name is recorded as the owner of such Note in the register provided for in the Indenture; (b) may retain and consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made in, or in connection with, this Collateral Agreement or any of the other Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Collateral Agreement or any of the other Documents on the part of MR or to inspect the property (including the books and records) of MRT; (e) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of the initial Collateral or of this Collateral Agreement or any of the other Documents or any other instrument or document furnished pursuant hereto or thereto or for the adequacy, perfection or priority of the security interests in connection with the initial Collateral; and (f) shall incur no liability under or in respect of this Collateral Agreement or any of the other Documents by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. 8.03 If a Lender is also Collateral Agent and Affiliates. With --------------------------------------------------- respect to the Liabilities owing to any Lender who, at any time is or becomes the Collateral Agent hereunder, -28- such Lender shall have the same rights and powers under this Collateral Agreement as any other Lender and may exercise the same as though it were not the Collateral Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include any such Lender in its individual capacity. Any such Lender and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, MRT and any Person who may do business with or own securities of MRT, all as if such Lender were not the Collateral Agent and without any duty to account therefore to the Lenders. Notwithstanding the foregoing, no Lender may serve as Collateral Agent unless MRT approves such Lender. 8.04 Lender Credit Decision. Each Lender acknowledges that it has, ---------------------- independently and without reliance upon the Collateral Agent or any other Lender reviewing the Indenture and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Collateral Agreement and the Indenture. Each Lender also acknowledges that it will, independently and without reliance upon the Collateral Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Collateral Agreement and the other Documents. 8.05 Collateral Agent's Fee. MRT shall pay to Collateral Agent a ---------------------- quarterly fee equal to $3,750, plus reimbursement of all expenses incurred by Collateral Agent in performing its duties under this Collateral Agreement. At the end of each Fiscal Year, the Collateral Agent and MRT shall each have the right to negotiate a change in fees paid to Collateral Agent hereunder, neither party being bound to agree to any such change. 8.06 Successor Collateral Agent. Either Collateral Agent may resign -------------------------- at any time by giving written notice thereof to the Lenders and MRT and may be removed at any time with or without cause by the Required Holders. Upon any such resignation or removal of the Corporate Collateral Agent, the Required Holders shall have the right to appoint a successor Corporate Collateral Agent. If no successor Corporate Collateral Agent -29- shall have been so appointed and shall have accepted such appointment, within 30 days after the retiring Corporate Collateral Agent's giving of notice of resignation or the Required Holders' removal of the retiring Corporate Collateral Agent, then the retiring Corporate Collateral Agent may, on behalf of the Required Holders, appoint a successor Corporate Collateral Agent, which shall be a commercial bank organized under the laws of the United States of America or of any state thereof and having a combined capital surplus of at least $200,000,000 and having comparable prior experience as the previous Corporate Collateral Agent in acting as a trustee or agent for collateral similar in value and type as the Collateral delivered herewith or may petition a court of competent jurisdiction to appoint a successor Corporate Collateral Agent. Within 30 days of notification of a successor Corporate Collateral Agent, and provided that no Event of Default has occurred and is continuing, MRT may recommend to the Lenders one or more other institutional entities which would both qualify to serve as Corporate Collateral Agent hereunder and would agree to so act, and the Lenders agree to replace the successor Corporate Collateral Agent with a new successor Corporate Collateral Agent selected by Lenders from amongst such group of proposed entities if one of such proposed new successor Corporate Collateral Agents is acceptable to the Lenders in their sole discretion. Upon the acceptance of any appointment as Corporate Collateral Agent hereunder by a successor Corporate Collateral Agent, such successor Corporate Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Corporate Collateral Agent, and upon delivering the Collateral to the New Corporate Collateral Agent the retiring Corporate Collateral Agent shall be discharged from its duties and obligations under this Collateral Agreement and the other Documents arising or accruing thereafter. Upon any such resignation or removal of the Individual Collateral Agent the Corporate Collateral Agent shall appoint a successor Individual Collateral Agent and shall notify both Lenders and MRT of such appointment; provided, however, that no Individual Collateral Agent, or any co- -------- ------- Collateral Agent or any sub-agent, may be a Lender or a direct employee of a Lender, other than a Lender approved by MRT. After any retiring Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was -30- Collateral Agent under this Collateral Agreement and the other Documents. 8.07 Payments to Lenders. Payments to be made hereunder by the ------------------- Collateral Agent to each Lender from funds received by the Collateral Agent from MRT, or in connection with the Indenture, or this Collateral Agreement shall be made to such Lender at the address or to the account identified for payments on the register provided for in the Indenture according to each Lender's pro rata interest in the Liabilities. A Lender may change the address or account to which payments shall be delivered under this Section, by delivering to Collateral Agent reasonable advance written notice of such substituted address or account for recordation in such register. 8.08 Other Matters Relating to the Collateral Agent. (a) The ---------------------------------------------- Corporate Collateral Agent shall be under no obligation or duty to take any action under this Collateral Agreement or the other Documents if taking such action (i) would subject the Corporate Collateral Agent to tax in any jurisdiction where it is not then subject to a tax, (ii) would require the Corporate Collateral Agent to qualify to do business in any jurisdiction where it is not then so qualified, or (iii) would subject the Corporate Collateral Agent to in personam jurisdiction in any jurisdiction where it is not then so -- -------- subject, and in any such case, the Corporate Collateral Agent shall act through the Individual Collateral Agent or appoint a co-Collateral Agent pursuant to Section 8.10. (b) The Collateral Agent may execute any of the rights or powers, and perform any duties under, this Collateral Agreement or the other Documents either directly or by or through agents or attorneys-in-fact, and the Collateral Agent shall not be responsible for the default or misconduct of any such agents or attorneys-in-fact selected by the Collateral Agent without gross negligence or willful misconduct. 8.09 Powers of Individual Collateral Agent. The Individual ------------------------------------- Collateral Agent has been joined as a party hereunder so that if, by any present or future law in any jurisdiction in which it may be necessary to perform any act in the execution of the trusts hereby created, the Corporate Collateral Agent may be incompetent or unqualified to act as a Collateral Agent, then all -31- the acts required to be performed in such jurisdiction, in the execution of the responsibilities hereby created, shall and will be performed by the Individual Collateral Agent, acting alone. Therefore, notwithstanding any other term or provisions hereof to the contrary, the Corporate Collateral Agent alone shall have and exercise the rights and powers granted herein and shall be solely charged with the performance of the duties herein declared on the part of the Collateral Agent to be had and exercised or to be performed; provided, however, -------- ------- (i) that if the Corporate Collateral Agent, or the Required Holders, deem it necessary or desirable for the Individual Collateral Agent to act in a particular jurisdiction, the Individual Collateral Agent shall have and exercise the right and powers granted herein (but no greater powers) and shall be charged with the performance of the duties herein declared on the part of the Collateral Agent to be had and exercised or to be performed, but only in such particular jurisdiction, and (ii) the Individual Collateral Agent shall act as and be such upon the term and condition that no power granted by this Collateral Agreement to, or which this Collateral Agreement provides may be exercised by, the Individual Collateral Agent shall be exercised by the Individual Collateral Agent except jointly with, or with the consent in writing of, the Corporate Collateral Agent. 8.10 Additional Collateral Co-Agents; Separate Collateral Agents. ----------------------------------------------------------- (a) If at any time or times it shall be necessary or prudent in order to conform to any law or any jurisdiction in which MRT shall be organized, or shall conduct business or maintain any Collateral, or the Collateral Agent shall be advised by counsel, satisfactory to them, that it is so necessary or prudent in the interest of the Lenders, or the Collateral Agent shall deem it desirable for their own protection in the performance of their duties hereunder, the Collateral Agent and the authorized representative of the Lenders shall execute and deliver all instruments and agreements necessary or proper to appoint another bank or trust company, or one or more persons approved by the Collateral Agent and MRT, either to act as collateral co-agent or co-agents of all or any of the Collateral, jointly with the Collateral Agent originally named herein or any successor or successors, or to act as separate collateral agent or agents of any such property. In the event MRT shall not have joined in the execution of such instruments and agreements within 10 days after the receipt of a written -32- request from the Collateral Agent to do so, or in the case an Event of Default shall have occurred and be continuing, the Collateral Agent may act under the foregoing provisions of this Section 8.10 without the concurrence of MRT and MRT hereby irrevocably appoints the Collateral Agent and its agent and attorney to act under the foregoing provisions of this Section 8.10 in either of such contingencies. (b) Every separate collateral agent and every collateral co-agent, other than any collateral agent which may be appointed as successor to either of the Collateral Agent, shall, to the extent permitted by law, be appointed and act and be such, subject to the following provisions and conditions, namely: (i) all rights, powers, duties and obligations conferred upon the Collateral Agent in respect of the custody, control and management of moneys, papers or securities shall be exercised solely by the Collateral Agent, or their successors as the Collateral Agent hereunder; (ii) all rights, powers, duties and obligations conferred or imposed upon the Collateral Agent hereunder shall be conferred or imposed and exercised or performed by the Collateral Agent and such separate collateral agent or separate collateral agents or co-agents or co-agents jointly, except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed that the Collateral Agent shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations shall be exercised and performed by such separate collateral agent or separate collateral agents or co-agent or co- agents; (iii) no power given or provided hereby may be exercised by any such collateral co-agent or co-agents or separate collateral agents, except jointly with, or with the consent in writing of, the Collateral Agent, anything herein contained to the contrary notwithstanding; -33- (iv) no collateral agent hereunder shall be personally liable by reason of any act or omission of any other collateral agent hereunder; and (v) Collateral Agent at any time may accept the resignation of or remove any such separate collateral agent or co-agent and in that case, by an instrument in writing executed by the Collateral Agent, may appoint a successor to such separate collateral agent or co-agent, as the case may be, anything herein contained to the contrary notwithstanding. In the event that the Collateral Agent shall have appointed a separate collateral agent or separate collateral agents or co-agent or co-agents as above provided, it may at any time, by an instrument in writing, accept the resignation of or remove any such separate collateral agent, the successor to any such separate collateral agent or co-agent to be appointed by Collateral Agent. 8.11 Payments to Holders. Subject to the rights of the Collateral ------------------- Agent under Section 8.12 hereof, payments of any amount which may be received hereunder from time to time for the benefit of the Holders shall be delivered to the Trustee at the address or to the accounts identified by the Trustee for such payments to be distributed by the Trustee pursuant to Section 10.06 of the Indenture. 8.12 Prior Lien. To secure the Issuer's obligations to make payments ---------- and to provide indemnification to the Collateral Agent as contemplated by this Collateral Agreement and the other Collateral Documents, the Collateral Agent shall have a Lien prior to the Notes on all Collateral held or collected by the Collateral Agent. Such Lien shall survive the termination of the Collateral Documents. 8.13 Services after Event of Default. When the Collateral Agent ------------------------------- incurs expenses or renders services after an Event of Default specified in Section 6.01(e) of the Indenture occurs, the expenses and the compensation for such services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. -34- ARTICLE IX GENERAL PROVISIONS 9.01 Notices. All notices and other communications provided for ------- under this Collateral Agreement to be effective shall be sent in accordance with the terms of Section 10.02 of the Indenture. 9.02 Severability. If any of the provisions of this Collateral ------------ Agreement shall for any reason be held to be invalid, illegal and unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Collateral Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 9.03 Captions. The captions, headings and arrangements used in this -------- Collateral Agreement are for convenience only and do not in any way affect, limit, amplify or modify the terms and provisions hereof. 9.04 Successors and Assigns. This Collateral Agreement and all ---------------------- obligations of MRT and the Subsidiaries hereunder shall be binding upon the successors and assigns of MRT and the Subsidiaries, and shall, together with the rights and remedies of the Collateral Agent hereunder, inure to the benefit of the Collateral Agent, the Lenders, and their respective successors and assigns. 9.05 Applicable Law and Jurisdiction. (a) This Collateral Agreement ------------------------------- shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York, except that the provisions of this Collateral Agreement creating an agency and setting forth the rights, duties, obligations, and liabilities of the Collateral Agent shall be governed and construed in accordance with the laws in the State of New York. The parties hereto hereby submit to the non-exclusive jurisdiction of the courts of the State of New York. However, to the extent the law of the State in which particular Collateral is located requires that the law of such State be applicable for purposes of enforcement of the Lenders' remedies with respect to such Collateral, then for such limited purpose -35- the law of such State shall apply; except where such State permits or otherwise does not prohibit the parties to waive the applicability of such State law in which case the parties hereby waive applicability of such State law. In particular, MRT and each Subsidiary hereby waives and disclaims any state law or principle of equity which limits the ability of the Collateral Agent to sell or dispose of the Collateral in multiple actions, rather than one action, by parcel rather than en masse in any particular order, or to obtain and/or enforce a -------- deficiency judgment in respect of any sale of any piece of Collateral. (b) MRT and each Subsidiary hereby irrevocably waives any objection, including, without limitation, any objection to the submission to jurisdiction set forth above which it now or hereafter may have to the bringing of any such action or proceeding in such jurisdiction. (c) EACH OF THE PARTIES HERETO WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES HEREUNDER. 9.06 Defeasance. Upon payment or satisfaction in full of all the ---------- Liabilities or upon receipt of direction by the Required Holders, the Collateral Agent shall release, reconvey or reassign the Collateral without warranty to the person or persons entitled thereto; provided, however, that such release, -------- ------- reconveyance or reassignment shall constitute a representation and warranty by the Collateral Agent (whether or not so stated therein) that the Collateral Agent has not assigned or encumbered the Collateral covered by such release, conveyance or reassignment. 9.07 Attorneys' Fees and Other Costs. All payments, fees, costs and ------------------------------- expenses, including the reasonable fees, costs and expenses of attorneys, accountants, real estate advisors, and professional advisors employed or retained by the Collateral Agent and incurred by the Collateral Agent in performing any of its obligations or in asserting any of its rights or remedies under this Collateral Agreement shall be payable by MRT to the Collateral Agent as set forth in the Indenture. 9.08 Counterparts. This Collateral Agreement may be executed in any ------------ number of counterparts and by different parties -36- in separate counterparts, copies of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and this same Collateral Agreement. 9.09 Amendments. No amendment or waiver of any provision of this ---------- Collateral Agreement nor consent to any departure by MRT or the Subsidiaries therefrom shall in any event be effective unless the same shall be in writing, approved by the Required Holders and signed by the Collateral Agent, and then any such waiver or consent shall only be effective in the specific instance and for the specific purpose for which given. 9.10 No Waiver; Remedies. (a) No failure on the part of the ------------------- Collateral Agent or any Lender to exercise, and no delay in exercising any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative, may be exercised singly or concurrently, and are not exclusive of any remedies provided by law or any of the other Documents. (b) Failure by the Collateral Agent or any of the Lenders at any time or times hereafter to require strict performance by MRT or any Subsidiary or any other Person of any of the provisions, warranties, terms or conditions contained in any of the Documents now or at any time or times hereafter executed by MRT or any Subsidiary or any such other Person and delivered to the Collateral Agent or any of the Lenders shall not waive, affect or diminish any right of the Collateral Agent or any of the Lenders at any time or times hereafter to demand strict performance thereof, and such right shall not be deemed to have been modified or waived by any course of conduct or knowledge of the Collateral Agent or any of the Lenders, or any agent, officer or employee of the Collateral Agent or any Lender. 9.11 Limitation of Liability. Any term or provision of this ----------------------- Collateral Agreement or any other Document to the contrary notwithstanding, the maximum aggregate amount of the Liabilities for which any Subsidiary shall be liable shall not exceed the maximum amount for which such Subsidiary can be liable without rendering this Collateral Agreement or any other Document, as it relates to such Subsidiary, voidable under -37- applicable law relating to fraudulent conveyance or fraudulent transfer. 9.12 Execution of this Collateral Agreement. This Collateral -------------------------------------- Agreement has been executed on behalf of MRT by an officer in his capacity as a Trustee and officer of MRT. As provided in Section 7.02 of the Amended Declaration of Trust of MRT, no Trustee, officer, agent or shareholder of MRT shall be bound or held to any personal liability in connection with the obligations of MRT arising out of the execution of this Collateral Agreement. The execution of this Collateral Agreement by any of these individuals shall not bind the individuals and they shall not be held to any personal liability in connection with the obligations under this Collateral Agreement as a result of such execution. 9.13 Rights to Deal with Collateral. (a) Subject to the provisions ------------------------------ and covenants of the Indenture and so long as no Event of Default has occurred and is continuing, MRT shall have full rights to service and otherwise deal with the Collateral, including the following: (a) to receive and utilize all payments made with respect to the Collateral; (b) to work out the collection of Receivables and any other amounts payable with respect to Collateral and to compromise, extend, modify and take other steps with respect to the Collateral, including amending the terms of the Collateral, extending maturities, modifying interest rates, waiving and declaring defaults, proceeding with foreclosure, accepting deeds in lieu thereof, and exercising any other legal remedies available to it; (c) in the case of Collateral relating to loans as to which MRT has an ongoing funding obligation, to continue to administer and fund such loans; and (d) to operate and develop any Real Estate. Without limiting the generality of the foregoing, MRT shall have the right to conduct any foreclosure in its discretion, including pursuing actions which may limit the right to seek a deficiency judgment. The Collateral Agent shall fully cooperate with MRT in the exercise of such rights, including executing and delivering to MRT, subject to the provisions of Section 6.01 hereof, promptly upon MRT's request, such acknowledgements, agreements and other instruments and documents as MRT may reasonably require to facilitate the exercise of such rights. So long as no Event of Default has occurred and is continuing, MRT may, without obtaining the Lenders' consent, take title to (i) a mortgage or -38- equivalent security then held by MRT or acquired in connection with property held by MRT for the purpose of foreclosing upon such mortgage or equivalent security or (ii) Real Estate which is the subject of the lien of a mortgage or equivalent security then held by MRT or acquired in connection with property held by MRT for the purpose of holding and operating such Real Estate in a Subsidiary organized under Section 4.18 of the Indenture, provided that MRT or such Subsidiary delivers to the Collateral Agent, at the time of taking such title in such Subsidiary, (a) a mortgage lien upon the Real Estate to the same extent, and having the same priority, as would have been required to be delivered hereunder to the Collateral Agent had MRT taken title thereto, (b) a pledge of one hundred (100%) percent of the issued and outstanding capital stock of such Subsidiary pursuant to a pledge agreement in form and substance satisfactory to the Collateral Agent, and (c) a legal opinion of MRT's legal counsel as to compliance with the foregoing or such other evidence to such effect as is reasonably satisfactory to the Collateral Agent. Contemporaneous with delivery of the requirements of the preceding sentence, MRT shall execute, deliver, file or record (as appropriate) all necessary documents and instruments necessary to grant to the Collateral Agent a valid, perfected and enforceable security interest in the assets and capital stock of such Subsidiary, including, a duly authorized and executed pledge of all of such Subsidiary's issued and outstanding capital stock (with each stock certificate endorsed in blank), a mortgage or deed of trust, an assignment of leases and rents, a security agreement, and such filings necessary to comply with the Uniform Commercial Code adopted in the state in which the Real Estate is located and the state or states in which such Subsidiary is organized or is otherwise doing business. (b) In the event that MRT desires to take any action not otherwise provided for by this Collateral Agreement or the Indenture, MRT shall deliver written notice of such proposed action to the Collateral Agent and the Trustee which notice shall be executed by a trustee of MRT and shall be accompanied by an explanation of the reasons why MRT desires that such proposed action be taken. The Collateral Agent may direct MRT to deliver such other opinions, instruments and documents that it deems reasonably necessary to assist the Lenders in their determination of whether such proposed action is acceptable. If the Collateral Agent or any Lender does not make a request to MRT for additional -39- information in connection with a proposed action within five (5) Business Days of the Collateral Agent's, receipt of the notice of proposed action, then the Collateral Agent and the Lenders shall be deemed to have waived the right to request additional information in connection with such proposed action. Promptly following the Collateral Agent's, the Lenders' and the Trustee's receipt of all information requested in connection with the proposed action, the proposed action shall be submitted by the Trustee to the Lenders for the consent of the Required Holders pursuant to Section 9.02 of the Indenture. If the Required Holders approve MRT's proposed action, then the Trustee shall so notify MRT and the Collateral Agent of such approval, and upon receipt of such notice the Collateral Agent shall fully cooperate with MRT in the exercise of such actions and promptly execute and deliver to MRT the releases and other documents and instruments specified or included in the notice of proposed action. If the Required Holders do not deliver to the Trustee an objection, and if the Trustee in turn does not deliver a copy of such objection to MRT, within twenty (20) Business Days of either (a) the Trustee's and the Lenders' receipt of all information requested in connection with the proposed action or (b) the Collateral Agent's or the Lenders' failure to make a request for additional information within five (5) Business Days of the Collateral Agent's receipt of the notice of proposed action, then the Lenders will be deemed to have approved such action and the Collateral Agent shall fully cooperate with MRT in the exercise of such action and promptly execute and deliver to MRT the releases and other documents and instruments specified or included in the notice of proposed action. -40- IN WITNESS WHEREOF, the parties hereto have caused this Collateral Agreement to be executed by their respective duly authorized officers or other representatives as of the day and year first above written. WILMINGTON TRUST COMPANY, as Corporate Collateral Agent By: __________________________ Title: WILLIAM J. WADE, as Individual Collateral Agent ______________________________ WILLIAM J. WADE MORTGAGE AND REALTY TRUST By: __________________________ Title: MRT WEST, INC. By: _________________________ Title: MRT CREEKSIDE, INC. By: ________________________ Title: -41- MRT NEWARK, INC. By: ________________________ Title: MRT SANTA MONICA, INC. By: _______________________ Title: 150 RITTENHOUSE CIRCLE, INC. By: _______________________ Title: MUTUAL SERIES FUND, INC. By: _______________________ Title: FIDELITY MANAGEMENT & RESEARCH COMPANY By: _______________________ Title: -42- ANGELO, GORDON & CO. By: _______________________ Title: EMERALD PARTNERS By: _______________________ Title: STROME-SUSSKIND & CO. By: _______________________ Title: -43- EX-99.T3E 5 DEF 14A EXHIBIT T3E.1 DISCLOSURE STATEMENT AND PROXY STATEMENT FOR THE SOLICITATION OF VOTES FOR THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST Mortgage and Realty Trust, a Maryland real estate investment trust (the "Company"), upon the terms and subject to the conditions set forth in this Disclosure Statement and Proxy Statement for the Solicitation of Votes for the Prepackaged Plan of Reorganization of Mortgage and Realty Trust (this "Disclosure Statement") and the accompanying forms of Ballot (the "Ballot") and/or Master Ballot (the "Master Ballot"), hereby solicits (the "Plan Solicitation" or "Solicitation") from each holder of Outstanding Notes, Outstanding Common Shares, Other Secured Claims and Unsecured Claims (as each such term is hereinafter defined) (collectively, the "Holders") as of the close of business on July 7, 1995 (the "Record Date"), acceptance of a prepackaged plan of reorganization (the "Prepackaged Plan") under chapter 11 of title 11 of the United States Code, as amended (the "Bankruptcy Code"). Consummation of the Prepackaged Plan will result in the restructuring described in this Disclosure Statement (the "Restructuring"). The Prepackaged Plan provides, among other things, that holders of the Company's debt securities as of the date the Prepackaged Plan becomes effective (the "Effective Date") shall receive the following securities, after giving effect to a one for 33.33 reverse stock split (the "Reverse Stock Split") of the Company's Common Shares, par value $1.00 per share (the "Common Shares"):
FOR EACH $1,000 PRINCIPAL AMOUNT OF: THE HOLDER WILL RECEIVE: ------------------------------------ ------------------------ Senior Secured Uncertificated Notes (a) $379.31 in principal amount of new due 1995 (the "Outstanding Notes") 11-1/8% Senior Secured Notes due 2002 (the "New Senior Notes") (an aggregate of $110,000,000 principal amount), (b) a pro rata portion of an aggregate of at least $50,000,000 less $25,000,000 paid pro rata to the holders of Outstanding Notes on April 11, 1995 and any additional amounts paid between March 1, 1995 and the date on which the Company files its voluntary petition for relief commencing the Bankruptcy Case (as hereinafter defined) (the "Petition Date") pursuant to the Agreement of Understanding (as hereinafter defined) (plus such additional amount, if any, based upon cash available in excess of the Initial Cash Reserve Fund (as hereinafter defined)) and (c) 37.55 Common Shares (the "New Common Shares"). The due, punctual and full payment of the principal of and interest on the New Senior Notes will be jointly, severally and unconditionally guaranteed by the Subsidiaries (as defined under the New Senior Note Indenture) of the Company.
Under the Prepackaged Plan, holders of the Company's currently outstanding Common Shares (the "Outstanding Common Shares") will retain their existing Common Shares, subject to the Reverse Stock Split and the issuance of the New Common Shares to holders of Outstanding Notes as described above. However, the total equity ownership in the Company of existing holders of Outstanding Common Shares will be reduced from 100% to 3% under the Prepackaged Plan. IF THE CLASS OF HOLDERS OF OUTSTANDING COMMON SHARES DOES NOT VOTE TO ACCEPT THE PREPACKAGED PLAN, THE PREPACKAGED PLAN PROVIDES FOR A "CRAMDOWN" UNDER WHICH ALL OUTSTANDING COMMON SHARES WILL BE CANCELLED AND HOLDERS OF OUTSTANDING COMMON SHARES WILL NOT RECEIVE OR RETAIN ANYTHING. If the "cramdown" is effected, the New Common Shares distributed to holders of Outstanding Notes will represent 99.5% of the Company's outstanding equity securities after the Restructuring and the remaining 0.5% will be distributed to charities designated by the Principal Holders (as hereinafter defined). THE PLAN SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1995, UNLESS EXTENDED (THE "EXPIRATION DATE"). ---------------- This Disclosure Statement is first being mailed to Record Holders on July 12, 1995. (cover page continued on the following pages) (cover page continued) The Prepackaged Plan also provides that (a) holders of Other Secured Claims (as defined below) will (at the option of the Company and with the consent of the Principal Holders (as hereinafter defined)) (i) be paid in full, in cash, on the Effective Date (or as soon as practicable after the date on which any such claim is allowed if the date of allowance is later than the Effective Date), (ii) be paid upon such other less favorable terms as may be mutually agreed upon by the Company and the holder of such claim, or (iii) be reinstated and paid or performed by the Company in accordance with section 1124 of the Bankruptcy Code, or the legal, equitable and contractual rights to which such claim entitles the holder of such claim shall be left unaltered, and (b) holders of Unsecured Claims (as defined below) will receive cash equal to the amount of such claim unless the holder of such claim agrees to a less favorable treatment, as described in this Disclosure Statement. "Other Secured Claims" means any Claim (as hereinafter defined) against the Company, other than a Claim of a holder of Outstanding Notes, or a Class 2 Expense Claim (as hereinafter defined), of a creditor secured by a lien on property of the Company, to the extent of the value, as determined by the Bankruptcy Court (as hereinafter defined) pursuant to section 506(a) of the Bankruptcy Code, of such creditor's interest in such property of the Company. "Unsecured Claim" means any Claim against the Company, that is not an Administrative Claim (as hereinafter defined), a Priority Claim (as hereinafter defined), a Claim under or evidenced by the Outstanding Notes, the Outstanding Note Indenture (as hereinafter defined), the Outstanding Collateral Agreement (as hereinafter defined) or the Prior Plan (as hereinafter defined), any Other Secured Claim, or a Claim based upon the Outstanding Common Shares or Outstanding Stock Rights (as hereinafter defined). The Outstanding Notes and the Outstanding Common Shares are referred to herein collectively as the "Outstanding Securities." The New Senior Notes and the New Common Shares are referred to herein collectively as the "New Securities." It is important that Holders read and carefully consider the matters described in this Disclosure Statement and respond promptly to the Plan Solicitation. Currently, the Company's capital structure is highly leveraged, and the Company is unable to meet its substantial debt service requirements. The Company is undertaking the Restructuring in order to adjust its capital structure to reflect its present projected prospects. By March 31, 1995, the Company had defaulted in the payment of $152.6 million in principal and $51.3 million of interest due in respect of the Outstanding Notes. As a result of the Company's financial condition and the current condition of the United States real estate markets, the Company will be unable to meet its debt service requirements and make scheduled payments in the absence of the Restructuring. Consequently, there can be no assurance that the Outstanding Note Trustee and the Outstanding Collateral Agent (as each such term is hereinafter defined) will not take remedial or enforcement action with respect to the Company's bank accounts or other properties, including acceleration of the Outstanding Notes and foreclosure. See "The Prepackaged Plan--Background of the Restructuring." Therefore, with or without the requisite acceptances of the Prepackaged Plan, it will be necessary for the Company to file for protection under chapter 11 of the Bankruptcy Code ("Chapter 11"). According to special purpose valuation reports prepared by Kenneth Leventhal & Company ("Kenneth Leventhal"), as of March 31, 1995, the range of enterprise going concern value of the Company is $265 million to $285 million and the range of liquidation value of the Company is $220 million to $260 million. As of May 31, 1995, the Company had $290 million in Outstanding Notes plus accrued interest of $32.9 million net of the April 11, 1995 payment of $25.0 million. Consequently, if the Prepackaged Plan is not consummated, holders of claims against the Company, whether or not asserted or allowed, as defined in section 101(5) of the Bankruptcy Code ("Claims") may not receive cash or securities of the same value and having as favorable terms as under the Prepackaged Plan and holders of Outstanding Common Shares may not receive or retain anything in the event of a foreclosure, nonconsensual bankruptcy or liquidation. THE COMPANY RECOMMENDS THAT ALL HOLDERS VOTE IN FAVOR OF THE PREPACKAGED PLAN. THE PRINCIPAL HOLDERS, WHO HOLD IN EXCESS OF 80% OF THE OUTSTANDING NOTES, HAVE AGREED TO VOTE WHEN SOLICITED IN FAVOR OF THE PREPACKAGED PLAN. For a discussion of certain important factors that should be considered in connection with the Restructuring, see "Special Factors and Certain Considerations." For the Prepackaged Plan to be confirmed (without the use of "cramdown" procedures as to classes of Holders entitled to vote on the Prepackaged Plan), the Company must receive acceptances ("Plan Acceptances") from the Holders of (i) Claims constituting at least two-thirds in dollar amount and more than one- half in number of the allowed Claims in each impaired class of Claims that have actually voted on the Prepackaged Plan, and (ii) equity ii (cover page continued) interests constituting at least two-thirds in amount of the allowed equity interests in each impaired class of equity interests that have actually voted on the Prepackaged Plan (the "Requisite Plan Acceptances"). ONLY VOTES ACTUALLY CAST WILL BE COUNTED IN DETERMINING WHETHER THE REQUISITE PLAN ACCEPTANCES FROM EACH VOTING CLASS HAVE BEEN OBTAINED. IF THE COMPANY RECEIVES THE REQUISITE PLAN ACCEPTANCES FROM THE HOLDERS OF OUTSTANDING NOTES BUT HOLDERS OF OUTSTANDING COMMON SHARES OR OTHER IMPAIRED CLAIMS REJECT THE PREPACKAGED PLAN, THE COMPANY WILL SEEK CONFIRMATION OF THE PREPACKAGED PLAN PURSUANT TO SECTION 1129(b) OF THE BANKRUPTCY CODE, PURSUANT TO "CRAMDOWN" PROCEDURES. IF THE COMPANY DOES NOT RECEIVE THE REQUISITE PLAN ACCEPTANCES FROM THE CLASS OF HOLDERS OF OUTSTANDING COMMON SHARES, THE PREPACKAGED PLAN PROVIDES THAT ALL OUTSTANDING COMMON SHARES WILL BE CANCELLED AND HOLDERS OF OUTSTANDING COMMON SHARES WILL NOT RECEIVE OR RETAIN ANYTHING. If the Company must invoke "cramdown" procedures, the Company may propose alternatives to the terms proposed in the Prepackaged Plan. For a discussion of "cramdown" procedures and the effects thereof, see "The Prepackaged Plan--Confirmation of the Prepackaged Plan--Nonconsensual Confirmation." Unless otherwise stated or otherwise indicated by context, the discussion contained in this Disclosure Statement assumes that the Prepackaged Plan will be confirmed with the approval of the holders of Outstanding Common Shares and that, consequently, holders of Outstanding Common Shares will retain their interests as provided in the Prepackaged Plan. If the Requisite Plan Acceptances are received from the holders of Outstanding Notes, the Company will commence a case under Chapter 11 (the "Reorganization Case" or "Bankruptcy Case") and use the Plan Acceptances received to obtain confirmation of the Prepackaged Plan. On the Effective Date, the Outstanding Notes will be exchanged for the consideration set forth above, and the Amended and Restated Declaration of Trust of the Company (the "Amended and Restated Declaration of Trust"), including the Reverse Stock Split, will be effected, each on the terms set forth in the Prepackaged Plan. After giving effect to the Reverse Stock Split and the distributions of New Common Shares under the Prepackaged Plan, there would be approximately 11,226,000 Common Shares outstanding, of which the Outstanding Common Shares held by existing shareholders would represent approximately 3% of the total number of outstanding Common Shares. Under the Agreement of Understanding (as hereinafter defined), the Principal Holders (who hold in excess of 80% of the Outstanding Notes), among other things, agreed to vote when solicited in favor of the Prepackaged Plan. The Prepackaged Plan also includes provisions relating to (i) the initial composition of the board of trustees of the Company (the "Board of Trustees"), (ii) certain registration rights granted in favor of certain holders of New Senior Notes and New Common Shares and (iii) release of certain claims by the Company and Holders. See "The Prepackaged Plan." The Company will not hold a meeting to vote on the Prepackaged Plan. Rather, the Company is soliciting acceptances of the Prepackaged Plan by means of Ballots and Master Ballots. Any Holder who wishes to vote with respect to the Prepackaged Plan should complete, sign and return the applicable Ballot or Master Ballot in accordance with the instructions set forth in this Disclosure Statement. IF THE PREPACKAGED PLAN IS CONFIRMED BY THE BANKRUPTCY COURT (AS HEREINAFTER DEFINED), ALL HOLDERS (INCLUDING THOSE WHO ABSTAIN OR VOTE TO REJECT THE PREPACKAGED PLAN) OF CLAIMS AGAINST AND EQUITY INTERESTS IN THE COMPANY WILL BE BOUND BY THE PREPACKAGED PLAN AND THE TRANSACTIONS CONTEMPLATED THEREBY. The Company reserves the right to amend, modify or supplement the Prepackaged Plan, subject to the conditions in the Prepackaged Plan, prior to its effectiveness. The Company also reserves the right to cancel the Solicitation at any time prior to the Expiration Date and revoke the Prepackaged Plan, subject to the conditions contained in the Prepackaged Plan. The Company will give the Record Holders (as hereinafter defined) notice of any amendments, modifications or supplements as may be required by applicable law. See "The Plan Solicitation; Voting Procedures--Expiration Date; Extension; Amendments" and "The Prepackaged Plan--Modification of the Prepackaged Plan." No appraisal rights are available to holders of Outstanding Common Shares in connection with the Prepackaged Plan. iii (cover page continued) ---------------- ALL HOLDERS SHOULD READ AND CAREFULLY CONSIDER THIS DISCLOSURE STATEMENT PRIOR TO RESPONDING TO THE PLAN SOLICITATION AND THE OTHER MATTERS ADDRESSED HEREIN, INCLUDING, WITHOUT LIMITATION, ALL OF THE FACTORS SET FORTH UNDER THE HEADING "SPECIAL FACTORS AND CERTAIN CONSIDERATIONS." Holders should not construe the contents of this Disclosure Statement as providing any legal, business, financial or tax advice. Each Holder should, therefore, consult with its own legal, business, financial and tax advisors on any matters concerning the contents of this Disclosure Statement and the transactions contemplated hereby. THE BOARD OF TRUSTEES HAS VOTED UNANIMOUSLY TO APPROVE THE RESTRUCTURING, HAS DETERMINED THAT THE RESTRUCTURING IS FAIR TO THE UNAFFILIATED HOLDERS OF THE COMPANY'S OUTSTANDING SECURITIES AND OTHER CLAIMS AND INTERESTS, AND RECOMMENDS THAT ALL HOLDERS, INCLUDING HOLDERS OF OUTSTANDING COMMON SHARES, VOTE IN FAVOR OF THE PREPACKAGED PLAN. ---------------- The Outstanding Common Shares are listed for trading on the New York Stock Exchange (the "NYSE") and the Pacific Stock Exchange (the "PSE") under the symbol "MRT." On July 5, 1995, the last reported sale price of the Outstanding Common Shares on the NYSE was $.234375 per share. See "Market and Trading Information." The Outstanding Notes are not listed on any national or regional exchange. The Outstanding Notes trade on a limited basis in the over-the-counter market. Prior to the Plan Solicitation, there has been no established trading market for the New Senior Notes. The Company does not contemplate that the New Senior Notes will be listed on a national or regional securities exchange, and there can be no assurance that the New Senior Notes will be eligible for listing or listed on any national or regional exchange in the future. Consequently, there can be no assurance concerning the prices at which the New Senior Notes will trade or whether a market will exist for the trading thereof. To the extent that the Solicitation is deemed to result in offers of new securities that are not exempted by section 1145(a) of the Bankruptcy Code, they are being made by the Company in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), afforded by Section 4(2) or Section 3(a)(9) thereof. The Company will not pay any commission or other remuneration to any broker, dealer, salesman or other person for soliciting acceptances of the Prepackaged Plan. Regular employees of the Company, who will not receive additional compensation therefor, may solicit acceptances. The Company has made no arrangements for and has no understandings with any broker, dealer, salesman or other person regarding the Plan Solicitation. ---------------- NEITHER THE NEW SECURITIES OFFERED HEREBY NOR THE PREPACKAGED PLAN HAS BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS DISCLOSURE STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. BECAUSE NO BANKRUPTCY CASE HAS YET BEEN FILED, THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED BY ANY BANKRUPTCY COURT WITH RESPECT TO THE ADEQUACY OF INFORMATION OR ANY OTHER MATTER. HOWEVER, IF A CASE IS SUBSEQUENTLY COMMENCED, THE COMPANY WILL SEEK BANKRUPTCY COURT APPROVAL OF THIS DISCLOSURE STATEMENT AS PART OF THE ORDER CONFIRMING THE PREPACKAGED PLAN. iv (cover page continued) SOLICITATION AGENT AND INFORMATION AGENT The Company, or its designee, will act as solicitation agent for the Solicitation (the "Solicitation Agent"). All correspondence in connection with the Plan Solicitation, the Ballots and the Master Ballots should be addressed to the Company at 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania 19027-1590, attention: Daniel F. Hennessey (telephone: (215) 881-1525). The Company, or its designee, will act as information agent in connection with the Solicitation (the "Information Agent"). Questions and requests for assistance may be directed to the Company at 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania 19027-1590, attention: Daniel F. Hennessey (telephone: (215) 881-1525). AVAILABLE INFORMATION The Company is subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). In addition, the Company has filed with the Commission an application on Form T-3 for qualification under the Trust Indenture Act of 1939, as amended, of the indenture governing the New Senior Notes. Such application contains certain information and exhibits not contained in the Disclosure Statement. Such application, reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located in the New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048 and the Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be obtained at prescribed rates from the Public Reference Section of the Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549. In addition, such reports, proxy statements and other information can be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005, or at the offices of the Pacific Stock Exchange, 233 South Beaudry Avenue, Los Angeles, California 90017, on which the Company's Common Shares are listed. The Company has not included all of the exhibits to the Prepackaged Plan in this Disclosure Statement. Such exhibits may be inspected at the offices of the Company. If you desire to review or obtain a copy of any exhibit to the Prepackaged Plan not included in the Disclosure Statement, you should contact Daniel F. Hennessey, Treasurer of the Company, 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania 19027-1590. The Company's telephone number is (215) 881-1525. No person has been authorized to give any information or to make any representation not contained in this Disclosure Statement in connection with the Plan Solicitation and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or any other person. The Plan Solicitation is not being made to, nor will the Company accept votes or tenders from, Holders in any jurisdiction in which the Solicitation would not be in compliance with the securities or blue sky laws of such jurisdiction. This Disclosure Statement does not constitute an offer to sell or a solicitation of any offer to purchase any securities to any person in any jurisdiction in which such offer or solicitation is unlawful. Neither the delivery of this Disclosure Statement nor any exchange made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company and its subsidiaries since the respective dates as of which information is given herein. v TABLE OF CONTENTS SUMMARY..................................................................... 1 The Company................................................................ 1 Background of the Restructuring............................................ 1 Purposes of the Restructuring.............................................. 5 Effects of the Prepackaged Plan............................................ 6 Recommendation of the Board of Trustees.................................... 8 Special Purpose Valuation Reports of Kenneth Leventhal .................... 10 The Plan Solicitation...................................................... 11 Special Factors and Certain Considerations................................. 13 Summary Projected Financial Information.................................... 15 Summary Pro Forma Financial Information.................................... 17 Summary Historical Financial Information................................... 18 Certain Federal Income Tax Consequences.................................... 19 SPECIAL FACTORS AND CERTAIN CONSIDERATIONS.................................. 20 Financial Condition of the Company; Liquidity................................................................. 20 Continuing Leverage........................................................ 20 Foreclosure and Bankruptcy Alternatives.................................... 20 Possible Further Decline of Real Estate Markets............................ 21 Disruption of the Company's Business....................................... 22 Considerations Relating to the Prepackaged Plan............................ 22 Certain Bankruptcy Considerations if the Prepackaged Plan is Not Confirmed and the Restructuring is Not Otherwise Consummated....................... 23 Certain Consequences to Non-Voting Holders of Common Shares................ 24 Material Dilution of Common Equity......................................... 24 Risks Relating to the Projections.......................................... 24 Restricted Payments........................................................ 24 Absence of Public Market................................................... 25 Delisting of the Common Shares from Trading on the NYSE.................... 25 Releases................................................................... 26 Federal Income Tax Considerations.......................................... 26 THE PREPACKAGED PLAN........................................................ 28 Background of the Restructuring............................................ 28 Recommendation of the Board of Trustees.................................... 39 Special Purpose Valuation Reports of Kenneth Leventhal..................... 41 Reports of Houlihan Lokey as Financial Advisor to the Company.............. 42 Brief Explanation of Chapter 11 Reorganization............................. 46 Classification and Treatment of Claims and Interests................................................................ 46 Summary of Other Provisions of the Prepackaged Plan......................................................... 50
Means For Implementation of the Prepackaged Plan........................... 53 Modification of the Prepackaged Plan....................................... 57 Revocation of the Prepackaged Plan......................................... 57 Confirmation of the Prepackaged Plan....................................... 57 Effects of Prepackaged Plan Confirmation................................... 64 Alternatives to Confirmation and Consummation of the Prepackaged Plan...... 65 Insider and Affiliate Claims............................................... 66 Applicability of Federal And Other Securities Laws To Resales of New Common Shares and New Senior Notes....................................... 66 THE PLAN SOLICITATION; VOTING PROCEDURES.................................... 67 General.................................................................... 67 Voting Record Date......................................................... 69 Required Votes............................................................. 69 How to Vote................................................................ 69 Agreements Upon Furnishing Ballots Accepting the Restructuring............. 71 Waivers of Defects, Irregularities, Etc. .................................. 71 Expiration Date; Extension; Amendments..................................... 71 Revocation Rights.......................................................... 72 Solicitation Agent......................................................... 72 Information Agent.......................................................... 72 Other Matters.............................................................. 72 FINANCIAL PROJECTIONS....................................................... 73 ACCOUNTING TREATMENT........................................................ 79 PRO FORMA FINANCIAL INFORMATION............................................. 79 SELECTED FINANCIAL DATA..................................................... 86 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................................. 87 Liquidity and Capital Resources............................................ 87 Results of Operations...................................................... 88 BUSINESS.................................................................... 92 General.................................................................... 92 Investments................................................................ 93 Allowance for Losses....................................................... 96 Properties................................................................. 97 Legal Proceedings.......................................................... 97 MANAGEMENT.................................................................. 98 Executive Compensation..................................................... 99 Executive Compensation Tables.............................................. 99 Aggregated Option/SAR Exercises in Last Fiscal Year and Year-End Values.... 100
vi Pension Plans.............................................................. 100 Trustee Compensation....................................................... 101 Savings Incentive Plan..................................................... 101 Employee Retention Plan.................................................... 102 Compensation Committee Interlocks and Insider Participation................ 103 Termination of Employment and Change-In-Control Arrangements............... 103 Indemnification............................................................ 103 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 104 Current Holders............................................................ 104 Certain Holders After Restructuring........................................ 105 MARKET AND TRADING INFORMATION.............................................. 106 Common Shares.............................................................. 106 Outstanding Notes.......................................................... 107 DESCRIPTION OF NEW SENIOR NOTES............................................. 108 General.................................................................... 108 Optional Redemption........................................................ 108 Mandatory Redemption....................................................... 108 Notice and Selection....................................................... 108 Guarantee.................................................................. 109 Asset Sale Proceeds........................................................ 109 Change of Control.......................................................... 111 Certain Covenants of the Company........................................... 112 Collateral and Security.................................................... 113 Amendment, Supplement and Waiver........................................... 114 Events of Default.......................................................... 115 Successor Company.......................................................... 116 Defeasance................................................................. 116 The New Indenture Trustee and New Collateral Agent.......................................................... 118 Certain Definitions........................................................ 118 DESCRIPTION OF CAPITAL STOCK................................................ 123 DESCRIPTION OF OUTSTANDING NOTES............................................ 127 General.................................................................... 127 Denomination and Modification.............................................. 127 Payments................................................................... 127 Certain Covenants of the Company........................................... 129 Redemption................................................................. 131 Security................................................................... 131 Amendment, Supplement and Waiver........................................... 132 Events of Default.......................................................... 132 Merger; Sale of Assets; Permitted Financings............................... 133 Restrictions on Transfer................................................... 134 Satisfaction and Discharge................................................. 134
The Outstanding Note Trustee and Collateral Agent.......................... 135 Certain Definitions........................................................ 135 CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................... 139 Tax Consequences to Creditors.............................................. 139 Recapture of Gain on Subsequent Sale of New Common Shares.................. 141 Tax Treatment of Holders of Outstanding Common Shares...................... 142 Tax Consequences of Holding New Senior Notes............................... 142 Tax Consequences of Holding New Common Shares.............................. 142 REIT Status and Taxation of Company Under the Prepackaged Plan............. 142 Additional Tax Consequences to the Company from the Prepackaged Plan....... 147 FINANCIAL ADVISOR........................................................... 151 FEES AND EXPENSES........................................................... 151 ADDITIONAL INFORMATION CONCERNING THE COMPANY............................... 152 PREPACKAGED PLAN OF REORGANIZATION..................................... ANNEX A AMENDED AND RESTATED DECLARATION OF TRUST.............................. ANNEX B SPECIAL PURPOSE VALUATION REPORT OF KENNETH LEVENTHAL & COMPANY: RANGE OF GOING CONCERN VALUES......................................... ANNEX C SPECIAL PURPOSE VALUATION REPORT OF KENNETH LEVENTHAL & COMPANY: RANGE OF LIQUIDATION VALUES........................................... ANNEX D ALSO ACCOMPANYING THIS DISCLOSURE STATEMENT: The Company's Annual Report on Form 10-K for the Year Ended September 30, 1994 The Company's Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1995
vii INDEX OF DEFINED TERMS
PAGE -------- 1991 Plan.............................................................. 1 1992 Modifications..................................................... 28 1992 Restructuring..................................................... 1 1993 Agreement in Principle............................................ 3 1994 Agreement in Principle............................................ 5 Additional Payment Date................................................ 128 Adjusted Prime Rate.................................................... 135 Adjusted Rate.......................................................... 28 Administrative Claims.................................................. 47 Affiliate.............................................................. 118, 135 Agreement of Understanding............................................. 5 Allowed Claim.......................................................... 8, 47 Allowed Interests...................................................... 47 Amended and Restated Declaration of Trust.............................. iii AMT.................................................................... 150 AMTI................................................................... 150 April 1994 Proposal.................................................... 4 Asset Sale............................................................. 118, 135 Asset Sale Account..................................................... 118 Asset Sale Offer....................................................... 109 Asset Sale Proceeds.................................................... 118, 135 Assignments of Leases.................................................. 118 August Term Sheet...................................................... 3 Available Cash......................................................... 119, 135 Ballot................................................................. i Bank of America........................................................ 7 Bankruptcy Case........................................................ iii Bankruptcy Code........................................................ i Bankruptcy Court....................................................... 1 Bankruptcy Rules....................................................... 12 Beneficial Attribution Rules........................................... 123 Best Interests Test.................................................... 23 Board of Trustees...................................................... iii Business Day........................................................... 119 Capital Base........................................................... 87, 136 Capital Expenditures................................................... 119 Cash Equivalents....................................................... 119, 136 Change of Control...................................................... 119 Change of Control Offer................................................ 111 Change of Control Payment.............................................. 111 Change of Control Payment Date......................................... 111 Chapter 7.............................................................. 6 Chapter 11............................................................. ii Claims................................................................. ii Class 2 Expense Claims................................................. 49 Class 3 Creditor Obligations........................................... 102 COD.................................................................... 19 Code................................................................... 1 Collateral............................................................. 119, 136 Collateral Assignment of Leases........................................ 119 Collateral Assignments of Mortgages.................................... 120 Commission............................................................. v Common Shares.......................................................... i Company................................................................ i Completion Fee......................................................... 43, 151 Completion Fee Balance................................................. 43, 151 Confirmation Date...................................................... 13 Confirmation Order..................................................... 51 Consolidated Net Worth................................................. 120
PAGE ---------- Constructive Ownership Limit......................................... 124 Constructive Ownership Rules......................................... 123 Contingent Obligation................................................ 120, 136 Contractual Obligation............................................... 136 Creditor Obligation.................................................. 127 Creditor Releasees................................................... 11 Creditor/Shareholder Release......................................... 26, 52 Creditors' Committee................................................. 1 Creditors' Committee Advisors........................................ 2 Debtor in Possession................................................. 57 Debtor Release....................................................... 26, 52 Debtor Releasees..................................................... 11, 26, 52 Declaration of Trust................................................. 24 Default.............................................................. 120 Defaulted Interest................................................... 128 Defeasance........................................................... 117 Deferred Payment..................................................... 128 Disbursing Agents.................................................... 54 Disclosure Statement................................................. i Disputed Claim....................................................... 54 Disputed Interest.................................................... 54 Dividend Overpayments................................................ 136 Earning Assets....................................................... 136 Effective Date....................................................... i Effective Period..................................................... 102 Entity............................................................... 57 Equities............................................................. 92 Equity Committee..................................................... 1 Equity Committee's Advisor........................................... 32 Estate............................................................... 47 Event of Default..................................................... 115, 132 Exchange Act......................................................... v Excluded Claims...................................................... 52 Existing Holder Limit................................................ 124 Existing Holders..................................................... 124 Expiration Date...................................................... i Feasibility Test..................................................... 22 Final Order.......................................................... 48 First Lien Debt...................................................... 120 Foreign Shareholders................................................. 147 GAAP................................................................. 77, 120 Governmental Securities.............................................. 120 Guarantor............................................................ 120 Houlihan Lokey....................................................... 2 Houlihan Lokey Materials............................................. 44 Holders.............................................................. i Indebtedness......................................................... 120, 136 Information Agent.................................................... v Initial Cash Reserve Fund............................................ 49 Instruments.......................................................... 55 Interested Group..................................................... 2 Interests............................................................ 11 Internal Revenue Code................................................ 1 Investment........................................................... 121, 137 Kenneth Leventhal.................................................... ii Kenneth Leventhal Reports............................................ 41 Lease................................................................ 121 Legal Holiday........................................................ 121 Lien................................................................. 121, 137 Loss Corporation..................................................... 147
viii INDEX OF DEFINED TERMS (CONTINUED)
PAGE ------- Major Holder............................................................ 3 Master Ballot........................................................... i Material Subsidiary..................................................... 121 Milbank................................................................. 35 Monthly Fee............................................................. 43, 151 Mortgages............................................................... 121 Named Executive Officers................................................ 99 Net Cash Value.......................................................... 137 New Collateral Agent.................................................... 54 New Collateral Documents................................................ 121 New Common Shares....................................................... i New Indenture Trustee................................................... 108 New Major Holder........................................................ 5 New Monthly Fee......................................................... 43, 151 New Securities.......................................................... ii New Senior Note Indenture............................................... 49 New Senior Notes........................................................ i NOLs.................................................................... 34 Non-Earning Assets...................................................... 87, 137 Non-Earning Loans....................................................... 137 Non-Earning Properties.................................................. 137 Notice.................................................................. 38 NYSE.................................................................... iv Offer Amount............................................................ 109 Offer Period............................................................ 109 Officers' Certificate................................................... 121 Original Effective Period............................................... 102 Other Priority Claims................................................... 48 Other Secured Claims.................................................... ii Outstanding Collateral Agent............................................ 30 Outstanding Collateral Agreement........................................ 29 Outstanding Common Shares............................................... i Outstanding Indenture Trustee........................................... 53 Outstanding Note Indenture.............................................. 29 Outstanding Note Trustee................................................ 29 Outstanding Notes....................................................... i Outstanding Pledge Agreement............................................ 54 Outstanding Securities.................................................. ii Outstanding Stock Rights................................................ 50 Ownership Limit......................................................... 123 Pension Plan............................................................ 101 Permitted Deferred Payment.............................................. 128 Permitted Financing..................................................... 134 Petition Date........................................................... i Plan Acceptances........................................................ ii Plan Solicitation....................................................... i Pledge Agreement........................................................ 122 PNB..................................................................... 92 Preferred Stock......................................................... 122 Prepackaged Plan........................................................ i Principal Holders....................................................... 3 Principal Holders' Advisor.............................................. 3
PAGE -------- Prior Plan............................................................. 29 Priority Claim......................................................... 48 Priority Tax Claims.................................................... 48 Projections............................................................ 73 Promissory Note........................................................ 137 PSE.................................................................... iv Purchase Date.......................................................... 109 Real Estate............................................................ 122, 138 Record Date............................................................ i Record Holders......................................................... 67 Reference Rate......................................................... 138 REIT................................................................... 1 REIT Provisions........................................................ 142 REIT Requirements...................................................... 142 REIT Taxable Income.................................................... 145 Registration Rights Agreement.......................................... 49 Related Party Tenant................................................... 144 Released Claims........................................................ 12 Reorganization Case.................................................... iii Reorganization Value................................................... 79 Reorganized Debtor..................................................... 47 Required Holders....................................................... 122, 138 Required Payment Date.................................................. 127 Requisite Plan Acceptances............................................. iii Restructure Value...................................................... 44 Restructuring.......................................................... i Retention Plan......................................................... 102 Retirement Plan........................................................ 100 Reverse Stock Split.................................................... i Savings Plan........................................................... 101 Section 382 Limitation................................................. 147 Securities Act......................................................... iv Security Agreement..................................................... 122 Share Trust............................................................ 124 Shares-in-Trust........................................................ 124 Shelf Registration..................................................... 67 Solicitation........................................................... i Solicitation Agent..................................................... v SOP 90-7............................................................... 79 Standing Instruction................................................... 110 Standstill Period...................................................... 30 Stock Ownership Limit Provisions....................................... 123 Subsidiary............................................................. 122, 138 Sutro.................................................................. 92 Tax Security........................................................... 19 Termination Date....................................................... 138 Title 11 Case.......................................................... 148 Title 11 Exception..................................................... 148 Underlying Loan Documents.............................................. 122 Underlying Mortgages................................................... 122, 138 Underlying Promissory Notes............................................ 122 Unsecured Claim........................................................ ii
ix SUMMARY The following summary is qualified in its entirety by reference to the more detailed information included elsewhere herein and the financial statements and the related notes thereto referred to under "Additional Information Concerning the Company." THE COMPANY The Company is a self-administered real estate investment trust (a "REIT") that satisfies the conditions under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code" or "Code"), and under other applicable law that was organized in 1970 under the laws of the State of Maryland. As of May 31, 1995, the Company had available cash of approximately $46.5 million and invested assets consisting of 34 mortgage loans and 37 investments in real estate located throughout the United States. For a further description of the business of the Company, see "Business." The Company's principal offices are located at 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania 19027-1590 and 3500 West Olive Avenue, Suite 600, Burbank, California 91505-4628; the Company's telephone numbers are (215) 881- 1525 and (818) 953-7700, respectively. BACKGROUND OF THE RESTRUCTURING Previous Chapter 11 Case and 1991 Plan of Reorganization. On April 12, 1990, the Company filed a voluntary petition for reorganization under Chapter 11 in the United States Bankruptcy Court (the "Bankruptcy Court"). Following the Chapter 11 filing, the United States Trustee appointed the creditors' committee (the "Creditors' Committee") and an equity security holders' committee representing the Company's shareholders (the "Equity Committee"). In February 1991, a Joint Plan of Reorganization (the "1991 Plan") proposed by the Company, the Creditors' Committee and the Equity Committee was confirmed. Following confirmation of the 1991 Plan, the Creditors' Committee and the Equity Committee continued to represent their respective constituencies. The 1991 Plan provided for a restructuring of the Company's outstanding indebtedness and provided the Company with the right to defer payment of certain amounts for up to 24 months or until December 31, 1995, when all deferred payments would be due. The forecast on which the 1991 Plan was based assumed that real estate markets would begin to improve in fiscal 1992. However, the markets continued to deteriorate significantly and the Company was in danger of imminent default. After several months of negotiations with the Creditors' Committee, the Company completed an out-of-court restructuring of its outstanding debt in July 1992 (the "1992 Restructuring"). Pursuant to the 1992 Restructuring, the outstanding debt was restructured through the issuance of the Outstanding Notes. The 1992 Restructuring (i) increased the amount of principal that could be deferred (while retaining the final payment date for deferred payments at December 31, 1995), (ii) extended the permitted repayment period of such deferred amounts from 24 months to 30 months from the date a deferral is utilized, (iii) established a limit on the maximum rate of interest to be paid in cash on a current basis at 9% through June 30, 1994, with any excess being accrued and paid at December 31, 1995, (iv) changed certain required financial covenants to reflect the then-existing financial condition of the Company and then-existing real estate market conditions, (v) provided for the release of collateral for certain financings by the Company upon approval of the holders of 66 2/3% of the Outstanding Notes, and (vi) provided for the payment of additional consideration to the holders of the Outstanding Notes equal to 1% of the principal amount of the Outstanding Notes, payable in four semi-annual installments commencing on the date the 1992 Restructuring became effective. 1 The financial projections on which the 1992 Restructuring was based assumed that the real estate markets would stop or slow their decline by 1993 and show some improvement in 1994. Instead, since the effective date of the 1992 Restructuring, the real estate markets have failed to improve in any significant way. The Company's business operations, including its ongoing efforts to refinance and sell property, have not generated cash flow sufficient to service the Outstanding Notes. Development of the Current Restructuring. During December 1992, it became apparent to the Company that its projected cash flow would not be adequate to meet its debt obligations in the future. Thus, the Company began to explore possible restructuring options for its debt obligations. In considering possible restructuring options, the Company's goals were (i) to survive as a going concern and preserve the Company as a real estate investment vehicle so that the Company's shareholders could enjoy the benefits of an improved or stabilized real estate market, and (ii) to substantially de-leverage the capital structure of the Company. Early in 1993, the Company retained Houlihan Lokey Howard & Zukin ("Houlihan Lokey") to advise it in connection with the Restructuring. Beginning in December 1993, the Company suspended all payments due in respect of the Outstanding Notes. By March 31, 1995, the Company had defaulted in the payment of $152.6 million of principal and $51.3 million in interest. The Company currently has no agreement with any holders of Outstanding Notes that suspends its obligations to pay interest, principal or other amounts due in respect of the Outstanding Notes. On April 11, 1995, the Company paid $25.0 million in accrued interest on the Oustanding Notes, with such payment to be credited against the cash payment of at least $50 million to be made to the holders of the Outstanding Notes pursuant to the Prepackaged Plan. The Company does not currently plan to make any further principal or interest payments in respect of the Outstanding Notes prior to the Effective Date. Notwithstanding the uncured events of default under the Outstanding Note Indenture (as hereinafter defined), the Outstanding Notes have not been accelerated. Commencing in March 1993 and continuing through August 1993, the Company and the Creditors' Committee and its advisors (the "Creditors' Committee Advisors") negotiated regarding a restructuring of the Company. During that same time period, from time to time the Company and its counsel apprised the Equity Committee and its advisors of the status of negotiations regarding the restructuring efforts. During April, May and June 1993, Houlihan Lokey made numerous formal and informal presentations to the Creditors' Committee designed to focus the Creditors' Committee on restructuring proposals that would be consistent with the Company's restructuring goals. These presentations included, among other things, discussions regarding the proposals submitted by potential third-party investors and acquirors and the Company's internal restructuring proposals. See "The Prepackaged Plan--Reports of Houlihan Lokey as Financial Advisor to the Company--Presentations to the Creditors' Committee" and "The Prepackaged Plan--Background of the Restructuring--Development of the Current Restructuring." While the Company was attempting to restructure its obligations, it continued to operate, even though it was in default, due to the lack of foreclosure action by the Outstanding Note Trustee (as hereinafter defined). While the Company was negotiating with the Creditors' Committee, the Company and Houlihan Lokey also met with several prospective investors and acquirors to discuss possible third-party investment in or sale of the Company. Although several potential third-party investors and acquirors were offered an opportunity to propose restructuring alternatives, only three prospective third-party investor groups made proposals to the Company and the Creditors' Committee (each an "Interested Group"). After reviewing the terms of these proposals, the Creditors' Committee advised the Company that the offers were not acceptable because the valuations of the Company reflected by such proposals were lower than the value placed on the Company by the Creditors' Committee and were substantially below the amount of the Outstanding Notes. As a result, the Company suspended the solicitation of potential third-party investors or acquirors. On or about August 10, 1993, after extensive negotiations, the Company and the Creditors' Committee agreed to the broad outlines of a proposed restructuring, subject to approval by the Board of Trustees. Pursuant to the terms of the restructuring proposal, the Outstanding Notes would be exchanged for approximately $195 million of new senior secured notes and common stock representing approximately 85% of the equity of the reorganized Company. The restructuring proposal anticipated that the new notes would 2 be issued in two series: $120 million of 7% notes maturing in 2003 with scheduled annual principal amortization, and approximately $75 million in additional notes payable principally from available cash flow. In addition, the restructuring proposal provided for the payment by the Company on September 30, 1993, of all outstanding restructuring fees relating to the 1992 Restructuring and the interest due on the Outstanding Notes, with interest to accrue thereafter on the Outstanding Notes at 7%. Interest accruing through March 31, 1994 would be added to the principal of the new cash flow notes and any interest accruing after March 31, 1994 would be paid at closing. Although existing holders of the Company's Outstanding Common Shares would have retained 15% of the equity of the reorganized Company under this restructuring proposal, the Company's remaining debt level under this proposal would have been greater than the debt levels thought desirable by the Company. On August 18, 1993, the Board of Trustees unanimously agreed to pursue the restructuring proposal set forth in a draft term sheet dated August 16, 1993 (the "August Term Sheet"), subject to a number of conditions including, among other things, the receipt by the Company of written indications of support from members of the Creditors' Committee and additional holders of sufficient Outstanding Notes to effect the restructuring through either a prepackaged or prearranged plan of reorganization under Chapter 11 (the "1993 Agreement in Principle"). After the terms of the 1993 Agreement in Principle were announced, trading in the Outstanding Notes increased substantially. Included in the Outstanding Notes initially traded were all of the Outstanding Notes held by two members of the Creditors' Committee who had not been in favor of the 1993 Agreement in Principle. By November 1993, one of the three remaining members of the Creditors' Committee had sold all of its Outstanding Notes, part to one of the other Creditors' Committee members and the balance to other persons. These sales left the Creditors' Committee with two members, one of which held in excess of 33 1/3% of the Outstanding Notes (the "Major Holder"). By December 1993, in excess of 50% of the principal amount of the Outstanding Notes had traded. In early September 1993, the Company commenced negotiations with certain holders who had acquired a significant portion of the Outstanding Notes (collectively, such holders as variously constituted from time to time, including, as of March 31, 1995, the New Major Holder (as hereinafter defined), the "Principal Holders") and the Major Holder regarding the restructuring of the Company. By the end of November 1993, the Company had still not received written indications of support for the 1993 Agreement in Principle from any holders of Outstanding Notes. Thereafter, the Company suspended all actions to implement the terms of the 1993 Agreement in Principle and resumed responding to inquiries from third parties regarding participation in a restructuring of the Company. In November 1993, the Principal Holders retained Smith Barney Inc. as their financial advisor (the "Principal Holders' Advisor") to evaluate the alternatives available to the Company's creditors, analyze the cash flows and values of the Company's portfolio, participate in talks with the Company and its creditors and evaluate the proposals submitted by the Interested Groups. In early December 1993, the Principal Holders' Advisor presented an oral analysis that included a valuation of the Company at approximately $230 million, an amount below the values thought reasonable at the time by the Company and the two remaining members of the Creditors' Committee. Throughout December 1993 and January 1994, the Company attempted to bridge the gap in valuations placed on the Company by the various creditor groups, but was ultimately unsuccessful. From December 1993 to November 1994, the Creditors' Committee, the Major Holder and the Principal Holders attempted to negotiate a consensual plan to restructure the Company. The Major Holder and the Principal Holders, however, had different views regarding how the restructuring of the Company should be handled: the Principal Holders preferred a substantially deleveraged Company while the Major Holder preferred substantial levels of senior debt. On December 13, 1993, the Major Holder submitted a restructuring proposal that was the basis for a draft term sheet, dated December 14, 1993, prepared by the Company. At a meeting of the Board of Trustees held on December 15, 1993, the Company and the Board of Trustees discussed such draft term sheet and the 3 negotiating stance the Company might assume based on the concepts in the Major Holder's proposal that the Company considered to be most important. Throughout the second and third quarters of fiscal 1994, the Company's management and advisors continued discussions with the Major Holder, the Principal Holders and their representatives to explore various alternatives for restructuring the Outstanding Notes that would resolve the impasse between the Major Holder and the Principal Holders. At a meeting of the Board of Trustees held on April 20, 1994, the Board of Trustees considered a term sheet for a prepackaged reorganization plan based on a court-approved valuation of the Company (assumed to be $230 million). Under this proposal, Outstanding Note holders would be issued new senior convertible notes equal in aggregate principal amount to the court-approved value of the Company, whereupon the Principal Holders would convert their notes into shares representing 100% of the common stock of the reorganized Company and give shares representing 4% of the equity of the reorganized Company to the existing shareholders (the "April 1994 Proposal"). For a more detailed discussion of the April 1994 Proposal, see "The Prepackaged Plan--Background of the Restructuring--Development of the Current Restructuring." The Major Holder, however, would not agree to the April 1994 Proposal because, among other things, the reorganized Company would not retain debt levels satisfactory to the Major Holder. In May and June 1994, the Creditors' Committee, the Principal Holders and the Company had several contacts with the Equity Committee to attempt to reach agreement on a consensual plan to restructure the Company. Such attempts, however, proved unsuccessful because of the inability to agree upon the terms of a mutually acceptable restructuring. In June 1994, at the Principal Holders' request, the Company retained Kenneth Leventhal to perform a special purpose valuation and to provide such valuation analysis to the Creditors' Committee, the Principal Holders and the Equity Committee. The Board of Trustees agreed to retain Kenneth Leventhal because it believed that it would be worth the additional expense if such an additional special purpose valuation might lead to the negotiation of a consensual agreement among the creditors and also result in fair treatment of the shareholders. On or about September 14, 1994, the Company's advisors, the Equity Committee's advisors and counsel to the Principal Holders met in a final attempt to negotiate the treatment of equity in the context of a prepackaged plan of reorganization based on the April 1994 Proposal. At this meeting, the Company and the Principal Holders outlined the terms of the April 1994 Proposal to the Equity Committee's advisors in order to determine whether the Equity Committee would accept 4% of the common stock of the reorganized Company. At the conclusion of the meeting, the Equity Committee's advisors agreed to recommend to the Equity Committee that it accept one of the following two proposals: (i) 5% of the common stock of the reorganized Company and warrants to purchase new common shares representing 7 1/2% of the common stock of the reorganized Company; or (ii) 4% of the common stock of the reorganized Company and warrants to purchase new common shares representing 10% of the common stock of the reorganized Company. On October 4, 1994, Kenneth Leventhal produced its special purpose valuation report, which placed the Company's approximate going concern value as of July 1, 1994, between $255 million and $275 million. Because Kenneth Leventhal's report placed the Company's value higher than the $230 million value assumed by the April 1994 Proposal, the Principal Holders decided to abandon the April 1994 Proposal. Thus, the Company renewed its efforts to negotiate a deal with the Principal Holders that was acceptable to the Equity Committee. The Company, the Principal Holders and the Equity Committee, however, were unable to reach agreement on the terms of a restructuring due, among other things, to the inability to agree on the respective shareholdings of the holders of Outstanding Notes and the existing shareholders after giving effect to the issuance of new shares in a restructuring. On or about October 27, 1994, the Major Holder and the Principal Holders submitted a proposal for a prepackaged restructuring of the Company. Pursuant to the proposal, the Company would retain all of its 4 assets and have between $10 million and $15 million of cash following the restructuring. The Outstanding Notes would be exchanged for $110 million of new senior secured notes and 98% of the common stock of the reorganized Company. Common stock retained by the existing shareholders would represent 2% of the reorganized Company's common stock. Thereafter, the Company and Houlihan Lokey spent several weeks negotiating with such holders regarding the proposed equity split between the holders of Outstanding Notes and the existing shareholders. In November 1994, the Company reached a non-binding agreement in principle with the Major Holder and the Principal Holders (the "1994 Agreement in Principle"). Pursuant to the 1994 Agreement in Principle, upon shareholder approval for a prepackaged Chapter 11 reorganization, holders of the Outstanding Notes would receive (i) $110 million of new senior secured notes due 2002, (ii) approximately $50 million in cash, and (iii) common stock representing 97% of the common stock of the reorganized Company (or, if the Company's existing shareholders did not vote to accept the Prepackaged Plan, substantially all of the common stock of the reorganized Company). The existing shareholders would retain their shares, which would represent the remaining 3% of the reorganized Company's common stock, provided that they voted to accept the Prepackaged Plan. The holders of unsecured claims would receive cash in the allowed amount of their respective claims. On November 16, 1994, the Board of Trustees unanimously approved the proposed Restructuring, subject to approval by the Board of Trustees of the final documentation necessary to effect the restructuring. On November 17, 1994, the Company announced that it had reached the 1994 Agreement in Principle with the Major Holder and the Principal Holders for the Restructuring. On November 22, 1994, the Equity Committee gave notice that it had dissolved, claiming, among other things, that the Company had not involved the Equity Committee or its advisors in the development of the Restructuring and that the Equity Committee was unable to conclude that the Restructuring was fair or equitable to the Company's shareholders. On November 29, 1994, the Company informed the Equity Committee that the Company disagreed with many of the purported factual statements contained in the Equity Committee's notice and that the Company believed that the notice was misleading. Subsequent Developments. On March 15, 1995, the Major Holder sold all of its Outstanding Notes to one of the Principal Holders who, after giving effect to such sale, held an aggregate principal amount of $133.8 million or approximately 46.1% of the Outstanding Notes (the "New Major Holder"). This change in holdings of Outstanding Notes had no material effect on the terms of the previously negotiated 1994 Agreement in Principle among the Company, the Major Holder and the Principal Holders. In April 1995, the Company and the Principal Holders entered into an agreement of understanding (the "Agreement of Understanding") pursuant to which the Company agreed to distribute to the holders of Outstanding Notes $25.0 million in cash prior to the Petition Date. Under this agreement, the Principal Holders (who hold in excess of 80% of the Outstanding Notes), among other things, agreed to vote when solicited in favor of the Prepackaged Plan. On April 11, 1995, the Company paid $25.0 million pursuant to the Agreement of Understanding, with such payment to be credited against the cash payment of at least $50 million to be made to the holders of the Outstanding Notes pursuant to the Prepackaged Plan. For further information regarding the background and development of the Restructuring, see "The Prepackaged Plan--Background of the Restructuring." PURPOSES OF THE RESTRUCTURING The Restructuring is necessary to make it possible for the Company to satisfy its outstanding obligations and remain in business. Currently, the Company's capital structure is highly leveraged and the Company is unable to meet its substantial debt service requirements. The Restructuring is intended to enhance the long- 5 term viability of the Company by adjusting the Company's capitalization to reduce the principal amount, extend the maturities and adjust the interest rates on the Company's debt, thereby reducing the Company's debt service obligations so that such obligations may be paid out of the Company's operating cash flow and cash reserves. The Restructuring is designed to allow the Company to continue to operate and expand its business without the need for further financial restructuring, and to be able to obtain additional financing or equity infusions or to enter into other financial transactions in the future when and as management and the Board of Trustees of the reorganized Company so determine. The Company is currently in default in payment of interest, principal and other amounts due on the Outstanding Notes, and the Company has no agreement with any holders of Outstanding Notes that it is not required to pay such amounts. Consequently, there can be no assurance that the Outstanding Note Trustee and the Outstanding Collateral Agent will not take remedial or enforcement action with respect to the Outstanding Notes, including acceleration of the Outstanding Notes and foreclosure. If the Restructuring is not consummated, based upon Kenneth Leventhal's analysis of the Company's range of enterprise going concern value of $265 million to $285 million and range of liquidation value of $220 million to $260 million, holders of Claims may not receive cash or securities of the same value and having as favorable terms as under the Prepackaged Plan, and holders of Outstanding Common Shares may not receive or retain anything in the event of a foreclosure, nonconsensual bankruptcy or liquidation. Through the Restructuring, the Company intends to maximize the recovery to holders of Outstanding Notes and other Claims while also maximizing the return to holders of Outstanding Common Shares. The Company believes that the Restructuring is a significantly more attractive alternative than a traditional bankruptcy case. The Company believes that acceptance of the Prepackaged Plan before a bankruptcy case is commenced will be more beneficial to the Company and all of its creditors, holders of Outstanding Common Shares and other constituencies than seeking to obtain acceptance of a plan of reorganization after commencement of a bankruptcy case. The Company believes that the Prepackaged Plan would reduce the risks of litigation, minimize disputes during the bankruptcy case concerning the reorganization of the Company, significantly shorten the time required to accomplish the reorganization, reduce the expenses of a case under Chapter 11, minimize the disruption of the Company's business that would result from a protracted and contested bankruptcy case and therefore result in a larger distribution to creditors of the Company and recovery on investments of holders of Outstanding Common Shares than would other types of reorganization under Chapter 11 or a liquidation under Chapter 7 of the Bankruptcy Code ("Chapter 7"). See "The Prepackaged Plan." After giving effect to the Restructuring as if it had occurred at the beginning of the fiscal year 1994, the Company anticipates that its annual interest expense would have been reduced by approximately $19.1 million as a result of a lower interest rate and reduced principal amount outstanding on the New Senior Notes compared to the Outstanding Notes. In addition, the New Senior Notes will have a longer maturity than the Outstanding Notes and will contain no scheduled amortization requirements. The Restructuring will also reduce the Company's overall debt obligations from approximately $322.9 million (including accrued but unpaid interest) on the Outstanding Notes, as of May 31, 1995, to approximately $110 million. The Company's management believes that, based on its financial projections, after giving effect to the Restructuring, the Company will have sufficient operating cash flow to pay cash interest and scheduled amortization on all of its outstanding indebtedness and fund anticipated capital expenditures. See "Financial Projections." There can be no assurance, however, that targeted levels of operating cash flow will actually be achieved. See "Special Factors and Certain Considerations." EFFECTS OF THE PREPACKAGED PLAN The following summary of the effects of the Prepackaged Plan is qualified in its entirety by reference to all the provisions of the Prepackaged Plan set forth as Annex A to this Disclosure Statement. 6 Effects on Holders of Outstanding Notes. Pursuant to the Prepackaged Plan, the Outstanding Notes will be exchanged for (a) $110,000,000 in aggregate principal amount of New Senior Notes, (b) at least $50,000,000 in cash less the $25,000,000 paid on April 11, 1995 and any additional amounts paid between March 1, 1995, and the Petition Date pursuant to the Agreement of Understanding (plus such additional amount, if any, based upon cash available in excess of the Initial Cash Reserve Fund (as hereinafter defined)), and (c) assuming the class of holders of Outstanding Common Shares accept the Prepackaged Plan, approximately 10,890,180 New Common Shares (which will constitute 97% of the fully diluted Common Shares outstanding after the Restructuring). The New Senior Notes and the New Common Shares will differ from the Outstanding Notes in the following respects, among others: . The principal amount of the Outstanding Notes will be reduced from approximately $322.9 million (including accrued but unpaid interest) to $110 million under the New Senior Notes. . The New Senior Notes will be guaranteed by the Subsidiaries (as defined in the New Senior Note Indenture) of the Company. The Company currently has five Subsidiaries: MRT West, Inc., MRT Creekside, Inc., MRT Newark, Inc., MRT Santa Monica, Inc., and 150 Rittenhouse Circle, Inc. Each of the Subsidiaries is a single-asset entity created solely for the purpose of holding title to a specific property while insulating the Company from liabilities associated with the ownership of or investment in such property. As of March 31, 1995, the aggregate net book value of the Subsidiaries represented 2.6% of the aggregate net book value of the Company on a consolidated basis. . The New Senior Notes will have a fixed interest rate. Interest on the New Senior Notes will accrue at 11 1/8% per annum. Interest on the Outstanding Notes is payable at the reference rate of Bank of America National Trust and Savings Association ("Bank of America") plus a margin. The interest rate on the Outstanding Notes as of January 1, 1995 was the Adjusted Rate (as hereinafter defined) (13.0%) with the next six-month increase occurring on July 1, 1995. Interest on the deferred principal of the Outstanding Notes is payable at the Adjusted Rate (as hereinafter defined) plus two percent. . Assuming confirmation of the Prepackaged Plan, holders of the Outstanding Notes will receive, in the aggregate, approximately 10,890,180 New Common Shares constituting 97% of the fully diluted Common Shares outstanding after consummation of the Restructuring. For a more detailed discussion of the terms of the New Senior Notes and the New Common Shares, see "Description of New Senior Notes" and "Description of Capital Stock," respectively. Effects on Holders of Outstanding Common Shares. Pursuant to the Prepackaged Plan, if the class of holders of Outstanding Common Shares votes in favor of the Prepackaged Plan, each holder of Outstanding Common Shares will retain its Common Shares in the Company. Pursuant to the Reverse Stock Split to be effected as part of the Restructuring, each 33.33 Outstanding Common Shares automatically will become one Common Share. In addition, the issuance of approximately 10,890,180 New Common Shares to holders of Outstanding Notes pursuant to the Prepackaged Plan will reduce the percentage common equity ownership of holders of Outstanding Common Shares from 100% to 3%. If the class of holders of Outstanding Common Shares does not vote in favor of the Prepackaged Plan, however, all Outstanding Common Shares will be cancelled and holders of Outstanding Common Shares will not receive or retain anything under the Prepackaged Plan. Effects on Holders of Other Secured Claims. Pursuant to the Prepackaged Plan, holders of Other Secured Claims that are also Allowed Claims (as defined below) will (at the option of the Company and with the consent of the Principal Holders) (i) be paid in full in cash on the Effective Date (or as soon as practicable after the date on which any such Claim is allowed if the date of allowance is later than the Effective Date), (ii) be paid upon such other terms as may be mutually agreed upon by the Company and the holder of such Claim, with the consent of the Principal Holders, or (iii) be reinstated and paid or performed by the Company in accordance with section 1124 of the Bankruptcy Code, or the legal, equitable and contractual rights to 7 which such Claim entitles the holder of such Claim shall be left unaltered. "Allowed Claim" means a claim to the extent that (a)(i) a proof of the Claim was or is timely filed or deemed timely filed under applicable law or by order of the Bankruptcy Court or (ii) if no proof of Claim is filed, the Claim is scheduled as liquidated, undisputed, and noncontingent, and (b)(i) the Claim is not a disputed Claim (but only to the extent that such Claim is not a disputed Claim), (ii) the Claim is allowed by a final order (but only to the extent allowed), or (iii) the Claim is allowed under the Prepackaged Plan, but only to the extent allowed. Effects on Holders of Unsecured Claims. Pursuant to the Prepackaged Plan, each holder of an Unsecured Claim that is also an Allowed Claim will receive cash equal to the amount of such Claim unless such holder agrees to less favorable treatment. Common Share Ownership. The following table shows the ownership (as between holders of Outstanding Common Shares and holders of Outstanding Notes) of the Company's Common Shares before and after consummation of the Restructuring (assuming confirmation of the Prepackaged Plan).
COMMON SHARES BEFORE COMMON SHARES AFTER COMMON REVERSE STOCK SPLIT REVERSE STOCK SPLIT BUT SHARES AFTER OR CONSUMMATION BEFORE CONSUMMATION OF CONSUMMATION OF THE RESTRUCTURING THE RESTRUCTURING (a) OF THE RESTRUCTURING (b) ------------------------ ----------------------- ------------------------ NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF SHARES COMMON SHARES SHARES COMMON SHARES SHARES COMMON SHARES ---------- ------------- --------- ------------- ---------- ------------- Holders of Outstanding Notes.................. -0- -0- -0- -0- 10,890,180 97% Holders of Outstanding Common Shares.......... 11,226,215 100% 336,820 100% 336,820 3%
- -------- (a) These columns are provided for illustrative purposes only. The Reverse Stock Split is conditioned upon the consummation of the Restructuring, including issuance of the New Common Shares, and will be effected immediately prior to such issuance. The Reverse Stock Split will not be effected if the Restructuring is not consummated. (b) Assumes holders of Outstanding Common Shares vote to approve the Prepackaged Plan. Accrued Interest and Unpaid Mandatory Principal Redemption on Outstanding Notes. Accrued but unpaid interest and unpaid mandatory principal payments on Outstanding Notes to the date on which New Senior Notes are issued in exchange therefor will not be paid to holders of Outstanding Notes. The Prepackaged Plan provides that if the sum of consideration being distributed in exchange for the Outstanding Notes is less than the aggregate amount of the principal and accrued but unpaid interest due on the Outstanding Notes, such distribution will be applied first to principal and then to accrued but unpaid interest. Corporate Governance Matters. Pursuant to the Prepackaged Plan, as of the Effective Date, the Principal Holders and the New Major Holder have agreed among themselves that the initial members of the Board of Trustees of the reorganized Company will consist of seven members, including (a) the new President and Chief Executive Officer of the reorganized Company, (b) one member selected by the New Major Holder, and (c) five members selected by the Principal Holders. At each election of the Board of Trustees subsequent to the Effective Date, the Board of Trustees will be elected by vote of the Common Shares. See "The Prepackaged Plan--Summary of Other Provisions of the Prepackaged Plan--Officers and Trustees" and "Management" for information regarding the new President and Chief Executive Officer and the new Board of Trustees. RECOMMENDATION OF THE BOARD OF TRUSTEES On November 16, 1994, the Board of Trustees met to consider the proposed Restructuring. In connection therewith, the Board of Trustees heard presentations from the Company's management and the Company's 8 financial and legal advisors describing the discussions, negotiations and alternative proposals leading to the Restructuring. At the request of the Board of Trustees, the Company's management and financial advisors described the feasibility of the Restructuring and its effect on the Company's capital structure and cash flow problems. In addition, the Board of Trustees discussed other restructuring alternatives available to the Company. After lengthy consideration and discussion of these matters, the Board of Trustees voted unanimously to approve in principle the terms of the Restructuring, subject to approval by the Board of Trustees of the final documentation required to implement the Restructuring and to confirm the Prepackaged Plan, and to authorize management to proceed with the steps necessary to effect the Restructuring. The Board of Trustees has unanimously approved the Restructuring and the transactions contemplated thereby and recommends that all Holders, including holders of Outstanding Common Shares, vote in favor of the Restructuring and the transactions contemplated thereby. The Board of Trustees approved the Restructuring because it believes that the Restructuring is necessary to make it possible for the Company to satisfy its outstanding obligations and remain in business and provide the shareholders with the best opportunity to receive any value or recovery, having determined that the Restructuring is fair to the unaffiliated Holders of the Company's Outstanding Securities and other Claims and Interests. In considering the Restructuring, the Board of Trustees considered, and have considered since November 1994, among other things, the factors set forth below. . The Board of Trustees' familiarity with the Company's business, operations and financial condition and its future prospects, including the financial difficulties facing the Company and the inability of the Company to secure adequate financing for its ongoing operations as long as the Outstanding Notes remained outstanding. . The fact that consummation of the Restructuring appeared to be the only viable way for the Company to deal with its outstanding obligations and continue to operate its business. . The fact that the Company's range of enterprise going concern value and liquidation value are in each case substantially less than the Company's liabilities. . The Board of Trustees' review of monthly reports on the status of the Restructuring, as presented by the Company's financial and legal advisors, as well as valuations of the Company reflected from time to time in the various proposals of the Interested Groups, the Major Holder and the Principal Holders. . Presentations by the Company's management and its legal advisors, each of whom reviewed various considerations with the Board of Trustees. In particular, the Board of Trustees noted that based on the valuations of the Company prepared by Houlihan Lokey, the special purpose valuations prepared by Kenneth Leventhal and management's internal analyses, foreclosure or a liquidation of the Company would yield a much smaller return to the Holders and would leave nothing for the holders of the Outstanding Common Shares. . Presentations by Houlihan Lokey and the results of discussions with other parties concerning proposals for the Restructuring and potential alternatives to the Restructuring. In particular, the Board of Trustees placed substantial weight on the tentative willingness of certain third parties to invest in the Company upon consummation of the Restructuring and the unwillingness of such investors to make a capital investment in the Company absent successful completion of the Restructuring in the form presented. . The historical and current market prices of the Company's Outstanding Common Shares, as well as the net book value of the Company's assets per share, both before giving effect to the Restructuring and on a pro forma basis after giving effect to the Restructuring, when compared to a liquidation of the Company. 9 . The fact that the Major Holder and the Principal Holders had retained separate financial and legal advisors, had negotiated at arm's-length with the Company and its financial and legal advisors after a review of the Company and its prospects and had agreed upon the terms of the Restructuring in preference to a liquidation or other alternatives. Based on the foregoing, the Board of Trustees determined that the Restructuring was fair to the Holders and determined to recommend approval of all elements of the Restructuring. SPECIAL PURPOSE VALUATION REPORTS OF KENNETH LEVENTHAL In June 1994, Kenneth Leventhal was engaged to prepare a special purpose valuation of the Company and its investment portfolio in order to assist the Company and its various interested creditor parties in determining an appropriate basis for valuation of a potential restructuring transaction. The Company selected Kenneth Leventhal to perform such special purpose valuation at the request of the Principal Holders and because of Kenneth Leventhal's qualifications, expertise and reputation in the area of financial restructuring and real estate due diligence and valuation. Also, Kenneth Leventhal was familiar with the Company's portfolio as a result of a comprehensive due diligence investigation of all assets in the Company's portfolio undertaken in early 1993 on behalf of a potential equity investor and for the use and benefit of such potential investor. On October 4, 1994, Kenneth Leventhal produced a report which placed the Company's going concern value as of July 1, 1994, between $255 million and $275 million and its liquidation value between $210 million and $240 million. At the Company's request, in April and May 1995, Kenneth Leventhal updated its analysis using the same methodology as that used to prepare its October 1994 report. On May 31, 1995, Kenneth Leventhal provided the Company with updated reports dated May 15, 1995 that placed the Company's going concern value as of March 31, 1995 between $265 million and $285 million and its liquidation value between $220 million and $260 million. Kenneth Leventhal's May 15, 1995 reports are included in this Disclosure Statement as Annexes C and D. Kenneth Leventhal has granted its consent to the use of its reports included as Annexes C and D to this Disclosure Statement. In preparing its valuations, the Company instructed Kenneth Leventhal to determine the valuation of the Company's portfolio on a going concern basis. The assumptions utilized by the Company and reviewed by Kenneth Leventhal included normal collection of amounts due on mortgage loans and cash flow from operating properties. To determine a going concern valuation, the assumptions were predicated on the orderly collection and selected disposal of assets over a period of several years. Moreover, Kenneth Leventhal's going concern valuation was not reflective of values which would result from a distressed sale, forced liquidation, or disposition of the portfolio in a bulk sale or any other accelerated manner. In addition to these specific portfolio valuation procedures, the Company further instructed Kenneth Leventhal to approximate a range of valuation for the total enterprise as of July 1, 1994, and later as of March 31, 1995, utilizing the Company's most recently available financial statements. In conducting its special purpose valuations, Kenneth Leventhal obtained selected publicly-available financial information prepared by the Company as of June 30, 1994, and later, as of March 31, 1995. Utilizing this information, Kenneth Leventhal selected 26 assets representing mortgage loans, investments, in-substance foreclosure assets and real estate equities owned. The selection was divided between the west coast and east coast portfolios and generally represented the highest dollar values in the portfolios. In addition, the selection of assets included different asset classifications. Utilizing the portfolio so selected, Kenneth Leventhal, among other things, (i) obtained the most recent "Argus" (a property cashflow software package) property cashflow projections for the properties selected, 10 (ii) obtained, where applicable, the most recent operating rent roll and other financial information relative to the assets selected, (iii) obtained the most recent appraisals, where applicable and available, (iv) obtained the previous Kenneth Leventhal analyses performed as of March 1993 and July 1994, (v) discussed the current status with the respective asset manager to determine loan status, property characteristics, current occupancy, existing market rental rates, new leases, current payoff discussions and asset sales, (vi) reviewed limited market information for the properties, (vii) modified the Company's assumptions, as necessary, to conform to certain known current market conditions and Kenneth Leventhal's understanding of the assets, (viii) updated the valuation model prepared by Kenneth Leventhal in 1993 and 1994 utilizing current market and/or assumption modifications determined from the procedures provided above, and (ix) calculated estimated asset values on both a going concern and liquidation value basis. For a more complete discussion of the Kenneth Leventhal reports, see "The Prepackaged Plan--Special Purpose Valuation Reports of Kenneth Leventhal." THE PLAN SOLICITATION Solicitation of Acceptances of the Prepackaged Plan. The Company will not hold a meeting to vote on the Prepackaged Plan. Rather, the Company is soliciting acceptances of the Prepackaged Plan by means of Ballots and Master Ballots. Any Holder who wishes to vote with respect to the Prepackaged Plan should complete, sign and return the applicable Ballot or Master Ballot in accordance with the instructions set forth in this Disclosure Statement. See "The Plan Solicitation; Voting Procedures." The Company is soliciting acceptances of the Prepackaged Plan from holders of Claims or interests of any equity security holder, as defined in section 101(17) of the Bankruptcy Code, of the Company, whether or not asserted, including an interest arising out of any Outstanding Stock Rights ("Interests") in Class 2 (Outstanding Notes), Class 3 (Other Secured Claims), Class 4 (Unsecured Claims) and Class 5 (Outstanding Common Shares). A vote in favor of the Prepackaged Plan may only be used by the Company for the Prepackaged Plan as it may be amended in accordance with the Prepackaged Plan and approved by the Bankruptcy Court. If, by the Expiration Date, the Requisite Plan Acceptances have been received from holders of Outstanding Notes, the Company currently intends to commence a Reorganization Case by filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code and to use the Ballots and Master Ballots solicited pursuant to this Disclosure Statement to seek confirmation of the Prepackaged Plan under Chapter 11 of the Bankruptcy Code as promptly as possible. Under the Agreement of Understanding, the Principal Holders (who hold in excess of 80% of the Outstanding Notes) agreed to vote when solicited in favor of the Prepackaged Plan. Plan Acceptances will be irrevocable upon filing of the Prepackaged Plan unless permission of the Bankruptcy Court is received to withdraw such acceptances. The Ballots provide that a holder of a Claim or Interest may opt out of the release otherwise effected by the Prepackaged Plan of (i) the Creditors' Committee formed under the Prior Plan, each holder of a Claim or Interest, and each of the officers, trustees, employees, members and professionals of such committee or holder (collectively, the "Creditor Releasees") and (ii) the Company, the Reorganized Debtor (as hereinafter defined), the Creditors' Committee under the Prior Plan, the Principal Holders, the New Major Holder, and their respective officers, directors, employees, members and professionals (collectively, the "Debtor Releasees"). Pursuant to the Prepackaged Plan, the Creditor Releasees, to the extent permitted by applicable law, would be released from any Released Claims (as defined below) that the Company may have against any of them and the Debtor Releasees would be released from any Released Claims (as hereinafter defined) that any holder of a Claim or Interest may have against any of the Debtor Releasees and from any and all actions, causes of action, claims liabilities, demands and obligations of any kind or nature whatsoever that the Company or any holder of a Claim or Interest may have against any of the Debtor Releasees. Such Released 11 Claims (as hereinafter defined) include, without limitation, Claims under the federal securities laws. A holder of a Claim or Interest may elect not to grant such release and such release would not be enforceable against such holder, and such holder would not be a Creditor Releasee and would not, therefore, be released from Released Claims. "Released Claims" means any and all actions, causes of action, claims, liabilities, demands, and obligations of any kind or nature whatsoever that are based upon or that arise out of any act or omission that is related to the Bankruptcy Case or that are made in connection with or relate to negotiating, formulating, implementing, confirming, or consummating the Prepackaged Plan or this Disclosure Statement; provided, however, that the term "Released Claims" shall not include any Excluded Claim (as hereinafter defined). If the Prepackaged Plan is confirmed by the Bankruptcy Court, all holders of Claims and Interests will receive or retain the same consideration as all other holders of Claims and Interests, respectively, whether or not such holder voted to accept the Prepackaged Plan. Upon confirmation, the Prepackaged Plan will be binding upon all holders of Claims and Interests regardless of whether or not such holders voted to accept the Prepackaged Plan. Voting on the Prepackaged Plan. As disclosed above, the Prepackaged Plan designates six separate classes of Claims and Interests. See "The Prepackaged Plan--Classification and Treatment of Claims and Interests." Five classes are impaired. The Company is soliciting the votes of four of those classes. The other impaired class (Class 6 Outstanding Stock Rights) will not receive any distribution under the Prepackaged Plan, is deemed to reject the Prepackaged Plan and, therefore, is not being solicited to vote on the Prepackaged Plan. To vote on the Prepackaged Plan, Holders must follow the procedures set forth under "The Plan Solicitation; Voting Procedures--How to Vote." For the Prepackaged Plan to be confirmed (unless "cramdown" procedures are utilized as to a class of Holders entitled to vote on the Prepackaged Plan), the Bankruptcy Code requires, among other things, that the Prepackaged Plan be accepted by the (i) holders of two-thirds in principal amount and more than one-half in number in each class of holders of Outstanding Notes, Other Secured Claims and Unsecured Claims voting on the Prepackaged Plan, and (ii) holders of at least two-thirds of the Outstanding Common Shares in such class who vote on the Prepackaged Plan. Because only votes actually cast on the Prepackaged Plan are counted, the Company may obtain the Requisite Plan Acceptances with the acceptance of the Prepackaged Plan by substantially less than two-thirds of the holders of Outstanding Common Shares, or by substantially less than one-half in number and two-thirds in principal amount of the holders of Outstanding Notes, Other Secured Claims and Unsecured Claims. If a class of Holders entitled to vote on the Prepackaged Plan does not accept the Prepackaged Plan, the Company may, with the consent of the Principal Holders, nevertheless seek confirmation of the Prepackaged Plan from the Bankruptcy Court by employing the "cramdown" procedures set forth in section 1129(b) of the Bankruptcy Code. Under the "cramdown" procedures, the Prepackaged Plan may be confirmed despite the lack of sufficient acceptances from one or more impaired classes voting on the Prepackaged Plan if the Bankruptcy Court determines that the requirements of section 1129(b) of the Bankruptcy Code are met. See "Special Factors and Certain Considerations-- Considerations Relating to the Prepackaged Plan--Nonconsensual Confirmation" and "The Prepackaged Plan--Confirmation of the Prepackaged Plan--Nonconsensual Confirmation." Confirmation of the Prepackaged Plan. If the Requisite Plan Acceptances are received from the holders of Outstanding Notes and the Company seeks to implement the Prepackaged Plan by commencing a reorganization case under Chapter 11 of the Bankruptcy Code, the Company will request that the Bankruptcy Court hold a confirmation hearing as promptly as practicable, upon such notice to the parties in interest as is required by the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") and the Bankruptcy Court. Parties in interest will receive notice of the date and time fixed by the Bankruptcy Court for the confirmation hearing. The Bankruptcy Court will also establish procedures for the filing and service of objections to confirmation of the Prepackaged Plan. 12 In order to confirm the Prepackaged Plan, the Bankruptcy Code requires, among other things, that the Bankruptcy Court find that confirmation of the Prepackaged Plan is not likely to be followed by the need for further financial reorganization of the Company. The Company believes that, with the substantial reduction in outstanding debt, the conversion of a substantial amount of debt to equity, the extended maturity, revised mandatory redemption schedule and the reduction in interest payments, the Company will possess sufficient resources and working capital to operate the Company's business and repay the New Senior Notes. See "The Prepackaged Plan--Confirmation of the Prepackaged Plan-- Feasibility Test." In addition, the Bankruptcy Code requires that each holder of a Claim or Interest in an impaired class must either (i) accept the Prepackaged Plan, or (ii) receive or retain under the Prepackaged Plan cash or property of a value, as of the date on which the Bankruptcy Court enters the order confirming the Prepackaged Plan pursuant to section 1129 of the Bankruptcy Code on its docket (the "Confirmation Date"), that is not less than the value such Holder would receive or retain if the Company was liquidated under Chapter 7 of the Bankruptcy Code on such date. As set forth in "The Prepackaged Plan--Confirmation of the Prepackaged Plan--Best Interest of Creditors Test; Liquidation Value" and "The Prepackaged Plan--Confirmation of the Prepackaged Plan--Comparative Analysis," the Company believes that the members of the classes of impaired Claims and impaired Interests (i.e., the holders of Outstanding Notes, Outstanding Common Shares, Other Secured Claims and Unsecured Claims) will receive or retain more pursuant to the Prepackaged Plan than they would receive in a Chapter 7 liquidation. SPECIAL FACTORS AND CERTAIN CONSIDERATIONS Acceptance of the Prepackaged Plan and ownership of the Company's Common Shares involves a high degree of risk. Prior to deciding whether and how to vote in the Prepackaged Plan, each Holder should consider carefully all the information contained in this Disclosure Statement, including the factors mentioned below and more fully described in "Special Factors and Certain Considerations." . Financial Condition of the Company; Liquidity. As of May 31, 1995, the Company is in default on principal and interest (including accrued but unpaid interest) of approximately $322.9 million of the Outstanding Notes. The Company has no standstill agreement in effect with the holders of the Outstanding Notes, and the Outstanding Note Trustee could at any time accelerate such notes and/or exercise other rights and remedies available to such holders, including foreclosure on the Company's assets. See "Special Factors and Certain Considerations-- Financial Condition of the Company; Liquidity." . Continuing Leverage. The Company will continue to be highly leveraged after the Restructuring, requiring significant cash for debt service, and its ability to borrow additional funds will be limited by the New Senior Note Indenture (as hereinafter defined). Moreover, the New Senior Note Indenture requires the Company to maintain certain ratios and other measures of financial performance. See "Special Factors and Certain Considerations--Continuing Leverage." . Foreclosure and Bankruptcy Alternatives. The Company believes that any bankruptcy case other than the bankruptcy case contemplated pursuant to the Prepackaged Plan would have a material adverse effect on the Company, its creditors and its shareholders. Possible consequences of a failure of the Company to consummate the Restructuring contemplated by the Prepackaged Plan include (i) substantial diminution in the value of the Company's assets, (ii) substantially higher costs for any alternative restructuring transaction, (iii) uncertainty regarding the amount of time needed to effectuate an alternative restructuring transaction, if any, (iv) interference and delay of payments to holders of the Outstanding Notes and other Claims, (v) disruption of the Company's efforts to increase its liquidity, (vi) potential forced liquidation of the Company's assets in distressed markets at substantially reduced values, and (vii) the failure of the holders of Outstanding Common Shares to receive anything. See "Special Factors and Certain Considerations--Foreclosure and Bankruptcy Alternatives." 13 . Possible Further Decline of Real Estate Markets. Substantial declines in real estate markets over the last few years have had a material adverse impact on the Company. If the real estate markets decline further, the Company may not be able to meet its payment obligations under the New Senior Notes. See "Special Factors and Certain Considerations--Possible Further Decline of Real Estate Markets." . Disruption of the Company's Business. If the Restructuring is not consummated, it may be necessary for the Company to dispose of a material amount of assets in a depressed real estate market or to liquidate. See "Special Factors and Certain Considerations--Disruption of the Company's Business." . Considerations Relating to the Prepackaged Plan. A failure by an impaired class to accept the Prepackaged Plan may result in the "cramdown" of such class. Even if the Prepackaged Plan is accepted, there can be no assurances that it will be confirmed by the Bankruptcy Court. Should the Prepackaged Plan not be accepted, it may be necessary for the Company to file a case for reorganization under Chapter 11 or liquidation under Chapter 7, which may result in reduced distributions (or no distributions) to holders of Claims and Interests. See "Special Factors and Certain Considerations--Considerations Relating to the Prepackaged Plan." . Certain Bankruptcy Considerations if the Prepackaged Plan is Not Confirmed and the Restructuring is Not Otherwise Consummated. If the Prepackaged Plan is not confirmed, it may be necessary for the Company to be liquidated in a bankruptcy case, in which case the holders of Claims and Interests would receive less than they would pursuant to the Prepackaged Plan. Moreover, during the pendency of a bankruptcy case, the Company may have insufficient operating cash. See "Special Factors and Certain Considerations--Certain Bankruptcy Considerations if the Prepackaged Plan Is Not Confirmed and the Restructuring is Not Otherwise Consummated." . Certain Consequences to Non-Voting Holders of Common Shares. If the Prepackaged Plan is confirmed, pursuant to the Reverse Stock Split, each 33.33 Outstanding Common Shares will be converted into one Common Share or, if the class of holders of Outstanding Common Shares rejects the Prepackaged Plan, the Outstanding Common Shares will be canceled, in each case, regardless of whether any particular holder of Outstanding Common Shares voted for the Prepackaged Plan. See "Special Factors and Certain Considerations--Certain Consequences to Non-Voting Holders of Common Shares." . Material Dilution of Common Equity. Pursuant to the Prepackaged Plan, a large number of New Common Shares will be issued to holders of Outstanding Notes, resulting in a substantial dilution of the equity ownership of the holders of Outstanding Common Shares. See "Special Factors And Certain Considerations--Material Dilution of Common Equity." . Risks Relating to the Projections. The Company has prepared projections of the cash flows of its business following the Restructuring, and such projections are inherently imprecise, based on numerous assumptions with respect to industry performance, general business and economic conditions and other matters. Holders are cautioned not to place undue reliance on the projections. See "Special Factors And Certain Considerations--Risks Relating to the Projections." . Restricted Payments. The indenture governing the New Senior Notes will limit the Company's ability to make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of or in respect of any of its Common Shares. See "Special Factors and Certain Considerations--Restricted Payments." . Absence of Public Market. There can be no assurances that an active trading market for the New Senior Notes will develop and no assurance can be given as to the prices at which such securities may trade. In addition, the NYSE has notified the Company that it may commence delisting proceedings in respect of the Common Shares. If the Common Shares are delisted, there can be no 14 assurance that the Company would be able to make alternative listing arrangements for the Common Shares, and the liquidity and price of the Common Shares could be adversely affected. See "Special Factors and Certain Considerations--Absence of Public Market." . Delisting of the Common Shares from Trading on the NYSE. The NYSE notified the Company that a review of the Company's annual financial results for the fiscal year ended September 30, 1994 indicated that the Company had fallen below several of the continued listing criteria of the NYSE, and that consideration was being given to the appropriateness of continued listing of the Company's Common Shares. If the Common Shares are delisted from the NYSE, (i) there can be no assurance that a public market will continue to exist for the Common Shares, (ii) the Company may be unable to obtain news coverage, have greater difficulty in obtaining financing, suffer a significant decline in the market value of its Common Shares, and (iii) shareholders of the Company may subsequently have difficulty in selling their Common Shares should they desire to do so. See "Special Factors and Certain Considerations-- Delisting of the Common Shares from Trading on the NYSE." . Releases. Pursuant to the Prepackaged Plan, holders of Claims and Interests may elect to release certain Claims against the Company and others. See "Special Factors and Certain Considerations--Releases." . Federal Income Tax Considerations. There can be no assurances that the Internal Revenue Service could not successfully take the position at some future time that the Company no longer qualifies for taxation as a REIT, in which case, the Company would be subject to federal income tax on its income (including capital gains). See "Special Factors and Certain Considerations--Federal Income Tax Considerations." SUMMARY PROJECTED FINANCIAL INFORMATION In connection with the preparation of the Prepackaged Plan, financial projections were prepared in May 1995 by management of the Company in a manner consistent with the special purpose valuation reports prepared by Kenneth Leventhal and the valuations prepared by Houlihan Lokey, based on assumptions considered reasonable by the management of the Company. These projections are summarized below. The projections assume that the Prepackaged Plan will be approved and implemented in accordance with its terms. The projections below are based on a number of assumptions, including, without limitation, assumptions relating to industry performance, general business and economic conditions and the assumption that excess cash flow will be used to prepay debt and not to pay dividends except to the extent required to retain REIT status, but were not prepared with any other specific business plan in mind. After the Effective Date, the Board of Trustees of the reorganized Company may adopt a different policy and business plan, and there can be no assurance that any of these assumptions will be met. The projections are only estimates, and actual results may vary materially from the projections. In addition, uncertainties that are inherent in the projections increase for later years in the projection period due to the increased difficulty associated with forecasting levels of economic activity and corporate performance at more distant points in the future. Holders are cautioned not to place undue reliance on the projections. The projections were not prepared with a view towards compliance with the published guidelines of the American Institute of Certified Public Accountants regarding financial projections, and have not been reviewed, examined or compiled by the Company's independent auditors or any other independent certified public accountants or by Houlihan Lokey or Kenneth Leventhal. The Company does not, in the ordinary course of business, prepare multi-year projections as to future revenues or earnings. Accordingly, the Company does not plan to update or otherwise revise the projections. For purposes of the projections below, the effective date of the Prepackaged Plan is assumed to occur as of September 30, 1995. The summary projections below are subject to the more detailed presentation set forth under "Financial Projections," and should be read together with the information contained in "Pro Forma Financial Information," "Accounting Treatment" and "Business" and the Company's financial statements referred to under "Additional Information Concerning the Company." 15 UNAUDITED PROJECTED OPERATING INFORMATION FISCAL YEARS ENDED SEPTEMBER 30, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1997 1998 1999 2000 ------- ------ ------- ------- ------- Income Interest and fee income on mortgage loans.................................. $ 6,512 $6,517 $ 6,292 $ 5,860 $ 4,428 Net operating income from real estate owned.................................. 21,856 23,252 24,113 24,376 25,816 Interest on short-term investments...... 703 626 611 564 622 ------- ------ ------- ------- ------- Total Income.......................... 29,071 30,395 31,016 30,800 30,866 ------- ------ ------- ------- ------- Expenses Interest................................ 12,614 10,498 8,418 6,402 3,232 Depreciation and amortization on real estate owned........................... 7,892 7,997 7,805 7,971 8,309 Provision for losses.................... 0 0 0 0 0 Other operating expenses................ 3,200 3,000 2,900 2,800 2,700 ------- ------ ------- ------- ------- Total Expenses........................ 23,706 21,495 19,123 17,173 14,241 ------- ------ ------- ------- ------- Net Income.............................. $ 5,365 $8,900 $11,893 $13,627 $16,625 ======= ====== ======= ======= ======= Dividend distributions.................. $ 0 $ 0 $ 2,368 $ 4,098 $ 7,011 ======= ====== ======= ======= ======= Earnings per share (based upon 11,226,215 shares outstanding)......... $ 0.48 $ 0.79 $ 1.06 $ 1.21 $ 1.48
UNAUDITED PROJECTED BALANCE SHEET INFORMATION AT SEPTEMBER 30, (DOLLARS IN THOUSANDS)
1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- Total Assets....................... $225,086 $216,578 $207,643 $198,259 $175,892 Total Liabilities.................. 103,832 86,424 67,964 49,051 17,070 Total Shareholders' Equity......... 121,254 130,154 139,679 149,208 158,822
16 SUMMARY PRO FORMA FINANCIAL INFORMATION The following summary unaudited pro forma operating information for the year ended September 30, 1994, and the six months ended March 31, 1995, was prepared as if consummation of the Prepackaged Plan occurred at October 1, 1993. The summary unaudited pro forma balance sheet information as of March 31, 1995 was prepared as if the consummation of the Prepackaged Plan occurred as of March 31, 1995. The adjustments set forth under the caption "Proposed Reorganization" reflect the assumed effects of the Restructuring. The adjustments set forth under the caption "Fresh Start" reflect the assumed effects of the adoption of the "fresh start" accounting prescribed by SOP 90-7 (as hereinafter defined). The summary unaudited pro forma information should be read in conjunction with the financial statements of the Company and the related notes thereto referred to under "Additional Information Concerning the Company" and management's discussion thereof contained elsewhere in this Disclosure Statement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The summary unaudited pro forma information is not necessarily indicative of what the actual financial position or results of operations would have been at such times or for such periods, nor does it purport to represent the future financial results of the Company. Amounts below are stated in thousands of dollars.
YEAR ENDED SEPTEMBER 30, 1994 SIX MONTHS ENDED MARCH 31, 1995 ------------------------------- ------------------------------------ PRO FORMA PRO PRO FORMA PRO PRO FORMA OPERATING HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA INFORMATION: ---------- ----------- ------- ----------- ------------ --------- (UNAUDITED) Total income............ $ 26,450 $ 494 $25,956 $ 14,304 ($ 1,253) $ 13,051 --------- ------- ------- ---------- ---------- --------- Interest and operating expense................ 37,840 (19,064) 18,776 22,030 (12,640) 9,390 Depreciation and amortization........... 5,840 (731) 5,109 3,486 (681) 2,805 Provision for losses.... 2,000 (2,000) 0 3,000 (3,000) 0 Reorganization expenses, net.................... 2,360 (2,360) 0 1,505 (1,505) 0 --------- ------- ------- ---------- ---------- --------- Total expenses......... 48,040 (24,155) 23,885 30,021 (17,826) 12,195 --------- ------- ------- ---------- ---------- --------- Net income (loss)....... ($ 21,590) $23,661 $ 2,071 ($15,717) $ 16,573 $ 856 ========= ======= ======= ========== ========== =========
AS AT MARCH 31, 1995 -------------------------------------------- PROPOSED FRESH PRO PRO FORMA BALANCE SHEET HISTORICAL REORGANIZATION START FORMA INFORMATION: ---------- -------------- -------- -------- (UNAUDITED) Total assets..................... $366,948 ($ 61,873) ($68,908) $236,167 Total liabilities................ 362,632 (231,324) (315) 130,993 Shareholders' equity............. 4,316 169,451 (68,593) 105,174
17 SUMMARY HISTORICAL FINANCIAL INFORMATION The following summary financial data for the five years ended September 30, 1994 are derived from the audited consolidated financial statements of the Company. The financial data for the six month periods endedMarch 31, 1995 and 1994 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of only normal recurring accruals, which the Company considers necessary for fair presentation of the financial position and the results of operations for these periods. Operating results for the six months ended March 31, 1995 are not necessarily indicative of the results that may be expected for the entire year ended September 30, 1995. The data should be read in conjunction with the consolidated financial statements and the related notes referred to in "Additional Information Concerning the Company" and the other financial information included herein.
SIX MONTHS ENDED YEARS ENDED SEPTEMBER 30, MARCH 31, ------------------------------------------------ ------------------ 1990 1991 1992 1993 1994 1995 1994 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA Total income............ $ 68,233 $ 56,253 $ 42,009 $ 38,342 $ 36,277 $ 19,776 $ 17,266 Interest and operating expenses............... 47,601 51,736 42,077 43,967 47,668 27,502 22,824 Depreciation and amorti- zation................. 2,391 3,062 4,470 5,500 5,839 3,486 2,833 Income (loss) before provision for losses, reorganization expenses and gain on sales of real estate......... 18,241 1,455 (4,538) (11,125) (17,230) (11,212) (8,391) Provision for losses.... 23,790 33,000 32,000 37,000 2,000 3,000 -- Reorganization expenses, net.................... 5,051 4,352 934 5,844 2,360 1,505 1,417 Gain on sales of real estate................. 244 244 -- -- -- -- -- Net income (loss)....... (10,356) (35,653) (37,472) (53,969) (21,590) (15,717) (9,808) PER SHARE DATA Net loss................ ($ .94) ($ 3.22) ($ 3.38) ($ 4.87) ($ 1.92) ($ 1.40) ($ .87) Dividends declared (1).. .45 -0- -0- -0- -0- -0- -0- Book value.............. 15.23 12.01 8.63 3.71 1.79 .38 2.83 BALANCE SHEET DATA Total assets............ $595,640 $514,754 $427,268 $353,874 $364,244 $366,948 $359,465 Invested assets......... 547,480 505,600 424,394 347,526 309,477 298,449 327,546 Allowance for losses.... 10,792 14,707 19,353 11,808 13,430 11,031 11,050 Creditor Obligations.... 403,884 374,000 312,000 290,000 290,000 290,000 290,000 Loans on equity invest- ment................... -- -- 15,515 17,572 17,593 17,593 17,593 Shareholders' equity.... 168,717 133,064 95,592 41,623 20,033 4,316 31,815
- -------- (1)Dividends shown are those attributable to earnings for the period indicated. 18 CERTAIN FEDERAL INCOME TAX CONSEQUENCES Tax Consequences to Creditors. Creditors whose Claims are not classified as a security for federal income tax purposes (a "Tax Security") will recognize taxable gain or loss on the exchange of such a Claim for cash or property. The Company expects the Prepackaged Plan to qualify as a "tax-free recapitalization," in which case holders of Tax Securities who receive New Common Shares, New Senior Notes, or both, will generally not recognize taxable gain or loss, subject to certain exceptions. Gain or loss recognized by a holder of a Claim may be capital or ordinary in character, depending on various factors, including each holder's individual circumstances. Payments made to qualifying creditors may be subject to backup withholding and such creditors may be required to provide general tax information to the Company. See "Certain Federal Income Tax Consequences--Tax Consequences to Creditors." REIT Status and Company Taxation. The Company will continue to elect to be taxed as a REIT under the Internal Revenue Code, and the Company intends to continue to operate in such a manner as to continue to qualify for taxation as a REIT under the relevant sections of the Internal Revenue Code. As long as the Company continues to qualify to be taxed as a REIT, it generally will not be subject to federal corporate income taxes on the portion of its ordinary income or capital gain that is distributed on a current basis to its shareholders. See "Certain Federal Income Tax Consequences--REIT Status and Taxation of Company Under the Prepackaged Plan." Additional Tax Consequences to the Company from the Prepackaged Plan. The Company's federal income tax returns reflect significant net operating loss carryovers. The Company's future use of those net operating loss carryovers will be limited by the application of Internal Revenue Code section 382, because the Prepackaged Plan will cause the Company to undergo an "ownership change." Subject to the above described limitations, the Company may generally elect to use its net operating loss carryover to reduce its REIT taxable income. The Company's use of its net operating loss carryovers to shelter its alternative minimum taxable income may be subject to separate limitations. As a result of the Prepackaged Plan, the Company's aggregate outstanding indebtedness will be reduced, causing the Company to realize cancellation of indebtedness ("COD") income. The Company will be required to reduce its tax attributes, including its net operating loss carryovers, by the amount of the COD income, although it will not be required to include such income in its taxable income. See "Certain Federal Income Tax Consequences--Additional Tax Consequences to the Company from the Prepackaged Plan." For a more complete discussion of certain United States federal income tax consequences of consummation of the transactions contemplated by the Prepackaged Plan to holders and the Company, see "Certain Federal Income Tax Consequences." 19 SPECIAL FACTORS AND CERTAIN CONSIDERATIONS Holders should consider the factors set forth below, as well as the other information set forth in this Disclosure Statement, prior to determining whether to accept or reject the Prepackaged Plan. FINANCIAL CONDITION OF THE COMPANY; LIQUIDITY The aggregate amount, including accrued but unpaid interest, owing on the Outstanding Notes as of May 31, 1995 is $322.9 million. Notwithstanding the uncured events of default under the Outstanding Note Indenture (as hereinafter defined), see "The Prepackaged Plan--Background of the Restructuring--Current Defaults," the Outstanding Notes have not been accelerated. As of May 31, 1995, the available cash of the Company was approximately $46.5 million. Consequently, the Company cannot pay amounts outstanding on the Outstanding Notes and anticipates that it will not receive sufficient cash from its operations or from the dispositions of assets to make the interest and principal payments scheduled for fiscal 1995 under the Outstanding Notes. Pursuant to the Restructuring, the Company does not anticipate making such principal or interest payments. Although the Outstanding Notes have not been accelerated, the holders of such notes or the Outstanding Note Trustee (as hereinafter defined) may determine at any time to accelerate such notes and exercise their rights and remedies, including the right to foreclose on the collateral, consisting of substantially all of the assets of the Company, granted to them under the Outstanding Note Indenture (as hereinafter defined) and the Outstanding Collateral Agreement (as hereinafter defined), based upon the existing events of default or otherwise. See "--Foreclosure and Bankruptcy Alternatives" and "--Possible Further Decline of Real Estate Markets" below. CONTINUING LEVERAGE The Company is now highly leveraged and, although completion of the Restructuring will significantly reduce the Company's debt obligations, the Company will still have a substantial amount of debt after the Restructuring. See "Pro Forma Financial Information--Pro Forma Balance Sheet." The Company believes that, after giving effect to the Restructuring, the Company's cash flow from operations and cash on hand will be adequate to make the required payments of principal and interest on its debt, to make anticipated capital expenditures and to fund working capital requirements. See "Financial Projections." If the Company is unable, however, to generate sufficient cash flow from operations in the future, or if it fails to satisfy the financial tests under the New Senior Note Indenture (as hereinafter defined), it could face default on its restructured obligations. The leveraged nature of the Company's capital structure will have several important effects on the Company and its operations, including the following: (i) the Company will continue to have significant cash requirements for debt service; (ii) the covenants and other restrictions contained in the New Senior Note Indenture governing the New Senior Notes will limit the Company's ability to borrow additional funds; (iii) as a result of the Company's debt service requirements and restrictions on the incurrence of indebtedness imposed under the terms of the New Senior Note Indenture (as hereinafter defined), funds available for capital expenditures may be limited; and (iv) the Company's ability to meet its debt service obligations and to reduce its total debt will be dependent upon its future performance, which, in turn, will be subject to general economic conditions and to financial, business and other factors affecting its operations and the real estate market, including many factors beyond its control. FORECLOSURE AND BANKRUPTCY ALTERNATIVES As stated above, if the Restructuring is not effected, the Company will continue to be in default under the Outstanding Note Indenture (as hereinafter defined). The Company does not anticipate that it will be able to address such default other than as contemplated by the Restructuring or through a nonconsensual bankruptcy filing. The holders of Outstanding Notes have certain rights and remedies, including the right to 20 foreclose on the collateral granted in connection with the Prior Plan (as hereinafter defined) and the Outstanding Collateral Agreement (as hereinafter defined). This collateral constitutes substantially all of the Company's assets. If the Company does not receive the Requisite Plan Acceptances, it is likely that the Company will nonetheless be forced to file for reorganization under Chapter 11 of the Bankruptcy Code for the second time to avoid such foreclosure. The Company's range of enterprise going concern value and range of liquidation value are substantially less than the Company's current liabilities. As a result, there may be no way to avoid liquidation of some or all of the Company's assets and it is unlikely that the holders of Outstanding Notes and other Claims would receive payment in full on their obligations. In any case, it is unlikely that holders of Outstanding Common Shares would receive or retain anything in a foreclosure or non-prepackaged bankruptcy. The Company believes that any bankruptcy case, other than the bankruptcy case contemplated pursuant to the Prepackaged Plan, would have a material adverse effect on the Company, its creditors and its shareholders. Possible consequences of a failure of the Company to consummate the Restructuring contemplated by the Prepackaged Plan include (i) substantial diminution in the value of the Company's assets, (ii) substantially higher costs of any alternative restructuring transaction, (iii) uncertainty regarding the amount of time needed to effectuate an alternative restructuring transaction, if any, (iv) interference and delay of payments to holders of the Outstanding Notes and other Claims, (v) disruption of the Company's efforts to increase its liquidity, and (vi) potential forced liquidation of the Company's assets in distressed markets at substantially reduced values, with a resulting loss to creditors and others. In such a case, the Company believes that holders of Outstanding Common Shares are unlikely to receive anything from the Company or its assets. POSSIBLE FURTHER DECLINE OF REAL ESTATE MARKETS Recent volatility in the United States and foreign financial markets, as well as financial distress encountered by numerous real estate companies, has had an adverse effect on the value of real estate, including that owned by the Company. In addition, volatility in the market for "high yield" debt securities, continued focus by financial institution regulators on "highly leveraged transactions" and a general reduction in the availability of other sources of funding have negatively impacted real estate values. Notwithstanding management's efforts to reduce the Company's non-performing assets and to generate cash from dispositions of selected assets at favorable prices since the effective date of the 1991 Plan, the real estate markets have unexpectedly continued to decline and the current liquidation value of the Company's portfolio has continued to decrease. This situation is exacerbated as other participants in the commercial real estate market experience financial difficulty, increasing the prospect of additional excess supply of real estate for sale, often through "fire-sale" liquidations. For example, the following shows, as of the dates indicated, the amount (in thousands) at book value of non-earning loans (including in-substance foreclosures) and non-earning properties acquired through foreclosure and held for sale, and the non-earning loans and non-earning properties as a percentage of the Company's invested assets:
NON-EARNING LOANS AND PROPERTY AS A PERCENT OF INVESTED PERIOD ENDED AMOUNT ASSETS - ------------ -------------- ------------------------------ (IN THOUSANDS) March 31, 1995.................... $52,460 17.6% December 31, 1994................. 47,008 15.2 September 30, 1994................ 42,480 13.7 June 30, 1994..................... 40,539 13.1 March 31, 1994.................... 44,909 13.7 December 31, 1993................. 41,822 12.3 September 30, 1993................ 58,804 16.9 June 30, 1993..................... 32,180 8.5 March 31, 1993.................... 29,562 7.5 December 31, 1992................. 30,278 7.5 September 30, 1992................ 58,348 13.8 June 30, 1992..................... 50,218 11.2
21 The Company's current projections assume that the overcapacity and illiquidity in the real estate markets will continue through 1995 with gradual improvements in 1996 and thereafter. See "Financial Projections." Notwithstanding the conclusion that the Restructuring as effected through the Prepackaged Plan is feasible, there can be no assurance that, even if the Restructuring is successful, payments in respect of the New Senior Notes can be made if the deterioration in the real estate market accelerates or continues longer than expected. ALTHOUGH THE COMPANY HAS ATTEMPTED TO PROJECT ACCURATELY ITS FUTURE CASH FLOWS (SUBJECT TO THE LIMITATIONS SET FORTH UNDER "FINANCIAL PROJECTIONS"), THERE IS A RISK THAT THE COMPANY MAY NOT BE ABLE TO MEET THE REPAYMENT TERMS OF THE NEW SENIOR NOTES OR PAY ANY DIVIDENDS ON THE COMMON SHARES. ADVERSE CONDITIONS, SUCH AS A FURTHER DOWNTURN IN THE REAL ESTATE MARKETS OR A "CREDIT CRUNCH" IN THE COMMERCIAL REAL ESTATE INDUSTRY OR OTHERWISE, ARE BEYOND THE ABILITY OF THE COMPANY, OR ANY OTHER ENTITY, TO PREDICT WITH ANY CERTAINTY AND MAY IMPACT THE COMPANY'S ABILITY TO REPAY THE NEW SENIOR NOTES AND TO PAY DIVIDENDS ON THE COMMON SHARES. DISRUPTION OF THE COMPANY'S BUSINESS If the Restructuring is not consummated, it may be necessary for the Company to dispose of a material amount of assets. There can be no assurance that the Company can complete asset dispositions that will generate sufficient cash to repay the Outstanding Notes. The Company's ability to realize acceptable values on a short-term basis is severely limited by current market conditions, including the lack of available capital to prospective purchasers. More likely, if the Restructuring is not consummated, the Company would be liquidated and consequently, holders of Claims may not receive cash or securities of the same value and having as favorable terms as under the Prepackaged Plan, and holders of Outstanding Common Shares most likely would not receive or retain anything. CONSIDERATIONS RELATING TO THE PREPACKAGED PLAN Risks Associated with Rejection of the Prepackaged Plan. Should the Company not receive sufficient acceptances to seek confirmation of the Prepackaged Plan by the Bankruptcy Court, the Company would be forced to seek alternative means of restructuring. The Company may be required to file a voluntary Chapter 11 petition for which a new plan of reorganization would need to be negotiated. As compared to the Prepackaged Plan, a non-prepackaged Chapter 11 case would likely be lengthier and result in significantly increased administrative expenses, a negative impact on cash flow and a corresponding reduction in the consideration received by holders of Claims and Interests. If a new plan of reorganization could not be confirmed within a reasonable amount of time, the Company might be forced into a liquidation under Chapter 7 of the Bankruptcy Code. In a Chapter 7 liquidation, based upon Kenneth Leventhal's estimate of liquidation value, the Company believes that (i) holders of Outstanding Notes would receive approximately 66.5%-75.8% of the value such holders would receive under the Prepackaged Plan and (ii) holders of Outstanding Common Shares would likely not receive any distribution. See "The Prepackaged Plan--Confirmation of the Prepackaged Plan--Chapter 7 Liquidation Analysis." Disruption of the Company's Business. The Company presently intends to commence the Reorganization Case in connection with the Prepackaged Plan. Although the Company anticipates that the Prepackaged Plan will shorten the period during which the Company must operate under Chapter 11, the Prepackaged Plan will still necessitate a bankruptcy filing and may not permit the Company to avoid some of the disruptions to the Company's business specified above. See "--Foreclosure and Bankruptcy Alternatives" above. Risk of Non-Confirmation of the Prepackaged Plan. Even if all classes of Claims and Interests accept or are deemed to have accepted the Prepackaged Plan, the Prepackaged Plan may not be confirmed by the Bankruptcy Court. Section 1129 of the Bankruptcy Code requires, among other things, that confirmation of the Prepackaged Plan not be followed by a need for liquidation or further financial reorganization of the debtor (the "Feasibility Test"). Furthermore, the value of distributions to dissenting creditors and equity 22 security holders may not be less than the value of distributions such creditors and shareholders would receive if the Company were liquidated under Chapter 7 of the Bankruptcy Code (the "Best Interests Test"). See "The Prepackaged Plan-- Confirmation of the Prepackaged Plan." Although the Company believes that the Prepackaged Plan will meet such tests, there can be no assurance that the Bankruptcy Court will reach the same conclusion. Additionally, this Solicitation for acceptances of the Prepackaged Plan must comply with the requirements of section 1126(b) of the Bankruptcy Code. In order to confirm the Prepackaged Plan, the Bankruptcy Court must determine that it was solicited in compliance with applicable non-bankruptcy law governing the adequacy of disclosure in connection with such Solicitation, including compliance with the federal securities laws. If the Bankruptcy Court were to find that this Solicitation was not in such compliance, acceptances received under the Solicitation could be invalidated. In such an event, the Company may be required to resolicit acceptances, and confirmation of the Prepackaged Plan could be delayed and possibly jeopardized. The Company believes that its Solicitation of acceptances of the Prepackaged Plan complies with the requirements of section 1126(b) of the Bankruptcy Code, that duly executed Ballots and Master Ballots will be in compliance with applicable provisions of the Bankruptcy Code, and that the Prepackaged Plan should be confirmed by the Bankruptcy Court if the Requisite Plan Acceptances are received. There can be no assurance, however, that the Requisite Plan Acceptances will be received or that the Prepackaged Plan will ever be filed. Additionally, if the Prepackaged Plan is filed, there can be no assurance that modifications thereof will not be required for confirmation, or that such modifications would not result in a resolicitation of acceptances. Subject to the consent of the Principal Holders, the Prepackaged Plan may be modified without resolicitation if the Bankruptcy Court finds, after proper notice to affected creditors or other affected entities and a hearing, that such modifications do not adversely affect the treatment of any Holder who has not accepted the modification in writing. Nonconsensual Confirmation. If an impaired class does not vote to accept the Prepackaged Plan, the Bankruptcy Court may nonetheless confirm the Prepackaged Plan under the "cramdown" provisions of section 1129(b) of the Bankruptcy Code. In order to confirm the Prepackaged Plan using "cramdown" procedures, the Bankruptcy Court must determine that, in addition to satisfying all other requirements for confirmation, the Prepackaged Plan "does not discriminate unfairly" and is "fair and equitable" with respect to each impaired class that has not accepted the Prepackaged Plan and with respect to Class 6. If necessary, the Company intends to use "cramdown" procedures with respect to all non-accepting impaired classes, other than holders of Outstanding Notes. See "The Prepackaged Plan--Confirmation of the Prepackaged Plan--Nonconsensual Confirmation." The Company reserves the right to request nonconsensual confirmation of the Prepackaged Plan in the event any impaired class, other than the class of holders of Outstanding Notes, fails to vote to accept the Prepackaged Plan. CERTAIN BANKRUPTCY CONSIDERATIONS IF THE PREPACKAGED PLAN IS NOT CONFIRMED AND THE RESTRUCTURING IS NOT OTHERWISE CONSUMMATED In addition to the material risks associated with any bankruptcy case and as discussed above in connection with the Prepackaged Plan, there may be additional risks to the Company and the holders of Claims and Interests if the Prepackaged Plan is not confirmed. Possible Liquidation. If the Prepackaged Plan is not confirmed and the Restructuring is not otherwise consummated, it is unclear what distributions the holders of Claims and Interests would receive in respect of their Claims or Interests. If an alternative reorganization could not be agreed to or confirmed through the use of "cramdown" procedures, it is possible that the Company would have to liquidate its assets under either Chapter 11 or Chapter 7 of the Bankruptcy Code, or that the holders of the Outstanding Notes may be allowed to foreclose their liens, in which cases the Company believes that holders of Claims and Interests would receive less than they would pursuant to the Prepackaged Plan. See "The Prepackaged Plan--Confirmation of the Prepackaged Plan--Best Interest of Creditors Test; Liquidation Value." 23 Lack of Operating Cash. All assets, including all cash (other than cash contained in the Company's termination pay plan), of the Company are subject to the liens granted to the holders of Outstanding Notes. There can be no assurance that if the Company were to commence a bankruptcy case it would be able to use such cash or cash proceeds of other assets of the Company to operate during the pendency of such bankruptcy case. The Company would only be able to use cash if it obtains a cash collateral stipulation from the holders of the Outstanding Notes or if the Company obtains an order of the Bankruptcy Court. The Company does not currently have any arrangement with the holders of the Outstanding Notes regarding the use of cash collateral in any bankruptcy case, other than a case commenced in connection with the Prepackaged Plan, and there can be no assurance that the Company would be able to obtain such a stipulation or court order. If the Company is forced to seek a Bankruptcy Court order authorizing the use of cash collateral, it would require, among other things, litigation regarding valuation of the Company's assets and the provision for adequate protection for the Outstanding Notes holders' interest in the collateral securing the Outstanding Notes. Failure to obtain a cash collateral agreement or court order permitting the use of cash collateral may result in a liquidation of the Company. CERTAIN CONSEQUENCES TO NON-VOTING HOLDERS OF COMMON SHARES If the Prepackaged Plan is confirmed, pursuant to the Reverse Stock Split, each 33.33 Outstanding Common Shares will be converted into one Common Share or, if the class of holders of Outstanding Common Shares rejects the Prepackaged Plan, the Outstanding Common Shares will be canceled, in each case, regardless of whether any particular holder of Outstanding Common Shares voted for the Prepackaged Plan. The effectiveness of the Reverse Stock Split will be conditioned, among other things, upon effectiveness of the Prepackaged Plan. On the Effective Date, the Company will file the Amended and Restated Declaration of Trust effecting certain changes to the Company's current Declaration of Trust of the Company as amended through February 17, 1993 (the "Declaration of Trust"), including the Reverse Stock Split, with the State Department of Assessments and Taxation of Maryland. MATERIAL DILUTION OF COMMON EQUITY Pursuant to the Prepackaged Plan, a large number of New Common Shares will be issued to holders of Outstanding Notes. Such issuance will result in a substantial dilution of the equity ownership of the holders of Outstanding Common Shares. Assuming the class of holders of Outstanding Common Shares votes to accept the Prepackaged Plan, the equity ownership of such holders will be reduced from 100% to 3% after the Restructuring. If the class of holders of Outstanding Common Shares does not vote to accept the Prepackaged Plan, all Outstanding Common Shares will be canceled and holders of Outstanding Common Shares will not receive or retain anything. RISKS RELATING TO THE PROJECTIONS The Company has prepared projections of the cash flows of its business following the Restructuring. The Projections (as hereinafter defined) were based on numerous assumptions with respect to industry performance, general business and economic conditions and other matters, such as interest rates, building occupancy and overall real estate prices and conditions, that are beyond the Company's control. The Projections are only estimates, and actual results may vary materially from the Projections. In addition, uncertainties that are inherent in the Projections increase for later years in the projection period due to the increased difficulty associated with forecasting levels of economic activity and corporate performance at more distant points in the future. Holders are cautioned not to place undue reliance on the projections. See "Financial Projections." RESTRICTED PAYMENTS The indenture governing the New Senior Notes will limit the Company's ability to declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of or in respect of any of its Common Shares or any preferred stock which may be issued by the Company, 24 other than such declaration and making of dividend payments that the Company deems necessary to preserve its status as a REIT, unless the Consolidated Net Worth (as defined in the New Senior Note Indenture (as hereinafter defined)) of the Company at the time of such payment and after giving effect thereto is at least $50 million; provided, however, that the Company shall in no event declare or make any such dividend payment or other distribution if a Default or Event of Default (collectively, as defined in the New Senior Note Indenture (as hereinafter defined)) has occurred and is continuing under the New Senior Note Indenture (as hereinafter defined) or purchase, redeem or otherwise acquire for value its Common Shares or any preferred stock of the Company, whether outstanding on the Effective Date or thereafter issued and outstanding, unless the Consolidated Net Worth (as hereinafter defined) of the Company at the time of such purchase, redemption or other acquisition and after giving effect thereto is at least $50 million; provided, however, that the Company shall in no event make any such purchase, redemption or other acquisition if a Default or Event of Default has occurred and is continuing. See "Description of New Senior Notes." To maintain the Company's REIT status under the Internal Revenue Code, the Company is required to distribute at least 95% of the Company's REIT taxable income, and certain other categories of income. However, the Company currently has substantial net operating loss carryforwards that will reduce the amount of distributions required under the Internal Revenue Code, to the extent available after giving effect to the limitations of section 382 of the Internal Revenue Code and the other effects of the Restructuring. See "Certain Federal Income Tax Consequences--REIT Status and Taxation of Company Under the Prepackaged Plan--Annual REIT Distribution Requirements." ABSENCE OF PUBLIC MARKET There is no existing market for the New Senior Notes and the Company cannot determine the value of these securities. The New Senior Notes will not be listed on any national or regional exchange. No appraisal or independent valuation of such securities has been sought. Consequently, there can be no assurance that an active trading market for these securities will develop and no assurance can be given as to the prices at which such securities might trade. In particular, there can be no assurance that the market price for the New Senior Notes will be at or near the face amount of the New Senior Notes. The market for "high yield" securities, such as the New Senior Notes, has been volatile and unpredictable, which has had an adverse effect on the liquidity and prices for such securities. The Outstanding Common Shares are currently listed and traded on the NYSE and the PSE. In a letter dated November 29, 1994, the NYSE notified the Company that in light of the Company's present financial condition as well as its intention to file a prepackaged plan of reorganization under Chapter 11 of the Bankruptcy Code, the NYSE is reviewing the continued listing of the Company. Although the Company is working with representatives of the NYSE to allow the Company to continue to be listed, there can be no assurance that the NYSE will not determine to commence a formal delisting action. If the Common Shares are delisted, the liquidity of the Common Shares and the price at which they may be resold would be adversely affected and there can be no assurance that the Common Shares will be eligible for listing on any other national or regional exchange or quotation on any market system. DELISTING OF THE COMMON SHARES FROM TRADING ON THE NYSE The Company has been informed by the NYSE that the Company's Common Shares no longer qualify for listing on the NYSE. In order for the Company to maintain the listing of its Common Shares on the NYSE, the Company must meet certain continued listing criteria, including without limitation, minimum levels with respect to (i) the number of shareholders and shareholdings (1,200 holders each owning 100 shares or more), (ii) the number of publicly-held shares (600,000), (iii) the aggregate market value of publicly-held shares ($5,000,000) and of all outstanding shares ($8,000,000), and (iv) minimum annual earnings (average of $600,000 per year for prior three years). On September 16, 1993, the NYSE notified the Company in writing that a review of the Company's annual financial results for the fiscal year ended September 30, 1992 and for the nine months ended June 30, 1993 indicated that the Company had fallen below the continued listing criteria for the aggregate market value of outstanding shares (less than $8,000,000) and average 25 earnings for the prior three years (less than $600,000 per year). On November 29, 1994, the NYSE notified the Company in writing that a review of the Company's annual financial results for the fiscal year ended September 30, 1994 indicated that the Company still fell below the continued listing criteria for the aggregate market value of outstanding shares (less than $8,000,000) and average earnings for the prior three years (less than $600,000 per year), and that the Company had fallen below the continued listing criteria for the aggregate market value of publicly-held shares ($5,000,000). Also, the NYSE advised the Company that it would normally give consideration to delisting the securities of a company when an intent to file under any of the sections of the bankruptcy law has been announced. The NYSE indicated in its letter of November 29, 1994 that consideration is being given to the appropriateness of continued listing of the Common Shares. Management of the Company provided the NYSE with information to support a recommendation for the continued listing of the Common Shares on the NYSE and is awaiting a response from the NYSE. To date, to the Company's knowledge, the NYSE has taken no affirmative action to delist the Common Shares, but has reserved the right to do so in the future. If the Common Shares are delisted from the NYSE, (i) there can be no assurances that a public market will continue to exist for the Common Shares, (ii) the Company may be unable to obtain news coverage, have greater difficulty in obtaining financing, suffer a significant decline in the market value of its Common Shares, and (iii) shareholders of the Company may subsequently have difficulty in selling their Common Shares should they desire to do so. RELEASES In consideration for the distributions to be made under the Prepackaged Plan and the releases provided for therein, and in order to protect the Reorganized Debtor from Claims for contribution or indemnity relating to pre-Effective Date acts or omissions, as of the Effective Date, (i) the Creditors' Committee, each holder of a Claim or Interest, and each of the officers, directors, employees, members and professionals of such committee or holder, shall be released to the extent permitted by applicable law from any Released Claims that the Company may have against any of them (the "Debtor Release"), (ii) the Company, the Reorganized Debtor, the Creditors' Committee, the Principal Holders and their respective officers, directors, employees, members and professionals (collectively, the "Debtor Releasees") shall be released to the extent permitted by applicable law from any Released Claims that any holder of a Claim or Interest may have against any of the Debtor Releasees, and (iii) the Debtor Releasees shall be released to the extent permitted by applicable law from any and all actions, causes of action, claims, liabilities, demands and obligations of any kind or nature whatsoever that the Company, the Reorganized Debtor, the Company's Estate (as hereinafter defined) or any holder of a Claim or Interest may have against any of the Debtor Releasees that is based upon or that arises out of any alleged act or omission by any of the Debtor Releasees that is related to the Company, including, without limitation, the Reorganization Case, the Outstanding Notes, the Outstanding Collateral Agreement (as hereinafter defined), the Prior Plan (as hereinafter defined), the Outstanding Common Shares, the Outstanding Stock Rights (as hereinafter defined) or any of the Claims or Interests in the Reorganization Case and any Claims under the federal securities laws, provided, however, such release shall not apply to Excluded Claims (as hereinafter defined) against the Company (the release described in subparagraphs (ii) and (iii) above is hereinafter referred to as the "Creditor/Shareholder Release") and no holder of a Claim shall be released until such Claim is allowed. FEDERAL INCOME TAX CONSIDERATIONS The Company will continue to elect to be taxed as a REIT under the Internal Revenue Code, and the Company intends to continue to operate in such a manner as to continue to qualify for taxation as a REIT under the relevant sections of the Internal Revenue Code following the consummation of the Prepackaged Plan. There can be no assurance, however, that the Internal Revenue Service could not successfully take the position at some future time that the Company no longer qualifies for taxation as a REIT. As long as the Company continues to qualify to be taxed as a REIT, it generally will not be subject to federal corporate income taxes on the portion of its ordinary income or capital gains that is currently distributed to its shareholders. In the event the Company were to no longer qualify for REIT taxation, it would be subject to federal income tax on its income (including capital gains). 26 As a result of the Prepackaged Plan, the Company's aggregate outstanding indebtedness will be reduced, causing the Company to realize COD income. The Company will not be required to include such COD income in its taxable income because the COD income will be realized pursuant to the Prepackaged Plan. Instead, the Company will be required to reduce its tax attributes, including its net operating loss carryovers, by the amount of the COD income realized pursuant to the Prepackaged Plan. The Company's federal income tax returns reflect significant net operating loss carryovers; those net operating loss carryovers will be reduced, as discussed above, by the Company's COD income. The Company's future use of its remaining net operating loss carryovers also will be limited by the application of Internal Revenue Code section 382 because the Prepackaged Plan will cause the Company to undergo an "ownership change." Subject to the Internal Revenue Code section 382 limitations, the Company may generally elect to use its net operating loss carryovers to reduce its REIT taxable income, thereby reducing the amount of its required dividend distributions to the Company's shareholders. See "Certain Federal Income Tax Consequences" for a more complete discussion of certain federal income tax consequences pursuant to the Prepackaged Plan. 27 THE PREPACKAGED PLAN A copy of the Prepackaged Plan is included in this Disclosure Statement as Annex A. The following summary of the material provisions of the Prepackaged Plan is qualified in its entirety by reference to all of the provisions of the Prepackaged Plan, including the definitions therein of certain terms used below. BACKGROUND OF THE RESTRUCTURING Previous Chapter 11 Reorganization. On April 12, 1990, the Company filed a voluntary petition for reorganization under Chapter 11 in the Bankruptcy Court. Following the Chapter 11 filing, the United States Trustee appointed the Creditors' Committee and the Equity Committee. On November 21, 1990, the 1991 Plan proposed by the Company, the Creditors' Committee and the Equity Committee was filed with the Bankruptcy Court. On February 27, 1991, the Bankruptcy Court confirmed the 1991 Plan. The 1991 Plan provided that the holders of the Company's outstanding debt would receive installment payments through June 30, 1995, subject to the right of the Company to defer payment of certain amounts for up to 24 months or until December 31, 1995, when all deferred payments would be due. Interest was payable initially at the reference rate of Bank of America plus one percent, increasing by 0.25% every six months (the "Adjusted Rate"), with interest on deferred amounts accruing at the Adjusted Rate plus two percent. The 1991 Plan also included certain financial, affirmative and negative covenants. The forecast on which the 1991 Plan was based assumed that real estate markets would begin to improve in fiscal 1992. However, the markets continued to deteriorate significantly and the Company was in danger of imminent default. Despite these conditions, the Company was able to make all required interest payments and to exceed the required amortization payments, reducing its debt to $329 million by January 3, 1992, primarily by liquidating Company assets at substantial discounts from their acquisition cost. Due to the continued deterioration of real estate markets, however, the Company could not meet a required amortization payment on June 30, 1992, which required the Company to reduce its debt to $291,250,000, taking into account deferrals permitted under the 1991 Plan. The Company was also unable to meet the financial covenants of the 1991 Plan. By 1992, the Company had redirected its focus to adjust its operations to then-prevailing market conditions. Management focused efforts on generating sufficient liquidity through active, asset-specific management of the Company's asset portfolio to meet payments required by the 1991 Plan, while at the same time attempting to maximize shareholder value. The Company also attempted to raise cash through structured financings such as asset securitizations, but was unable to complete any financing transactions. Despite such efforts, in light of the impending June 30, 1992 interest and principal payments, which aggregated, approximately $44.4 million under the 1991 Plan, and the continued stagnation in the real estate market in late 1991 and early 1992, the Company elected to defer a portion of the principal payment and limit future interest payments in the hope that United States real estate markets would improve sufficiently to enable the Company to meet its debt service requirements. This was accomplished by the 1992 Restructuring. See "--The 1992 Restructuring" below. The 1992 Restructuring. Commencing in the first quarter of fiscal 1992, the Company and the Creditors' Committee discussed a rescheduling of the Company's debt obligations under the 1991 Plan. Through the third quarter of fiscal 1992, the Company negotiated with the Creditors' Committee to develop a prudent rescheduling of such debt. On June 15, 1992, the Company commenced a Solicitation of acceptances to certain modifications (the "1992 Modifications") to the debt obligations of the Company. On July 15, 1992, the Company completed the 1992 Restructuring. Pursuant to the 1992 Restructuring, the outstanding debt was restructured through the issuance of the Outstanding Notes. The 1992 Restructuring, among other things, (i) increased the amount of principal that could be deferred (while retaining the final payment date due for deferred payments at December 31, 1995), 28 (ii) extended the permitted repayment period of such deferred amounts from 24 months to 30 months from the date a deferral is utilized, (iii) established a limit on the maximum rate of interest to be paid in cash on a current basis at 9% through June 30, 1994, with any excess interest being accrued and paid at December 31, 1995, (iv) changed certain required financial covenants to reflect the then-existing financial condition of the Company and then-existing real estate market conditions, (v) provided for the release of collateral for certain financings by the Company upon approval of the holders of 66 2/3% of the Outstanding Notes, and (vi) provided for the payment of additional consideration to the holders of the Outstanding Notes equal to one percent of the principal amount of the Outstanding Notes, payable in four semi-annual installments commencing on the date the 1992 Restructuring became effective. Pursuant to the 1992 Restructuring, the Company (i) entered into an indenture providing for the issuance of the Outstanding Notes (the "Outstanding Note Indenture") with Wilmington Trust Company, as trustee (the "Outstanding Note Trustee"), (ii) entered into a second amendment to the Collateral and Security Agreement dated as of February 21, 1991 (as amended, the "Outstanding Collateral Agreement"), and (iii) amended the 1991 Plan (as amended pursuant to the 1992 Restructuring, the "Prior Plan"). The Outstanding Notes. The aggregate principal amount of the Outstanding Notes is $290 million. The Outstanding Notes provide for semi-annual payments of principal on June 30 and December 31 of each year until June 30, 1995, when all undeferred principal is due. The Company has the right to defer certain principal payments for up to 30 months, until December 31, 1995, at which time all deferred amounts are due. The Outstanding Notes provide for interest payments on March 31, June 30, September 30 and December 31 of each year. The interest rate on the Outstanding Notes is determined on the same basis as under the 1991 Plan. The interest rate on the Outstanding Notes as of January 1, 1995 was the Adjusted Rate (13.0%) with the next six-month increase occurring on July 1, 1995. Interest on deferred principal is payable at the Adjusted Rate plus two percent. The Outstanding Note Indenture also contains certain financial, affirmative and negative covenants. For a more detailed description of the Outstanding Notes, see "Description of Outstanding Notes." Current Defaults. The financial projections on which the 1992 Restructuring was based assumed that the real estate markets would stop or slow their decline by 1993 and show some improvement in 1994. Instead, since the effective date of the 1992 Restructuring, the real estate markets have failed to improve in any significant way. The Company's business operations, including its ongoing efforts to refinance and sell property, have not generated cash flow sufficient to service the Outstanding Notes during the fiscal years ended September 30, 1993 and 1994. Because its operating income had declined due to the continued deterioration of the real estate markets, the Company was not able to make a required $20 million principal payment on June 30, 1993. The Company's failure to make that payment constituted an event of default under the Outstanding Note Indenture. In addition, the Company failed to meet certain ratios set forth in the financial covenants in the Outstanding Note Indenture as of March 31, June 30 and September 30, 1993, which constituted additional events of default. Beginning with the payments due on December 31, 1993, the Company suspended all payments due in respect of the Outstanding Notes. By March 31, 1995, the Company had defaulted in the payment of $152.6 million of principal and $51.3 million in interest. The Company currently has no agreement with any holders of Outstanding Notes that suspends its obligations to pay interest, principal or other amounts due in respect of the Outstanding Notes. Because the Company did not make the required payments during the period from June 30, 1993 through March 31, 1995, as of March 31, 1995, the Company held approximately $70.7 million in available cash. Pursuant to the Agreement of Understanding, on April 11, 1995, the Company paid $25.0 million in accrued interest on the Outstanding Notes, with such payment to be credited against the cash payment of at least $50.0 million to be made to the holders of the Outstanding Notes pursuant to the Prepackaged Plan. The Company does not currently plan to make any further principal or interest payments in respect of the Outstanding Notes prior to the Effective Date. 29 Notwithstanding the uncured events of default under the Outstanding Note Indenture, the Outstanding Notes have not been accelerated. On July 2, 1993, holders of approximately 81% of the Outstanding Notes agreed not to accelerate the Outstanding Notes during a defined standstill period (the "Standstill Period") initially expiring July 31, 1993. The Standstill Period was extended on August 3, August 20, September 23, October 5 and November 23, 1993. On December 3, 1993, the Standstill Period expired. On or about December 8, 1993, the Outstanding Note Trustee and the collateral agent under the Outstanding Collateral Agreement (the "Outstanding Collateral Agent") notified the Company's bank of the existence of the Outstanding Note Trustee's security interest in the Company's deposit accounts and instructed the bank to freeze the Company's cash until otherwise instructed by the Outstanding Note Trustee. Since that date, the Company has administered its cash on an ad hoc basis, with all use of cash subject to review and approval by the Outstanding Note Trustee. On or about February 3, 1994, the Company, the Outstanding Note Trustee and the Outstanding Collateral Agent reached a further understanding regarding the Company's use of cash and administration of its assets in the absence of a new or extended Standstill Period. Pursuant to the understanding, which is terminable at will by the Outstanding Note Trustee or the Outstanding Collateral Agent without the consent of the holders of the Outstanding Notes, the Company has been permitted to continue to use its cash on an ad hoc basis, subject to Outstanding Note Trustee and Outstanding Collateral Agent approval, and to administer its assets as if no default had occurred and was continuing. In May 1994, the Company's bank notified the Company that it intended to close all of the Company's operating accounts with the bank on May 31, 1994. Consequently, the Company established new operating accounts at Wilmington Trust Company and transferred all of its bank balances to such accounts. Concurrently, the Company and the Outstanding Note Trustee entered into a First Supplemental Indenture, dated as of May 25, 1994, amending the Outstanding Note Indenture to provide for the new accounts. The Company also entered into a Deposit Account Security Agreement relating to such accounts and supplemented the February operating arrangement with the Outstanding Note Trustee and the Outstanding Collateral Agent to provide for the new accounts. Although the Company has entered into the First Supplemental Indenture and amended its operating arrangement with the Outstanding Note Trustee and the Outstanding Collateral Agent, there can be no assurance that the Outstanding Note Trustee or Outstanding Collateral Agent will not terminate the amended operating arrangement or take further or other remedial or enforcement action with respect to the Company's bank accounts or other properties, including acceleration of the Outstanding Notes and foreclosure. In the event of such an acceleration and foreclosure, holders of Outstanding Notes might not receive cash or securities of the same value or having as favorable terms as under the Prepackaged Plan, and holders of Outstanding Common Shares might not receive or retain anything. Development of the Current Restructuring. During December 1992, it became apparent to the Company that the Company's projected cash flow would not be adequate to meet its debt obligations in the future. Thus, the Company began to consider possible restructuring options for its debt obligations. In considering possible restructuring options, the Company's goals were (i) to survive as a going concern and preserve the Company as a real estate investment vehicle so that the Company's shareholders could enjoy the benefits of an improved or stabilized real estate market, and (ii) to substantially deleverage the capital structure of the Company. In January 1993, the Company began the process of selecting a financial advisor to assist the Company in formulating the Restructuring. In late January and early February 1993, the Company's management interviewed several potential financial advisors. On February 11, 1993, the Company retained Houlihan Lokey to act as the Company's financial advisor in connection with the Restructuring. In February 1993, the Company contacted the Creditors' Committee to apprise it and the Creditors' Committee Advisors of the Company's forecasted difficulties. During that same month, the Company and Houlihan Lokey met with the Creditors' Committee and the Creditors' Committee Advisors to discuss the Company's condition and prospects. Thereafter, commencing in March 1993 and continuing through August 1993, the Company and the Creditors' Committee and the Creditors' Committee Advisors negotiated 30 regarding a restructuring of the Company. During that same time period, from time to time the Company and its counsel apprised the Equity Committee and its advisors of the status of negotiations regarding the restructuring efforts. While the Company was negotiating with the Creditors' Committee, the Company and Houlihan Lokey also met with several prospective investors and acquirors to discuss possible third-party investment in or sale of the Company. Although several potential third-party investors and acquirors were offered an opportunity to propose restructuring alternatives, only three Interested Groups made proposals to the Company and the Creditors' Committee. On April 8, 1993, the first Interested Group met with the Company's management and Houlihan Lokey to discuss a restructuring proposal that valued the Company at approximately $190 million. The Company believed this value to be too low to pursue. On May 20, 1993, the second Interested Group submitted a proposal to recapitalize the Company wherein the group would contribute cash and equity in exchange for a 20% ownership interest in the Company and an 80% ownership interest in a new partnership in which the second Interested Group would hold a 1% general partner interest and a 79% limited partner interest, while the Company would hold a 20% limited partner interest. On July 12, 1993, the second Interested Group submitted a second proposal that valued the Company at $220 million. This proposal contemplated the exchange of the Outstanding Notes for $120 million of new senior secured notes and new common stock of the reorganized Company in an amount to be negotiated with the Company's shareholders. On the following day, the third Interested Group submitted a proposal that valued the Company at $220 million. This proposal contemplated the purchase by the third Investor Group of 6 million newly issued shares of the reorganized Company's common stock for an aggregate purchase price of $60 million, subject to, among other things, the following conditions: (i) the obligations represented by the Outstanding Notes would be reduced to $100 million, such new debt to be represented by a new debenture with a market value of $100 million; (ii) the balance of the Company's creditor obligations and all outstanding shares of common stock would be exchanged for an aggregate of 12 million shares of the reorganized Company's common stock; (iii) the issuance of five-year options to purchase common stock of the reorganized Company sufficient to allow the third Interested Group's aggregate ownership to equal 51% of the reorganized Company's fully diluted equity; and (iv) the consummation of the foregoing transactions through a prepackaged plan of reorganization. After reviewing the terms of these proposals, the Creditors' Committee advised the Company that the offers were not acceptable because the Creditors' Committee did not believe that it was in the best interests of the Company's creditors to pursue such third-party participation. The Creditors' Committee's belief was based on its opinion that the proposals reflected valuations of the Company that were lower than the value placed on the Company by the Creditors' Committee and were substantially below the amount of the Outstanding Notes. As a result, the Company suspended the solicitation of potential third-party investors or acquirors. During April, May and June 1993, Houlihan Lokey made numerous presentations to the Creditors' Committee designed to focus the Creditors' Committee on restructuring proposals that would be consistent with the Company's restructuring goals. After each presentation, however, the Creditors' Committee, a majority in interest of which was comprised of institutional lenders, indicated only that it would review and analyze the materials presented by Houlihan Lokey in determining its negotiating position regarding a restructuring. On April 8, 1993, Houlihan Lokey made a presentation to the Creditors' Committee that included (i) an overview of the REIT industry that set forth a performance survey of secondary offerings, dividend yields for predominantly mortgage and equity REITs during the period between February 14, 1992 and April 2, 1993, 31 the historic average annual total returns for equity, mortgage and hybrid REITs, and a comparison of leverage within the REIT industry, (ii) an overview of the Company that included a description of the Company's investment portfolio and summaries of the Company's loan collateral and equity properties by type, and (iii) an overview of the Company's investment portfolio sorted by investment number, loan and book balance, state and investment type. On May 13, 1993, Houlihan Lokey made a presentation to the Creditors' Committee that included (i) a discussion regarding the Company's objective to effect a consensual financial restructuring of the Company that maximizes value for all constituents and the alternative general financing and monetization structures available to achieve the Company's objective, (ii) a financial overview of the Company that set forth a consolidated cash flow projection and reviews of the Company's portfolio by property type, asset classification, and geographic location, (iii) a preliminary portfolio and enterprise valuation by asset grade, (iv) an overview of capital markets for REITs that set forth performance surveys for initial public offerings and secondary offerings, (v) a REIT industry analysis that set forth an overview of dividend yields, and (vi) an overview of two possible internal restructuring scenarios where the Outstanding Notes would be exchanged for either common stock or common stock and new notes. On June 14, 1993, Houlihan Lokey made a presentation to the Creditors' Committee that included (i) the status of discussions with potential third- party investors and acquirors, (ii) an analysis of the second Interested Group's proposal, (iii) a discussion regarding whether the capital markets would embrace the Company's equity, (iv) a discussion regarding general issues related to creditors' "desired" debt load, and (v) an internal restructuring term sheet proposed by the Company that contemplated an exchange of the Outstanding Notes for $100 million in new senior secured notes, $35 million in new subordinated notes and 80% of the common stock of the reorganized Company. On June 24, 1993, Houlihan Lokey made a presentation to the Creditors' Committee that included (i) an occupancy analysis that set forth the current and projected occupancy levels for all loan and equity properties for the years 1993 through 1997, (ii) an internal restructuring summary term sheet proposed by the Company pursuant to which the Outstanding Notes would be exchanged for $100 million of new senior secured notes, up to $100 million in 4% perpetual preferred stock, and 75% to 87.5% of the common stock of the reorganized Company, and (iii) a cash flow model for the internal restructuring summary term sheet that included a financial restructuring summary, a summary balance sheet, a summary income statement and a summary cash flow statement. In early August 1993, the Equity Committee's financial advisor, Price Waterhouse LLP (the "Equity Committee's Advisor"), commenced a preliminary review of the valuation analysis performed by Houlihan Lokey. In connection therewith, beginning in August 1993 and continuing throughout the course of negotiations, the Company and Houlihan Lokey provided the Equity Committee's Advisor with, among other things, (i) a financial overview of the Company and its investment portfolio, (ii) an overview and analysis of the REIT industry and the capital markets for REITs, (iii) overviews of possible internal restructuring proposals, (iv) summaries and analyses of restructuring proposals submitted by third-party investors, (v) due diligence books, prepared by Houlihan Lokey, that were provided to prospective third-party investors which included property and collateral descriptions, cash flow forecasts, lease summaries, photographs of property, historical operating statements and consolidated Company cash flow forecasts, (vi) narrative written summaries for each asset that reviewed the initial funding date, current book value, interest rate terms (if applicable), description and location of collateral or equity investment, leasing and property management information, latest available leasing summaries, five-year cash flow projections, latest appraisals (if conducted), summary and actual operating statements of collateral or equity investment and photographs of property, and (vii) other analyses as requested by the Equity Committee's Advisor. On or about August 10, 1993, after extensive negotiations, the Company and the Creditors' Committee agreed to the broad outlines of a proposed restructuring, subject to approval by the Board of Trustees. Pursuant to the terms of the restructuring proposal, the Outstanding Notes would be exchanged for 32 approximately $195 million of new senior secured notes and common stock representing approximately 85% of the equity of the reorganized Company. The restructuring proposal anticipated that the new notes would be issued in two series: $120 million of 7% notes maturing in 2003 with scheduled annual principal amortization, and approximately $75 million in additional notes payable principally from available cash flow. In addition, the restructuring proposal provided for the payment by the Company on September 30, 1993, of all outstanding restructuring fees relating to the 1992 Restructuring and the interest due on the Outstanding Notes, with interest to accrue thereafter on the Outstanding Notes at 7%. Interest accruing through March 31, 1994, would be added to the principal of the new cash flow notes and any interest accruing after March 31, 1994, would be paid at closing. Although existing holders of the Company's Outstanding Common Shares would have retained 15% of the equity of the restructured Company under this restructuring proposal, the Company's remaining debt level under this proposal would have been greater than the debt levels thought desirable by the Company. Moreover, the amortization schedule, required cash sweeps and restrictions on dividends and other payments to shareholders would have essentially required an orderly liquidation of the Company. At a meeting of the Board of Trustees held on August 18, 1993, the Board of Trustees unanimously agreed to pursue the 1993 Agreement in Principle set forth in the August Term Sheet, subject to a number of conditions including, among other things, the receipt by the Company of written indications of support from members of the Creditors' Committee and additional holders of sufficient Outstanding Notes to effect the restructuring through either a prepackaged or prearranged plan of reorganization under Chapter 11. Upon the approval of the terms of the 1993 Agreement in Principle, on August 19, 1993, the Company announced that it had reached a non-binding conditional agreement in principle with the Creditors' Committee to restructure the indebtedness represented by the Outstanding Notes. The Company also announced that the standstill arrangement with its creditors (which had expired on August 16, 1993) had been extended conditionally to September 16, 1993. After the terms of the 1993 Agreement in Principle were announced, trading in the Outstanding Notes increased substantially. By December 1993, in excess of 50% of the principal amount of the Outstanding Notes had traded. Included in the Outstanding Notes initially traded were all of the Outstanding Notes held by two members of the Creditors' Committee who had not been in favor of the 1993 Agreement in Principle. Consequently, these two members no longer held any claims against the Company and resigned from the Creditors' Committee. In early September 1993, the Principal Holders requested to be named to the Creditors' Committee and receive financial and operating information relating to the Company. On September 21, 1993, the Creditors' Committee met with the Principal Holders to discuss the restructuring of the Company and the Principal Holders' request to become members of the Creditors' Committee. As a result of that meeting, the three then-remaining members of the Creditors' Committee did not grant committee membership to the Principal Holders but acquiesced in the Company's delivery of confidential information to the Principal Holders. Thus, on September 21, 1993, the Principal Holders signed confidentiality agreements with the Company and commenced a due diligence review of financial and other information regarding the Company. By October 22, 1993, the Equity Committee's Advisors had completed their preliminary review of Houlihan Lokey's valuation analysis. As a result of its review, the Equity Committee decided a more detailed analysis of Houlihan Lokey's valuation was required. The Equity Committee's Advisor believed that Houlihan Lokey's valuation may have undervalued the Company's assets because (i) Houlihan Lokey used discount and capitalization rates that allegedly were higher than industry norms, and (ii) its discounted consolidated cash flow analysis allegedly underestimated the time value of potential cash flows to investors in years one through five. Thus, at the Equity Committee's request, the Equity Committee's Advisor commenced its own valuation of the Company based upon a limited review of ten of the Company's larger properties. In connection therewith, the Company agreed to pay certain fees and costs of the Equity Committee's Advisor's valuation. 33 In November 1993, the Principal Holders retained the Principal Holders' Advisor to evaluate the alternatives available to the Company's creditors, analyze the cash flows and values of the Company's portfolio, participate in talks with the Company and its creditors and evaluate the proposals submitted by the Interested Groups. In connection with such engagement, the Company agreed to pay the Principal Holders' Advisor's fees, which were expected to be at least $300,000. On November 3, 1993, the Principal Holders' Advisor signed a confidentiality agreement with the Company and commenced a review of the Company's assets. By November 1993, one of the three remaining members of the Creditors' Committee had sold all of its Outstanding Notes, part to one of the other Creditors' Committee members and the balance to other persons. These sales left the Creditors' Committee with two members, one of whom was the Major Holder who held in excess of 33 1/3% of the Outstanding Notes. By the end of November 1993, the Company had still not received written indications of support for the 1993 Agreement in Principle from any holders of Outstanding Notes. Thereafter, the Company suspended all actions to implement the terms of the 1993 Agreement in Principle and resumed responding to inquiries from third parties regarding participation in a restructuring of the Company. In early December 1993, the Principal Holders' Advisor presented an oral analysis that included a valuation of the Company at approximately $230 million, an amount below the values thought reasonable at the time by the Company and the two remaining members of the Creditors' Committee. The Company was not provided with any written report or analysis by the Principal Holders' Advisors. Throughout December 1993 and January 1994, the Company attempted to bridge the gap in valuations placed on the Company by the various creditor groups, but was ultimately unsuccessful. On December 3, 1993, representatives from the Principal Holders, the Principal Holders' Advisor, the Major Holder and legal counsel for the Creditors' Committee met to discuss the possible options for the restructuring of the Company's debt obligations. The Major Holder favored a restructuring under which the Company would maintain a substantial amount of debt. The Principal Holders, on the other hand, favored a restructuring under which the Company would be substantially deleveraged. The meeting ended without resolving the differences in the respective restructuring approaches favored by the Major Holder and the Principal Holders. Subsequent to that meeting, the Major Holder decided that it wanted the Company to file a voluntary petition for bankruptcy by the end of the year in order to prevent an alleged loss of tax benefits arising from the Company's net operating losses (the "NOLs"). The Company disagreed with the Major Holder and rejected the Major Holder's demand that it file a voluntary bankruptcy petition. Thus, the Major Holder attempted to force a Chapter 11 filing by, among other things, demanding that the Outstanding Collateral Agent take action to preserve and protect the collateral securing the Company's debt, and suggesting that the Outstanding Collateral Agent freeze the Company's bank accounts. Consequently, on or about December 8, 1993, the Outstanding Note Trustee and the Outstanding Collateral Agent took action to freeze the Company's accounts at the Company's bank by notifying the Company's bank of the existence of the Outstanding Note Trustee's security interest in the Company's deposit accounts at the bank and instructed the bank to freeze the Company's cash until otherwise instructed by the Outstanding Note Trustee. Since that date, the Company has administered its cash on an ad hoc basis, with all use of cash subject to review and approval by the Outstanding Note Trustee. On or about February 3, 1994, the Company, the Outstanding Note Trustee and the Outstanding Collateral Agent reached a further understanding regarding the Company's use of cash and administration of its assets in the absence of a new or extended Standstill Period. Pursuant to the understanding, which is terminable at will by the Outstanding Note Trustee or the Outstanding Collateral Agent without the consent of the holders of the Outstanding Notes, the Company has been permitted to continue to use its cash on an ad hoc basis, subject to Outstanding Note Trustee and Outstanding Collateral Agent approval, and to administer its assets as if no default had occurred and was continuing. See "The Prepackaged Plan--Background of the Restructuring--Current Defaults." 34 At a special meeting of the Board of Trustees held on December 9, 1993, Houlihan Lokey reported that the Major Holder and the Principal Holders currently had many irreconcilable differences as to how the restructuring of the Company should be handled. Houlihan Lokey then outlined the different positions being taken by the Major Holder and the Principal Holders. Furthermore, Mr. Strong, the Company's Chief Executive Officer, reported that the restructuring efforts were in turmoil and that a meeting had been scheduled for December 13, 1993, to get things "back on track." He further stated that at the meeting, it was the Company's intent to try to convince the Major Holder and the Principal Holders to agree to some kind of compromise so that the Company could continue to operate its business while a consensual restructuring was being pursued. At the meeting on December 13, 1993, the Major Holder submitted a restructuring proposal that, among other things, provided that the Outstanding Notes would be exchanged for more than $140 million in new senior secured notes and 100% of the common stock of the reorganized Company, and the Company's existing shareholders would receive warrants to purchase common stock of the reorganized Company. At a meeting of the Board of Trustees held on December 15, 1993, Houlihan Lokey and the Company's legal counsel, Milbank, Tweed, Hadley & McCloy ("Milbank") reported on the results of the meeting with the creditors and other interested parties held on December 13, 1993, and reviewed the provisions of a draft term sheet, dated December 14, 1993, prepared by the Company based on the terms and conditions of the Major Holder's December 13, 1993 proposal. A lengthy discussion ensued as to the negotiating stance the Company might assume in connection with the various provisions of the term sheet in order to preserve those concepts in the Major Holder's proposal that the Company considered to be most important to the Company and its shareholders, such as reducing the Company's debt level and the participation by the existing shareholders in the equity of the reorganized Company. The trustees also noted that their approval would be required on any agreement reached as a result of any negotiations regarding the draft term sheet. During this time period while the Company was attempting to restructure its obligations, the Company continued to operate, even though it was in default, due to the lack of foreclosure action by the Outstanding Note Trustee. The Outstanding Note Trustee failed to foreclose because it was receiving conflicting orders from the Major Holder and the Principal Holders, who could not agree on the capital structure of the Company to be attained by a restructuring. At a meeting of the Board of Trustees held on January 10, 1994, Milbank reported that the creditors were still split primarily into two camps: the Principal Holders, who preferred a substantially deleveraged Company, and the Major Holder, who preferred substantial levels of senior debt. At a meeting of the Board of Trustees held on February 9, 1994, Mr. Strong reported that nothing had changed regarding the impasse between the Major Holder and the Principal Holders with respect to the financial restructuring, and that the only progress made was that the two groups had met on several occasions. Throughout the second and third quarters of fiscal 1994, the Company's management and advisors continued discussions with the Major Holder and the Principal Holders (who, as of March 31, 1994, held 32.9% of the Outstanding Notes) and their representatives to explore various alternatives for restructuring the Outstanding Notes that would resolve the impasse between the Major Holder and the Principal Holders. In March 1994, the Principal Holders requested that the Company agree to pay certain fees and expenses of legal counsel to the Principal Holders. The Company agreed and, on or about March 17, 1994, the Principal Holders retained O'Melveny & Myers to act as their legal counsel in connection with any proposed restructuring. At a meeting of the Board of Trustees held on April 20, 1994, the Board of Trustees considered (i) the April 1994 Proposal, which was based on a court- approved valuation of the Company (assumed to be $230 million) and provided that (a) the Bankruptcy Court would determine the value of the Company, (b) holders of the Outstanding Notes would receive new senior secured notes convertible to common stock of the reorganized Company in an aggregate principal amount equal to the court-approved value of the Company, 35 (c) the remaining principal amount of the Outstanding Notes would become unsecured claims, (d) the holders of unsecured claims would receive nothing, (e) the existing Common Shares would be cancelled, and (f) the Principal Holders would enter into a sharing agreement with the existing shareholders pursuant to which the Principal Holders would convert their new senior secured notes into shares representing 100% of the common stock and give 4% of such stock to the existing shareholders, (ii) a restructuring term sheet, dated April 11, 1994, proposed by the Major Holder, under which the Major Holder's Outstanding Notes would be exchanged for approximately $99.4 million of new senior secured notes (which would enjoy the benefit of restricted covenants that would prevent the distribution of cash to shareholders until such notes have been repaid) and all other holders' Outstanding Notes would be exchanged for 100% of the common stock of the reorganized Company, and the existing shareholders would receive warrants to purchase new common shares representing, in the aggregate, 6% of the fully diluted common stock of the reorganized Company, (iii) an analysis of the two term sheets, dated April 19, 1994, prepared by Houlihan Lokey, that set forth, among other things, a summary of the terms of each proposal, a description of the assumptions used, and the potential recoveries and the value of the rights offered to participants under each proposal, and (iv) an updated asset valuation summary for the Company, dated March 2, 1994, prepared by Houlihan Lokey which valued the Company as of December 31, 1993 at $261 million to $317 million. Milbank then reported in considerable detail all of the events regarding the restructuring that had transpired since the last meeting on March 16, 1994. Thereafter, the Board of Trustees determined that Milbank and Houlihan Lokey should continue to negotiate with the creditors and attempt to reach an agreement on a restructuring based on the April 1994 Proposal proposed by the Principal Holders. On April 25, 1994, based upon a limited review of ten of the Company's properties by the Equity Committee's Advisor, the Equity Committee informed the Company that it believed that the Company's going concern value was no less than $312 million. In order to verify its preliminary conclusions, the Equity Committee sought authorization from the Company to have the Equity Committee's Advisor complete its analysis. The Equity Committee's Advisor, however, never provided the Company with a written valuation. The Equity Committee, however, did inform the Company that it believed that the Company's going concern value was approximately $330 million to $340 million. Neither the Equity Committee nor the Equity Committee's Advisor ever provided a written valuation or any supporting documentation or basis for its assertions regarding the value of the Company. On April 26, 1994, representatives of the Company, Houlihan Lokey, Milbank, the Major Holder, legal counsel for the Creditors' Committee, O'Melveny & Myers and the Principal Holders met to attempt to resolve the differences in the respective restructuring approaches of the Major Holder and the Principal Holders. During this meeting, the Principal Holders presented the April 1994 Proposal to the Major Holder. The Major Holder, however, would not agree to the Principal Holders' April 1994 Proposal because, among other things, the reorganized Company would not retain debt levels satisfactory to the Major Holder. At a meeting of the Board of Trustees held on May 18, 1994, Milbank and Houlihan Lokey reported on the status of the restructuring since the April 20, 1994 meeting. The Board of Trustees learned that the meeting of all concerned parties in late April produced no agreement whatsoever between the two creditor factions. The Board of Trustees then reviewed various scenarios which might be expected to evolve in light of this impasse and their associated risks, and reviewed the different valuations being placed on the Company by the various entities involved in the restructuring efforts. The Board of Trustees determined that the Company's advisers should continue their negotiations with the concerned parties to the restructuring and attempt to reach an agreement on a restructuring based on the April 1994 Proposal proposed by the Principal Holders. In May and June 1994, the Creditors' Committee, the Principal Holders and the Company had several contacts with the Equity Committee to attempt to reach agreement on a consensual plan to restructure the Company. Such attempts, however, proved unsuccessful because of the inability to agree upon the terms of a mutually acceptable restructuring. 36 In June 1994, the Principal Holders requested that the Company retain an additional valuation firm to perform a special purpose valuation of the Company. At a meeting of the Board of Trustees held on June 15, 1994, the Board of Trustees considered this request. The Board of Trustees agreed that if such an additional special purpose valuation might lead to the negotiation of a consensual agreement among the creditors and also result in fair treatment of the shareholders, it would be worth the additional expense. After further discussions with the Major Holder, the Principal Holders and their advisors, the Company agreed to retain Kenneth Leventhal, the firm specified by the Principal Holders, to perform an additional valuation analysis of the Company and to provide such valuation analysis to the Creditors' Committee, the Principal Holders and the Equity Committee. The Company agreed to retain Kenneth Leventhal because Kenneth Leventhal was familiar with the Company's portfolio as a result of a due diligence investigation undertaken in early 1993 on behalf of a potential equity investor, and also because of Kenneth Leventhal's expertise in the area of financial restructuring and real estate due diligence and valuation. Thus, on June 24, 1994, the Company retained Kenneth Leventhal to perform a special purpose valuation of the Company. See "Special Purpose Valuation Reports of Kenneth Leventhal" below. On or about August 5, 1994, the Creditors' Committee member that was not the Major Holder sold all of its Outstanding Notes to the Principal Holders and certain other persons. With this sale, the only remaining member of the Creditors' Committee was the Major Holder. On or about September 9, 1994, Milbank received telephonic notice from the Creditors' Committee's counsel that the Creditors' Committee had ceased to operate. On or about September 14, 1994, the Company's advisors, the Equity Committee's advisors and counsel to the Principal Holders met in a final attempt to negotiate the treatment of equity holders in the context of a prepackaged plan of reorganization based on the April 1994 Proposal. At this meeting, the Company and the Principal Holders outlined the terms of the April 1994 Proposal to the Equity Committee's advisors in order to determine whether the Equity Committee would accept 4% of the common stock of the reorganized Company. At the conclusion of the meeting, the Equity Committee's advisors agreed to recommend to the Equity Committee that it accept one of the following two proposals: (i) 5% of the common stock of the reorganized Company and 4-year warrants to purchase new common shares representing 7 1/2% of the common stock of the reorganized Company at a strike price per share reflecting a market capitalization of $190 million; or (ii) 4% of the common stock of the reorganized Company and 5.5-year warrants to purchase new common shares representing 10% of the common stock of the reorganized Company at a strike price per share reflecting a market capitalization of $160 million. In return, the Principal Holders' legal advisor agreed to discuss incorporating these proposals into the April 1994 Proposal with the Principal Holders. On October 4, 1994, Kenneth Leventhal produced its special purpose valuation report, which placed the Company's approximate going concern value as of July 1, 1994, between $255 million and $275 million. Because Kenneth Leventhal's report placed the Company's value higher than the $230 million value assumed by the April 1994 Proposal, the Principal Holders decided to abandon the April 1994 Proposal. Thus, the Company renewed its efforts to negotiate a deal with the Principal Holders that was acceptable to the Equity Committee. The Company, the Principal Holders and the Equity Committee, however, were unable to reach agreement on the terms of a restructuring because the Equity Committee wanted existing shareholders to receive more than 3% of the common stock of the reorganized Company, and the Principal Holders were unwilling to give a greater percentage because, under Kenneth Leventhal's special purpose valuation, the Company was insolvent and the existing equity was valueless. On or about October 27, 1994, the Major Holder and the Principal Holders submitted a proposal for a prepackaged restructuring of the Company. Pursuant to the proposal, the Company would retain all of its assets and have between $10 million and $15 million of cash following the restructuring. The Outstanding Notes would be exchanged for $110 million of new senior secured notes and 98% of the common stock of the reorganized Company. Common stock retained by the existing shareholders would represent 2% of the reorganized Company's common stock. Thereafter, the Company and Houlihan Lokey spent several weeks 37 negotiating with such holders regarding the proposed equity split between the holders of Outstanding Notes and the existing shareholders. The Company was extremely concerned that the holders of Outstanding Notes would attempt to and succeed in eliminating the interests of the existing shareholders. As a result, the Company believed that it was their duty to protect the existing shareholders from losing their entire economic stake. Thus, the Company immediately commenced negotiations with the Major Holder and the Principal Holders to provide a greater recovery to the existing shareholders than that offered under the October 27, 1994 proposal. The Equity Committee was not involved in these negotiations because the Major Holder and the Principal Holders believed that the Equity Committee's involvement at this point would have been futile based on the parties' prior inability to reach an agreement on the treatment of the existing shareholders in a restructuring. In November 1994, the Company reached the 1994 Agreement in Principle with the Major Holder and the Principal Holders. Pursuant to the 1994 Agreement in Principle, upon shareholder approval, pursuant to a prepackaged Chapter 11 reorganization, holders of the Outstanding Notes would receive (i) $110 million of new senior secured notes due 2002, (ii) approximately $50 million in cash, and (iii) common stock representing 97% of the common stock of the reorganized Company (or, if the Company's existing shareholders did not vote to accept the Prepackaged Plan, substantially all of the common stock of the reorganized Company). The existing shareholders would retain their shares, which would represent the remaining 3% of the reorganized Company's common stock, provided that they voted to accept the Prepackaged Plan. The holders of unsecured claims would receive cash in the allowed amount of their respective claims. At a meeting of the Board of Trustees held on November 16, 1994, the Board of Trustees, the Company's management, Milbank and Houlihan Lokey discussed (i) the terms and conditions of the proposed Restructuring, (ii) the discussions, negotiations and alternative proposals leading to the Restructuring proposal, (iii) the feasibility of the proposed Restructuring and its effect on the Company's cash flow, (iv) the other restructuring alternatives available to the Company, and (v) the fairness of the proposed Restructuring to the Company's shareholders and creditors. The Board of Trustees also considered management's internal analyses of the proposed Restructuring, which included a discussion of management's views regarding (i) the advantages and disadvantages of the proposed Restructuring and the alternative proposals leading to the proposed Restructuring, and (ii) the effect of both the proposed Restructuring and the prior alternative proposals on the Company, its creditors and its shareholders. After lengthy consideration and discussion of these matters, the Board of Trustees unanimously approved the Restructuring, subject to approval by it of the final documentation necessary to effect the Restructuring. See "Recommendation of the Board of Trustees" below. The Board of Trustees then authorized the Company's management to proceed with the steps necessary to effect the proposed Restructuring. On November 17, 1994, the Company announced that it had reached the 1994 Agreement in Principle with the Major Holder and the Principal Holders to restructure the indebtedness represented by the Outstanding Notes. In connection therewith, the Company issued a press release describing the material terms of the Restructuring. On the following day, representatives of the Equity Committee advised the Company that the Equity Committee could not make a recommendation to the Company's shareholders with respect to the proposed Restructuring until the Company supplied the Equity Committee with the Company's cash flow projections, assumptions and current financial information. On November 21, 1994, the Company supplied the Equity Committee with the requested information. On November 22, 1994, the Equity Committee filed a "Notice of Dissolution of Equity Committee" (the "Notice") in the Bankruptcy Court wherein the Equity Committee stated that it had dissolved, effective as of the close of business on November 22, 1994. The Notice stated that the Equity Committee had dissolved because, among other things, (i) the Company had allegedly reached its agreement in principle without any discussion or input from the Equity Committee or its advisors, (ii) the Company had allegedly refused to supply adequate information to the Equity Committee and its advisors, including, but not limited to, cash flow projections, assumptions and financial information with respect to the 38 Company and each of its specific project holdings, (iii) the Company and its advisors had allegedly refused to discuss the Company's cash flow projections, assumptions and financial information with the Equity Committee, and (iv) the Equity Committee, due to its alleged lack of information, was unable to conclude that the proposed Restructuring was fair or equitable to the Company's shareholders. On November 29, 1994, the Company informed the Equity Committee that the Company disagreed with many of the purported factual statements contained in the Notice and that the Company believed that the Notice was misleading. Subsequent Developments. On March 15, 1995, the Major Holder sold all of its Outstanding Notes to the New Major Holder. This change in holdings of Outstanding Notes had no material effect on the terms of the previously negotiated 1994 Agreement in Principle among the Company, the Major Holder and the Principal Holders. In April 1995, the Company and the Principal Holders entered into the Agreement of Understanding pursuant to which the Company agreed to distribute to the holders of Outstanding Notes $25.0 million in cash prior to the Petition Date. Under this agreement, the Principal Holders (who hold in excess of 80% of the Outstanding Notes), among other things, agreed to vote when solicited in favor of the Prepackaged Plan. On April 11, 1995, the Company paid $25.0 million pursuant to the Agreement of Understanding, with such payment to be credited against the cash payment of at least $50.0 million to be made to the holders of the Outstanding Notes pursuant to the Prepackaged Plan. RECOMMENDATION OF THE BOARD OF TRUSTEES On November 16, 1994, the Company's Board of Trustees met to consider the proposed Restructuring. In connection therewith, the Board of Trustees heard presentations from the Company's management and the Company's financial and legal advisors describing the discussions, negotiations and alternative proposals leading to the Restructuring as described above. See also "--Reports of Houlihan Lokey as Financial Advisor to the Company" below. At the request of the Board of Trustees, the Company's management and financial advisors described the feasibility of the Restructuring and its effect on the Company's capital structure and its cash flow problems described above. In addition, the Board of Trustees discussed other restructuring alternatives available to the Company. After lengthy consideration and discussion of these matters, the Board of Trustees voted unanimously to approve in principle the terms of the Restructuring, subject to approval by the Board of Trustees of the final documentation required to implement the Restructuring and to confirm the Prepackaged Plan, and to authorize management to proceed with the steps necessary to effect the Restructuring. The Board of Trustees believes that the Restructuring is necessary to make it possible for the Company to satisfy its outstanding obligations, remain in business and provide the shareholders with the best opportunity to receive any value or recovery, having determined that the Restructuring is fair to the unaffiliated Holders of the Company's Outstanding Securities and other Claims and Interests. See "--Purposes of the Restructuring" below. THE COMPANY'S BOARD OF TRUSTEES HAS UNANIMOUSLY APPROVED THE RESTRUCTURING AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT ALL HOLDERS, INCLUDING HOLDERS OF OUTSTANDING COMMON SHARES, VOTE IN FAVOR OF THE RESTRUCTURING AND THE TRANSACTIONS CONTEMPLATED THEREBY. In evaluating the recommendation of the Board of Trustees, all Holders should consider carefully the factors described under "Special Factors and Certain Considerations," which include discussions regarding (i) the financial condition of the Company, including liquidity, (ii) the Company's continuing leverage, (iii) foreclosure and bankruptcy alternatives, (iv) the possible further decline of real estate markets, (v) disruption of the Company's business, (vi) considerations relating to the Prepackaged Plan, (vii) certain bankruptcy considerations if the Prepackaged Plan is not confirmed and the Restructuring is not otherwise consummated, (viii) certain consequences to non- voting holders of Common Shares, (ix) risks relating to the projections, (x) restrictions on payments, (xi) the absence of a public market, (xii) the risk of the NYSE delisting the Common Shares from trading, (xiii) the releases provided for by the Restructuring, and (xiv) certain federal income tax consequences of the Prepackaged Plan. 39 Approval by the Board of Trustees. In considering the Restructuring, the Board of Trustees considered, and have considered since November 1994, among other things, the factors set forth below. . The Board of Trustees' familiarity with the Company's business, operations and financial condition and its future prospects, including the financial difficulties facing the Company as a result of the shortfall in operating cash flow in fiscal 1993 and fiscal 1994 and forecasted shortfall for fiscal 1995 and beyond, and the inability of the Company to secure adequate financing for its ongoing operations as long as the Outstanding Notes remained outstanding. The Board of Trustees noted that without the Restructuring, the Company would be unable to service its outstanding obligations and could be forced to liquidate. . The fact that consummation of the Restructuring appeared to be the only viable way for the Company to deal with its outstanding obligations and continue to operate its business. . The Company's range of enterprise going concern value of $265 million to $285 million and range of liquidation value of $220 million to $260 million, based on the special purpose valuation reports of Kenneth Leventhal, are in each case substantially less than the Company's liabilities, which include, among other things, approximately $323 million of liabilities with respect to principal and accrued interest in respect of the Outstanding Notes. . The Board of Trustees' review of monthly reports on the status of the Restructuring, as presented by the Company's financial and legal advisors, as well as valuations of the Company reflected from time to time in the various proposals of the Interested Groups, the Major Holder and the Principal Holders. . Presentations by the Company's management and its legal advisors, each of whom reviewed various considerations with the Board of Trustees. In particular, the Board of Trustees noted that based on the valuations of the Company prepared by Houlihan Lokey, the special purpose valuations prepared by Kenneth Leventhal and management's internal analyses, foreclosure or a liquidation of the Company would yield a much smaller return to the holders of Claims and would leave nothing for the holders of the Outstanding Common Shares. Thus, a restructuring that resulted in a potential return to the holders of the Company's equity securities was determined to be superior to the real possibility that they would receive nothing in a foreclosure or liquidation. . Presentations by Houlihan Lokey and the results of discussions with other parties concerning proposals for the Restructuring and potential alternatives to the Restructuring. In particular, the Board of Trustees placed substantial weight on the tentative willingness of certain third parties to invest in the Company upon consummation of the Restructuring and the unwillingness of such investors to make a capital investment in the Company absent successful completion of the Restructuring in the form presented. . The historical and current market prices of the Company's Outstanding Common Shares, as well as the net book value of the Company's assets per share, both before giving effect to the Restructuring and on a pro forma basis after giving effect to the Restructuring, and when compared to a liquidation of the Company. . The fact that the Major Holder and the Principal Holders had retained separate financial and legal advisors, had negotiated at arm's-length with the Company and its financial and legal advisors after a review of the Company and its prospects, and had agreed upon the terms of the Restructuring in preference to a liquidation or other alternatives. Based on the foregoing, the Board of Trustees determined that the Restructuring was fair to the Holders and to recommend approval of all elements of the Restructuring. In view of the wide variety of factors considered by the Board of Trustees in connection with its evaluation of the Restructuring, the Board of Trustees did not find it practicable to quantify or otherwise 40 attempt to assign relative weights to the specific factors considered in making its determination, nor did it evaluate whether such factors were of equal weight. As a general matter, the Board of Trustees believes that the factors discussed above supported its decision to approve the Restructuring. SPECIAL PURPOSE VALUATION REPORTS OF KENNETH LEVENTHAL Engagement. In June 1994, Kenneth Leventhal was engaged to prepare a special purpose valuation of the Company and its investment portfolio in order to assist the Company and its various interested creditor parties in determining an appropriate basis for valuation of a potential restructuring transaction. Kenneth Leventhal is a nationally recognized firm of certified public accountants which has subsequently merged with Ernst & Young LLP. The Company selected Kenneth Leventhal to perform such special purpose valuation at the request of the Principal Holders and because of Kenneth Leventhal's qualifications, expertise and reputation in the area of financial restructuring and real estate due diligence and valuation. Also, Kenneth Leventhal was familiar with the Company's portfolio as a result of a comprehensive due diligence investigation of all assets in the Company's portfolio undertaken in early 1993 on behalf of a potential equity investor and for the use and benefit of such potential investor. As compensation for its services, the Company agreed to pay Kenneth Leventhal a fee of $2,000 per asset for which Kenneth Leventhal would perform a special purpose valuation or updated special purpose valuation, plus applicable out-of- pocket expenses and fees incurred by Kenneth Leventhal in connection with its engagement. Valuations of Company. On October 4, 1994, Kenneth Leventhal produced a report which placed the Company's going concern value as of July 1, 1994, between $255 million and $275 million and its liquidation value of between $210 million and $240 million. At the Company's request, in April and May 1995, Kenneth Leventhal updated its analysis using the same methodology it used to prepare its October 1994 report. On May 31, 1995, Kenneth Leventhal provided the Company with updated reports dated May 15, 1995 that placed the Company's going concern value as of March 31, 1995 between $265 million and $285 million and its liquidation value between $220 million and $260 million. Kenneth Leventhal's May 15, 1995 reports (the "Kenneth Leventhal Reports"), which set forth assumptions made, matters considered and limits on the review undertaken, are included as Annexes C and D to this Disclosure Statement. Kenneth Leventhal has granted its consent to the use of its reports included as Annexes C and D to this Disclosure Statement. The summary of the Kenneth Leventhal Reports herein is qualified in its entirety by reference to the full text of such reports and their respective exhibits. The special purpose valuations set forth in the Kenneth Leventhal Reports do not reflect the $25 million payment made on April 11, 1995 pursuant to the Agreement of Understanding. To assist Kenneth Leventhal, the Company provided it with certain data and information relative to the portfolio maintained by the Company. In preparing its valuations, Kenneth Leventhal relied upon the accuracy and completeness of the data and information provided to it by the Company and did not assume any responsibility for any independent verification of such information. The services provided by Kenneth Leventhal did not constitute independent asset appraisals. In relying on the data and information provided to it by the Company, Kenneth Leventhal assumed that such information was reasonably prepared based on assumptions reflecting the best currently available estimates and judgments by the Company's management as to the expected future results of operations and financial condition of the Company to which such analyses or forecasts relate. Kenneth Leventhal further relied upon the assurances of the Company's management that it is unaware of any facts that would make the information provided to Kenneth Leventhal incomplete or misleading. The Kenneth Leventhal reports were based on economic, monetary, market and other conditions as they existed and could be evaluated as of the respective dates of the Kenneth Leventhal reports. ALL HOLDERS, INCLUDING HOLDERS OF OUTSTANDING COMMON SHARES, ARE ENCOURAGED TO READ THE KENNETH LEVENTHAL REPORTS IN THEIR ENTIRETY. In preparing its reports, the Company instructed Kenneth Leventhal to determine the valuation of the Company's portfolio on a going concern basis. The assumptions utilized by the Company and reviewed by 41 Kenneth Leventhal included normal collection of amounts due on mortgage loans and cash flow from operating properties. To determine a going concern valuation, the assumptions were predicated on the orderly collection and selected disposal of assets over a period of several years. Moreover, Kenneth Leventhal's going concern valuation was not reflective of values which would result from a distressed sale, forced liquidation, or disposition of the portfolio in a bulk sale or any other accelerated manner. In addition to these specific portfolio valuation procedures, the Company further instructed Kenneth Leventhal to approximate a range of valuation for the total enterprise as of July 1, 1994, and later as of March 31, 1995, utilizing the Company's then-most recently available financial statements. In conducting its valuations, Kenneth Leventhal obtained selected publicly- available financial information prepared by the Company as of June 30, 1994, and later as of March 31, 1995. Utilizing this information, Kenneth Leventhal selected 26 assets representing mortgage loans, investments, in-substance foreclosure assets and real estate equities owned. The selection was divided between the west coast and east coast portfolios and generally represented the highest dollar values in the portfolios. In addition, the selection of assets included different asset classifications. Utilizing the portfolio so selected, Kenneth Leventhal, among other things, (i) obtained the most recent "Argus" (a property cashflow software package) property cashflow projections for the properties selected, (ii) obtained, where applicable, the most recent operating rent roll and other financial information relative to the assets selected, (iii) obtained the most recent appraisals, where applicable and available, (iv) obtained the previous Kenneth Leventhal analyses performed as of March 1993 and July 1994, (v) discussed the current status with the respective asset manager to determine loan status, property characteristics, current occupancy, existing market rental rates, new leases, current payoff discussions and asset sales, (vi) reviewed limited market information for the properties, including selected submarket information, if available, (vii) modified the Company's assumptions, as necessary, to conform to certain known current market conditions and Kenneth Leventhal's understanding of the assets, (viii) updated the valuation model prepared by Kenneth Leventhal in 1993 and 1994 utilizing current market and/or assumption modifications determined from the procedures provided above, and (ix) calculated estimated asset values on both a going concern and liquidation value basis. Copies of Kenneth Leventhal's reports will be made available for inspection and copying at the principal executive offices of the Company during regular business hours by any holder of Outstanding Notes, Outstanding Common Shares and Other Secured Claims and Unsecured Claims of the Company, or the representative of such holder who has been designated in writing as such by such holder. REPORTS OF HOULIHAN LOKEY AS FINANCIAL ADVISOR TO THE COMPANY Houlihan Lokey was engaged to act as the Company's financial advisor and to render its opinion in connection with the Restructuring and a possible sale of, or investment in, the Company pursuant to an engagement letter executed on February 11, 1993. In connection therewith, Houlihan Lokey performed a due diligence investigation on a majority of the Company's assets and prepared sales material to be presented to prospective investors in or purchasers of the Company. In addition, Houlihan Lokey performed valuations of the Company and explored several alternative restructuring possibilities for the Company including, but not limited to, a merger or sale of the Company, a refinancing coupled with a debt for equity exchange offer and a liquidation of the Company. In connection therewith, Houlihan Lokey made numerous presentations to the Board of Trustees and the Creditors' Committee. See "--Presentations to the Company's Board of Trustees" and "--Presentations to the Creditors' Committee" below. Engagement. Houlihan Lokey is a nationally recognized investment banking firm which regularly engages in the valuation of businesses and their securities in connection with restructurings both in and out of bankruptcy. Houlihan Lokey provides financial advisory services and execution capabilities in the areas of financial restructuring, investment banking, business and securities valuation and investment management. In the area of financial restructuring, Houlihan Lokey has provided financial advice, valuation analyses and investment banking services to debtors, secured and unsecured creditors, acquirors, employee stock 42 ownership plans, equity holders and other parties-in-interest involved with financially troubled companies both in and out of bankruptcy. The Houlihan Lokey Financial Restructuring Group is headed by four managing directors overseeing a staff of over 25 professionals dedicated to financial restructuring engagements. The Company selected Houlihan Lokey as its financial advisor because of Houlihan Lokey's qualifications, expertise and reputation in the area of financial restructuring. Prior to its engagement, Houlihan Lokey did not have any material relationship with the Company. As compensation for its services as financial advisor to the Company in connection with the Restructuring, the Company initially agreed to pay Houlihan Lokey a fee of $75,000 per month (the "Monthly Fee"), plus reimbursement for reasonable and actual out-of-pocket expenses incurred by Houlihan Lokey in connection with the Restructuring. In addition, if the Restructuring is consummated, Houlihan Lokey will receive a fee equal to 0.5% of the face amount of debt restructured, modified, converted or forgiven payable upon closing of the Restructuring (the "Completion Fee"). The Company also agreed to indemnify Houlihan Lokey for certain liabilities arising from its participation as the Company's advisor. Pursuant to a letter agreement that memorialized certain prior verbal modifications to the terms of Houlihan Lokey's engagement dated March 16, 1995, effective January 1, 1994, Houlihan Lokey had reduced its Monthly Fee to $50,000 and effective June 1, 1994, Houlihan Lokey had reduced its Monthly Fee to $10,000. Effective November 1, 1994, the Company had agreed to resume paying Houlihan Lokey a monthly fee of $75,000 (the "New Monthly Fee"), provided that the New Monthly Fees (beginning November 1, 1994, and continuing through the closing of the Restructuring) would be fully credited against the Completion Fee. Furthermore, Houlihan Lokey's aggregate Completion Fee was set at $1,450,000 less the New Monthly Fees paid to, and received by, Houlihan Lokey (the "Completion Fee Balance") and pursuant to a letter agreement dated April 7, 1995, the Completion Fee Balance was further reduced by $112,500. The Completion Fee Balance is payable in cash only. As of the date of this Disclosure Statement, Houlihan Lokey has been paid $600,000 in New Monthly Fees, reducing the Completion Fee Balance to $737,500 to be paid 2 days prior to the filing of a Chapter 11 petition by the Company. Presentations to the Company's Board of Trustees. During the period from February 11, 1993 through the date of this Disclosure Statement, Houlihan Lokey prepared and presented monthly overviews, both written and oral, on the status of the Restructuring. Such reports included updates on the progress of Houlihan Lokey's due diligence, the status of potential third-party investors and/or purchasers, the status of negotiations with the Creditors' Committee, the status of the valuation of the Company's restructure value, summaries and analyses of restructuring proposals submitted by third-party investors and possible Company counter-proposals and summary analyses of various internal restructuring scenarios. See "--Background of the Restructuring--Development of the Current Restructuring" above. While the Company was negotiating with the Creditors' Committee, the Company and Houlihan Lokey met with several prospective investors to discuss possible third-party investment in or purchase of the Company. Although all potential third-party investors were offered an opportunity to propose restructuring alternatives, only three prospective investors made formal proposals to the Company and the Creditors' Committee. In connection therewith, Houlihan Lokey prepared summary descriptions and analyses of each such proposal as well as possible counter-proposals. In analyzing each proposal, Houlihan Lokey also prepared summaries of equity ownership, noteholder recoveries and shareholder recoveries. Presentations to the Creditors' Committee. Houlihan Lokey also made several presentations to the Creditors' Committee during the period from April 8, 1993 through June 24, 1993. Such presentations included an overview of the REIT industry and the capital markets for REITs, a financial overview of the Company and its investment portfolio, overviews of possible internal restructuring proposals, the status of potential third-party investors and/or purchasers, and summaries and analyses of restructuring proposals submitted by third-party investors. Valuation Reports. At the Company's request, Houlihan Lokey performed several valuations of the Company on a going concern basis utilizing a variety of generally accepted valuation methods. See 43 "--Valuation Methodologies" below. Houlihan Lokey's most recent valuation report presented to the Board of Trustees, the Equity Committee and the Creditors' Committee, prepared as of December 31, 1993, valued the Company's Restructure Value between $261 million and $317 million. "Restructure Value" means the fair market value of the Company available for those noteholders, unsecured creditors and shareholders in a restructuring. Because the valuation analyses for these reports were performed as of dates more than one year ago, the Company's actual going concern value may have changed significantly due to changes in the various factors on which such an analysis depends. Thus, investors are cautioned not to place undue reliance on the range of values set forth in Houlihan Lokey's valuation reports. Valuation Methodologies. In connection with the preparation of its valuations and the various written and oral presentations it made to the Company and Creditors' Committee (the "Houlihan Lokey Materials") from time to time, Houlihan Lokey utilized a variety of generally accepted valuation methods. Set forth below is a brief summary of the valuation methods employed by Houlihan Lokey in connection with the preparation of its valuations and the Houlihan Lokey Materials. The summary set forth below does not purport to be a complete description of the analyses or data presented by Houlihan Lokey. The preparation of a valuation opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analyses and application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, Houlihan Lokey did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, notwithstanding the separate factors summarized below, Houlihan Lokey believes that its analyses must be considered as a whole and that selecting portions of its analyses or certain of the factors considered by it, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying such analyses and its opinion. In preparing its valuations and the Houlihan Lokey Materials, Houlihan Lokey relied upon the accuracy and completeness of the financial and other information provided to it by the Company and did not assume any responsibility for any independent verification of such information. In relying on the financial and other information provided to it by the Company, Houlihan Lokey assumed that such information was reasonably prepared based on assumptions reflecting the best currently available estimates and judgments by the Company's management as to the expected future results of operations and financial condition of the Company to which such analyses or forecasts relate. Houlihan Lokey further relied upon the assurances of the Company's management that it is unaware of any facts that would make the information provided to Houlihan Lokey incomplete or misleading. No limitations were imposed by the Company upon Houlihan Lokey with respect to the investigations made or procedures followed by Houlihan Lokey in rendering its analyses and opinions, and the Company's management cooperated fully with Houlihan Lokey in connection therewith. The Houlihan Lokey Materials and Houlihan Lokey's valuations were based on economic, monetary, market and other conditions as they existed and could be evaluated as of the respective dates of the Houlihan Lokey Materials and Houlihan Lokey's valuations. In preparing its valuations and conducting its analyses and preparing its numerous presentations, Houlihan Lokey, among other things, (i) reviewed summary documentation on all of the Company's material assets including the Company's loan collateral, (ii) interviewed all asset managers, (iii) reviewed and provided input to the formulation of individual asset disposition and business plans, (iv) assisted in the formulation of the Company's prepared asset cash flow forecasts, (v) performed on-site visits of selected Philadelphia and Los Angeles assets (collateral and ownership interests), (vi) prepared due diligence books to provide to prospective investors, which included property/collateral descriptions, cash flow forecasts, lease summaries, photographs of property, historical operating statements and consolidated Company cash flow forecasts, (vii) compiled a due diligence library for prospective investors, which included narrative written summaries for each asset reviewing the initial funding date, current book value, specific valuation reserves, charge-off amounts, interest rate terms (if applicable), description and location of collateral or equity investment, summary market area analysis, leasing and property management information, latest available leasing summaries, five-year cash flow projections, the latest appraisals (if conducted within the past 18 months), environmental reports, summary and actual operating statements of collateral or equity investment, and 44 photographs of property, (viii) reviewed and analyzed certain historical business and financial information relating to the Company, including the Company's Annual Reports to Stockholders and Annual Reports on Form 10-K for the fiscal years ended September 30, 1990 through September 30, 1994, and the Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 1990 through March 31, 1995, (ix) reviewed certain operating and financial information, including internal projections and forecasts, and other data provided to it by the Company's management relating to the Company's business and prospects, (x) held discussions with the Company's management regarding the Company's business, prospects and strategic objectives, and (xi) conducted such other financial studies, analyses, inquiries and investigations as it deemed appropriate. In connection with its valuations of the Company, Houlihan Lokey utilized the following methodologies: (i) asset valuation analysis; (ii) analysis based upon capitalization of 1993 net operating cash flow; and (iii) consolidated discounted cash flow analysis. . Asset Valuation. First, instead of valuing each asset on an individual basis, Houlihan Lokey classified the Company's assets according to a general risk-based classification (i.e., stable, long-term equity investment or high risk loan in foreclosure proceedings, etc.). The risk levels were not quantifiably defined, and the risk classifications determined were largely based on issues unique to a distressed commercial loan portfolio. Then, with respect to each class of assets, Houlihan Lokey applied selected discount rates and terminal capitalization rates to the projected cash flows. Thus, the projected cash flows of all assets within a particular classification were present-valued using the same discount and capitalization rates. The discount and capitalization rates were based solely on risk classification and were not adjusted for property type, location or other characteristic. The discount and capitalization rates were determined by researching such rates as announced in various publications, and compiling information off of Houlihan Lokey's databases, queries with third-party real estate professionals and analysis of interest rates, public company market capitalization multiples and other indications of rates of return on investments. Finally, the third-party secured debt and capitalized 1993 corporate administrative expenses were subtracted from the sum of the discounted cash flows of each risk class. . Capitalization of 1993 Net Operating Cash Flow. In this analysis, Houlihan Lokey valued the Company's Restructure Value by applying a range of capitalization rates to the 1993 net operating cash flow (net of corporate administrative expenses). The capitalization rates applied in this analysis were determined by researching such rates as announced in various publications, and compiling information off of Houlihan Lokey's databases, queries with third-party real estate professionals and analysis of interest rates, public company market capitalization multiples and other indications of rates of return on investments. This analysis used a single capitalization rate on the Company's overall net operating cash flow and therefore, by definition, that rate could not be adjusted by property type or location. An analysis was not performed to determine capitalization rates for individual properties or risk classification except as discussed above. . Consolidated Discounted Cash Flow Analysis. Houlihan Lokey prepared a consolidated discounted cash flow analysis utilizing the following assumptions: (i) 100% deleveraging; (ii) no external capital infusion; (iii) minimum required dividend payments; and (iv) reinvestment of available cash (all cash in excess of $5 million) into new real estate equities, assuming marginal acquisition leverage at 50%, a net operating income hurdle rate of 10%, a 3% capital expenditure reserve of net operating income and a net operating income annual growth rate of 4%. Using the valuation methods set forth above, Houlihan Lokey determined the range of value of the Company on a going concern basis using the asset valuation analysis, the analysis based upon capitalization of 1993 net operating cash flow and the consolidated discounted cash flow analysis. Using these ranges of value developed from these analyses of the Company on a going concern basis as well as other quantitative and qualitative factors discussed above, Houlihan Lokey arrived at the Company's Restructure Value as set forth above. See "--Valuation Reports." 45 BRIEF EXPLANATION OF CHAPTER 11 REORGANIZATION Chapter 11 of the Bankruptcy Code is the principal reorganization chapter of the Bankruptcy Code. Under Chapter 11, a debtor is authorized to reorganize its business for the benefit of itself and its creditors and shareholders. Confirmation of a plan of reorganization is the principal objective of a Chapter 11 case. In general, a Chapter 11 plan of reorganization (i) divides claims and equity interests into separate classes, (ii) specifies the property that each class is to receive under the plan, and (iii) contains other provisions necessary for the reorganization of the debtor. A Chapter 11 plan may specify that certain classes of claims or equity interests are either reinstated or their legal, equitable and contractual rights are to remain unchanged by the reorganization effectuated by the plan. Such classes are referred to under the Bankruptcy Code as "unimpaired" and, because of such treatment, are deemed to accept the plan. Accordingly, it is not necessary to solicit votes from the holders of claims or equity interests in such classes. All other classes of claims and equity interests are "impaired" claims and equity interests that are entitled to vote on the plan. As a condition to confirmation, the Bankruptcy Code generally requires that each impaired class of claims or equity interests that will receive or retain property under a plan of reorganization vote to accept the plan of reorganization. In order for a class to accept a plan, acceptances must be received from (i) the holders of claims constituting at least two-thirds in dollar amount and more than one-half in number of the allowed claims in each impaired class of claims that have voted to accept or reject the plan, and (ii) the holders of at least two-thirds in amount of the allowed equity interests in each impaired class of equity interests that have voted to accept or reject the plan. A Chapter 11 plan also may specify that certain classes will not receive any distribution of property. While such classes are impaired, such classes are deemed to reject the plan and, therefore, need not be solicited to vote to accept or reject the plan. If any class or classes of claims or equity interests entitled to vote rejects the plan, upon request of the plan proponents, the Bankruptcy Court may nevertheless confirm the plan if, among other things, certain minimum treatment standards are met with respect to such class or classes. See "--Confirmation of the Prepackaged Plan--Nonconsensual Confirmation" below. Chapter 11 of the Bankruptcy Code does not require each holder of a claim or equity interest to vote in favor of a plan of reorganization in order for the Bankruptcy Court to confirm the plan. However, the Bankruptcy Court must find that the plan of reorganization meets a number of statutory tests (other than the voting requirements described in this section) before it may confirm, or approve, the plan of reorganization. Many of these tests are designed to protect the interests of holders of claims or equity interests who do not vote to accept the plan of reorganization but who will nonetheless be bound by the plan's provisions if it is confirmed by the Bankruptcy Court. See "-- Confirmation of the Prepackaged Plan--Feasibility Test" and "--Confirmation of the Prepackaged Plan--Best Interests of Creditors Test; Liquidation Value" below. CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS Section 1123 of the Bankruptcy Code provides that a plan of reorganization must classify claims against and equity interests in a debtor. Under section 1122 of the Bankruptcy Code, a plan must classify claims and equity interests into classes that contain substantially similar claims or interests. The Prepackaged Plan divides the Claims of known entities that hold a Claim against the Company on the Effective Date that arose or is deemed to have arisen before the Petition Date, including a Claim against the Company of a kind specified in sections 502(g), 502(h) or 502(i) of the Bankruptcy Code and known holders of Interests into classes and sets forth the treatment offered each class. The Company believes it has classified all Claims and Interests in compliance with the provisions of section 1122, but once a Chapter 11 case has been commenced, it is possible that a holder of a Claim or Interest may challenge the Company's classification of Claims and Interests and that the Bankruptcy Court may find that a different classification is required for the Prepackaged Plan to be confirmed. In such event, it is the present intention of the Company, to the extent 46 permitted by the Bankruptcy Code and the provisions of the Prepackaged Plan, to amend or revoke such plan and file an amended or different plan that would modify the classification of Claims or Interests as is required by the Bankruptcy Court for confirmation. Only classes that are impaired under the Prepackaged Plan are entitled to vote to accept or reject the Prepackaged Plan. See "The Plan Solicitation; Voting Procedures." Claims and Interests are classified for all purposes including voting, confirmation and distribution pursuant to the Prepackaged Plan, as follows: Class 1--Priority Claims Class 2--Claims of Holders of Outstanding Notes (Impaired) Class 3--Other Secured Claims (Impaired) Class 4--Unsecured Claims (Impaired) Class 5--Interests of Holders of Outstanding Common Shares (Impaired) Class 6--Interests of Holders of Outstanding Stock Rights Only Claims and Interests that are not in dispute, are not contingent, are not unliquidated in amount and are not subject to a pending objection or estimation proceeding (respectively, "Allowed Claims" and "Allowed Interests") are entitled to receive distributions under the Prepackaged Plan. The following describes the Prepackaged Plan's classification of Claims against and Interests in the Company and the treatment that holders of Allowed Claims and Allowed Interests will receive for such Allowed Claims and Allowed Interests under the Prepackaged Plan if it is confirmed, unless such holders were to agree to accept less favorable treatment by settlement or otherwise. Such treatment will be in full satisfaction, release and discharge of such holder's respective Claims against or Interests in the Company, except as provided in the Prepackaged Plan. The following summary of proposed distributions under the Prepackaged Plan does not purport to be complete and is subject to and qualified in its entirety by, the Prepackaged Plan. (1) Administrative Claims. "Administrative Claims" are Claims for costs and expenses of administration allowed under section 503(b) of the Bankruptcy Code and referred to in section 507(a)(1) of the Bankruptcy Code, including, without limitation, (a) the actual and necessary costs and expenses incurred after the Petition Date of preserving the estate created by the commencement of the Reorganization Case under section 541 of the Bankruptcy Code (the "Estate") and operating the business of the Company (such as wages, salaries or commissions for services and payments for goods), (b) compensation for legal, financial advisory, accounting and other services and reimbursement of expenses awarded or allowed under section 330 of the Bankruptcy Code, and (c) all fees and charges assessed against the Estate under 28 U.S.C. (S) 1930. In general, subject to the bar date provisions contained in the Prepackaged Plan, the Company or any successor thereto by merger, consolidation or otherwise, from and after the Effective Date (the "Reorganized Debtor") will pay to each holder of an Administrative Claim, on account of the Administrative Claim and in full satisfaction thereof, cash equal to the amount of such Administrative Claim, unless the holder agrees or will have agreed to other less favorable treatment of such Claim. Except as otherwise provided in the Prepackaged Plan, payment on an Administrative Claim will be made on the later of (a) the Effective Date, and (b) the date such payment would have become due under the terms of such Claim in the absence of the Reorganization Case. All payments to professionals for compensation and reimbursement of expenses and all payments to reimburse expenses of members of any official committee appointed in the Reorganization Case will be made in accordance with the procedures established by the Bankruptcy Code and the Bankruptcy Rules relating to the payment of interim and final compensation and expenses and in accordance with any order of the Bankruptcy Court. The Bankruptcy Court will review and determine all requests for compensation and reimbursement of expenses. Assuming that there is no significant litigation initiated or objection filed with respect to the Prepackaged Plan, the Company estimates that its Administrative Claims payable to professional persons and service providers will, in the aggregate, not exceed $250,000.00. 47 In addition to the foregoing, section 503(b) of the Bankruptcy Code provides for the payment of compensation to creditors, indenture trustees and other persons making a "substantial contribution" to a Chapter 11 case and to attorneys for, and other professional advisors to, such persons. Certain entities may file applications with the Bankruptcy Court for allowances of compensation and reimbursement of expenses for substantial contribution. The amounts that such entities may seek for such compensation cannot be estimated by the Company at this time. The Company is presently unaware of any entities that may seek compensation under the substantial contribution doctrine. Requests for compensation and reimbursement of expenses under this substantial contribution doctrine must be approved by the Bankruptcy Court after a hearing on notice at which the Company and other parties in interest may participate, and, if appropriate, object to the allowance of any compensation and reimbursement of expenses. (2) Class 1: Priority Claims. (a) Section 507(a)(8) Priority Claims. Certain Claims for unpaid taxes are entitled to priority in right of payment under section 507(a)(8) of the Bankruptcy Code ("Priority Tax Claims"). Pursuant to the Prepackaged Plan, unless the applicable taxing agency agrees to less favorable treatment, the Reorganized Debtor will pay to each holder of a Priority Tax Claim that is also an Allowed Claim deferred cash payments, over a period not exceeding six years from the date of assessment of such Claim, in an aggregate amount equal to the amount of such Allowed Claim, plus interest from the Effective Date on the unpaid portion of such Allowed Claim (without penalty of any kind) at the rate prescribed below. The payment of the amount of each such Allowed Claim will be made in equal semi-annual installments due on the latest of (i) the Effective Date, (ii) 30 calendar days after the date on which an order allowing such Claim becomes a Final Order (as defined below), and (iii) such other time or times as may be agreed to by the holder of such Claim and the Reorganized Debtor. Each installment will include simple interest on the unpaid portion of such Allowed Claim, without penalty of any kind, at the statutory rate of interest provided for such taxes under applicable non- bankruptcy law; provided, however, that the Reorganized Debtor will have the right to pay any Priority Tax Claim that is also an Allowed Claim, or any remaining balance of such Claim, in full, at any time on or after the Effective Date, without premium or penalty of any kind. The Company estimates that there will be no Priority Tax Claims that are also Allowed Claims. "Final Order" means an order or judgment of the Bankruptcy Court or other court of competent jurisdiction as to which the time to appeal, seek leave to appeal, petition for certiorari or move for reargument or rehearing has expired and as to which no appeal, petition for certiorari or other proceedings for reargument, rehearing or leave to appeal shall have been waived in writing in form and substance satisfactory to the Company or the Reorganized Debtor or, in the event that an appeal, writ of certiorari, or reargument or rehearing thereof or leave to appeal has been motioned for or sought, such order of the court shall have been affirmed by the highest court to which such order was appealed, or certiorari has been denied or from which reargument or rehearing or leave to appeal was motioned for or sought, and the time to take any further appeal, petition for certiorari, move for reargument or rehearing or seek leave to appeal shall have expired. (b) Other Priority Claims. Certain Claims are entitled to a priority in right of payment pursuant to sections 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of the Bankruptcy Code ("Other Priority Claims"). Examples of Claims of this type include, without limitation, (i) unsecured Claims for accrued employee compensation, including vacation, severance and sick-leave pay payable in accordance with the Company's existing compensation procedures, earned within 90 days prior to the commencement of the Reorganization Case, to the extent of $4,000 per employee, and (ii) contributions to employee benefit plans arising from services rendered within the 180 days prior to the commencement of the Reorganization Case, but only to the extent of (A) the number of employees covered by such plans multiplied by $4,000, less (B) the aggregate amount paid to such employees for accrued employee compensation. The Company intends to ask the Bankruptcy Court for authorization to pay all pre-petition employee compensation and benefits on a current basis. To the extent not previously paid, each holder of a Priority Claim (as defined below) that is also an Allowed Claim will be paid the full amount of such Priority Claim in cash on the Effective Date (or as soon as practicable after the date on which any such Claim is allowed if the date of allowance is later than the Effective Date). The Company estimates that there will be no Priority Claims that are also Allowed Claims. "Priorty Claim" means any Claim, other than an Administrative Claim, of a Creditor to the extent such Claim is entitled to priority under section 507(a) of the Bankruptcy Code. 48 (3) Class 2: Outstanding Notes. Class 2 consists of all Claims under or evidenced by the Outstanding Notes, the Outstanding Note Indenture, the Outstanding Collateral Agreement, or any document, instrument or agreement delivered in connection therewith. The holders of a majority of the Outstanding Notes have elected, pursuant to section 1111(b)(2) of the Bankruptcy Code, to treat their entire Claim as secured by the collateral under the Outstanding Collateral Agreement. Pursuant to the Prepackaged Plan, the Reorganized Debtor will distribute to each holder of Class 2 Claims that are also Allowed Claims (other than the Class 2 Expense Claims (as hereinafter defined), which will be treated as described below) its pro rata share of (i) $110,000,000 in principal amount of New Senior Notes, (ii) cash in an amount not less than $50,000,000 (minus any amounts paid to the holders of the Outstanding Notes between March 1, 1995, and the Petition Date pursuant to the Agreement of Understanding), held by the Reorganized Debtor on the Effective Date, in excess of cash in an amount not to exceed $10,000,000, for use by the Reorganized Debtor in its business operations (the "Initial Cash Reserve Fund"), and (iii) approximately 10,890,180 New Common Shares (which will represent 97% of the Common Shares outstanding on the Effective Date if the Prepackaged Plan is accepted by holders of Outstanding Common Shares)(Class 5)). By way of example, the holders of Class 2 Claims that are also Allowed Claims will receive their pro rata portion of the foregoing consideration for each $10,000 in principal amount of Outstanding Notes (subject to rounding for fractional interests): New Senior Notes $3,793 in principal amount Cash $1,725 (assuming $50 million is distributed in the aggregate) New Common Shares 375.5 shares If holders of Outstanding Common Shares do not vote to accept the Prepackaged Plan, then all Outstanding Common Shares will be cancelled, and holders of Outstanding Notes will receive New Common Shares which will represent 99.5% of the Common Shares outstanding on the Effective Date with 0.5% of the New Common Shares to be distributed to charities designated by the Principal Holders. The Company estimates that Class 2 Claims that are also Allowed Claims will not exceed $355 million. On the Effective Date or as soon thereafter as is practicable, each holder of a Class 2 Claim that is also an Allowed Claim receiving 5% or more of the New Common Shares or New Senior Notes will be entitled to enter into the Registration Rights Agreement between the Company and each such holder relating to the New Securities (the "Registration Rights Agreement"). The Reorganized Debtor will pay to the applicable party entitled to payment an amount equal to the amount of any unpaid fees and reasonable unpaid out-of- pocket costs or expenses earned or incurred through the Effective Date by the Outstanding Indenture Trustee (as hereinafter defined) or the Principal Holders, including, without limitation, reasonable out-of-pocket costs and expenses and reasonable fees of legal counsel to the Outstanding Indenture Trustee and the attorneys for the Principal Holders (the "Class 2 Expense Claims"). Payment of such Class 2 Expense Claims will constitute distributions on account of Allowed Claims in Class 2, in addition to the distributions provided for such Class as described above and distributions otherwise provided under the Prepackaged Plan to holders of Class 2 Claims that are also Allowed Claims will not be reduced on account of such payment of Class 2 Expense Claims. Notwithstanding anything to the contrary, the Reorganized Debtor's obligation to pay Class 2 Expense Claims will be subject to the same bar date and procedural provisions set forth in the Prepackaged Plan for Administrative Claims and the procedures regarding resolution of contested Claims and Interests set forth in the Prepackaged Plan. Amounts payable to the Outstanding Indenture Trustee are subject to approval of the Bankruptcy Court pursuant to section 1129(a)(4). The Company estimates that Class 2 Expense Claims will not exceed $100,000, of which not more than $10,000 is estimated to represent fees payable to the Outstanding Indenture Trustee. The terms and conditions of the New Senior Notes, including terms and conditions governing payment of principal and interest, covenants of the Company and rights and remedies of the holders, are set forth in, and will be governed by, an Amended and Restated Indenture (the "New Senior Note Indenture"). See 49 "Description of New Senior Notes." The terms and conditions of the New Common Shares, including terms and conditions governing payment of dividends and voting, will be governed by the Amended and Restated Declaration of Trust as effected pursuant to the Prepackaged Plan. See "Description of Capital Stock." (4) Class 3: Other Secured Claims. This class consists of all Claims, other than Claims of a holder of Outstanding Notes or any Class 2 Expense Claims, of a Creditor secured by a lien on property of the Estate, to the extent of the value, as determined by the Bankruptcy Court pursuant to section 506(a) of the Bankruptcy Code, of such Creditor's interest in such property of the Estate. To the extent not previously paid, all Other Secured Claims that are also Allowed Claims will be (at the option of the Reorganized Debtor and with the consent of the Principal Holders) (a) paid in full, in cash, on the Effective Date (or as soon as practicable after the date on which any such Claim is allowed), (b) paid upon such other less favorable terms as may be mutually agreed upon by the Reorganized Debtor and the holders of such Claims, or (c) reinstated and paid or performed by the Reorganized Debtor in accordance with section 1124 of the Bankruptcy Code, or the legal, equitable and contractual rights to which such Claim entitles the holder of such Claim will be left unaltered. The Company estimates that there will be no Class 3 Claims that are also Allowed Claims. (5) Class 4: Unsecured Claims. This class consists of any Claim that is not an Administrative Claim, a Priority Claim, a Claim under or evidenced by the Outstanding Notes, the Outstanding Note Indenture, the Outstanding Collateral Agreement, the Prior Plan, an Other Secured Claim, or a Claim based upon the Outstanding Common Shares or Outstanding Stock Rights (as hereinafter defined). Each holder of a Class 4 Claim will receive as of the Effective Date, or as soon thereafter as the Claim becomes an Allowed Claim, whichever is later, cash equal to the amount of such Allowed Claim unless the holder of such Claim agrees to less favorable treatment. The Company may ask the Bankruptcy Court for authorization to pay some or all Unsecured Claims that are also Allowed Claims on a current basis. The Company estimates that Class 4 Claims that are also Allowed Claims will not exceed $25,000. (6) Class 5: Outstanding Common Shares. This class consists of all Interests of holders of Outstanding Common Shares. If holders of Class 5 Interests that are also Allowed Interests vote to accept the Prepackaged Plan, holders of Outstanding Common Shares will retain their existing Common Shares, subject to the Reverse Stock Split and the issuance of New Common Shares to holders of Class 2 Claims that are also Allowed Claims after which such holders will hold shares representing 3% of the aggregate of the Common Shares outstanding on the Effective Date. If holders of Outstanding Common Shares do not vote to accept the Prepackaged Plan, all Outstanding Common Shares will be cancelled and all holders of Interests in Class 5 will receive or retain no property under the Prepackaged Plan on account of such Interests. (7) Class 6: Outstanding Stock Rights. This class consists of any right to purchase or otherwise acquire Common Shares of the Company, and any stock appreciation or similar rights relating to Common Shares of the Company, existing prior to the Effective Date ("Outstanding Stock Rights"). Outstanding Stock Rights do not include any rights arising solely out of the ownership of the Outstanding Common Shares. The Outstanding Stock Rights will be cancelled under the Prepackaged Plan. No distributions will be made to holders of Outstanding Stock Rights under the Prepackaged Plan. All Claims or Interests in Class 6 will not receive or retain any property under the Prepackaged Plan on account of such Claims or Interests. SUMMARY OF OTHER PROVISIONS OF THE PREPACKAGED PLAN Officers and Trustees. As of the Effective Date, the Principal Holders and the New Major Holder have agreed among themselves that the initial members of the Board of Trustees of the Reorganized Debtor will consist of seven members, including (a) the new President and Chief Executive Officer of the Reorganized Debtor, (b) one member selected by the New Major Holder, and (c) five members selected by the Principal Holders. See "Management" for information regarding the new President and Chief Executive Officer and new Board of Trustees. Such persons will be deemed elected to the Board of Trustees, and such elections will 50 be deemed effective as of the Effective Date, without any requirement of further action by shareholders or the Board of Trustees of the Company or the Reorganized Debtor. The persons identified as officers of the Reorganized Debtor under the caption "Management" will serve as the initial officers of the Reorganized Debtor as of the Effective Date, however it is anticipated that the Board of Trustees of the Reorganized Debtor may replace one or more officers in addition to its selection of the new President and Chief Executive Officer. Subject to any requirement of Bankruptcy Court approval under section 1129(a)(5) of the Bankruptcy Code, those persons designated as trustees and officers of the Reorganized Debtor will assume their offices as of the Effective Date and will continue to serve in such capacities thereafter, pending further action of the Board of Trustees or shareholders of the Reorganized Debtor in accordance with the Amended and Restated Declaration of Trust, the Reorganized Debtor's bylaws and applicable state law. Prior to the confirmation of the Prepackaged Plan, in accordance with section 1129(a)(5) of the Bankruptcy Code, the Company will disclose the identity of any other insider that will be employed or retained by the Company and the nature of any compensation for such insider. Executory Contracts and Leases. Unless previously assumed or rejected by order of the Bankruptcy Court pursuant to section 365 of the Bankruptcy Code, as of the Effective Date, the Reorganized Debtor will assume each of the executory contracts and leases of the Company that are not rejected as set forth in the second succeeding paragraph and each of the executory contracts and unexpired leases which are identified in the Schedule of Assumed Executory Contracts and Unexpired Leases which is Exhibit E to the Prepackaged Plan. The Company reserves the right at any time prior to the hearing on confirmation, with the consent of the Principal Holders, to amend Exhibit E either to (a) delete any executory contract or lease listed therein and provide for its rejection pursuant to the Prepackaged Plan or (b) add any executory contract or lease to Exhibit E, thus providing for its assumption (or assumption and assignment) pursuant to the Prepackaged Plan. The Company will provide notice of any amendment to Exhibit E to the parties to the executory contract or lease affected thereby. The order of the Bankruptcy Court confirming the Prepackaged Plan pursuant to section 1129 of the Bankruptcy Code (the "Confirmation Order") will constitute an order of the Bankruptcy Court approving all such assumptions described in the Prepackaged Plan, pursuant to section 365 of the Bankruptcy Code, as of the Effective Date. Any monetary defaults under an executory contract or lease to be assumed under the Prepackaged Plan will be satisfied, pursuant to section 365(b)(1) of the Bankruptcy Code in either of the following ways: (1) by payment of the default amount in cash on the Effective Date, or (2) by payment of the default amount on such other terms as agreed to by the Reorganized Debtor and the other parties to such executory contract or lease. In the event of a dispute regarding (i) the amount of any cure payments, (ii) the ability of the Reorganized Debtor to provide adequate assurance of future performance under the contract or lease to be assumed, or (iii) any other matter pertaining to assumption (or assumption and assignment) of the contract or lease to be assumed, the cure payments required by section 365(b)(1) of the Bankruptcy Code will be made following the entry of a Final Order by the Bankruptcy Court resolving the dispute and approving assumption. Unless previously assumed or rejected by order of the Bankruptcy Court pursuant to section 365 of the Bankruptcy Code, on the Effective Date, all documents, agreements, contracts and leases listed on the Schedule of Rejected Executory Contracts and Unexpired Leases, which is Exhibit F to the Prepackaged Plan, will be rejected, to the extent, if any, that any of the foregoing constitute executory contracts or unexpired leases, and without conceding or admitting that they constitute executory contracts or unexpired leases or that the Company has any liability thereunder. The Company reserves the right at any time prior to the Confirmation Date with the consent of the Principal Holders, to amend Exhibit F either to (a) delete any contract or lease listed therein and provide for its assumption pursuant the Prepackaged Plan, or (b) add any contract or lease to Exhibit F, thus providing for its rejection pursuant to the Prepackaged Plan. The Company will provide notice of any amendment of Exhibit F to the parties to the contract or lease affected thereby. 51 The Confirmation Order will constitute an order of the Bankruptcy Court approving all such rejections, pursuant to section 365 of the Bankruptcy Code, as of the Effective Date. Any Claim for damages arising from the rejection under the Prepackaged Plan of an executory contract or unexpired lease must be filed within 30 days after the mailing of notice of confirmation or be forever barred and unenforceable against the Company, its Estate, the Reorganized Debtor and its properties and barred from receiving any distribution under the Prepackaged Plan on account of such Claim. Releases. In consideration for the distributions to be made under the Prepackaged Plan and the releases provided for therein, and in order to protect the Reorganized Debtor from Claims for contribution or indemnity relating to pre-Effective Date acts or omissions, as of the Effective Date, (i) the Creditors' Committee, each holder of a Claim or Interest, and each of the officers, directors, employees, members and professionals of such committee or holder, shall be released to the extent permitted by applicable law from any Released Claims that the Company may have against any of them (the "Debtor Release"), (ii) the Company, the Reorganized Debtor, the Creditors' Committee, the Principal Holders and their respective officers, directors, employees, members and professionals (collectively, the "Debtor Releasees") shall be released to the extent permitted by applicable law from any Released Claims that any holder of a Claim or Interest may have against any of the Debtor Releasees, and (iii) the Debtor Releasees shall be released to the extent permitted by applicable law from any and all actions, causes of action, claims, liabilities, demands and obligations of any kind or nature whatsoever that the Company, the Reorganized Debtor, the Company's Estate or any holder of a Claim or Interest may have against any of the Debtor Releasees that is based upon or that arises out of any alleged act or omission by any of the Debtor Releasees that is related to the Company, including, without limitation, the Reorganization Case, the Outstanding Notes, the Outstanding Collateral Agreement, the Prior Plan, the Outstanding Common Shares, the Outstanding Stock Rights or any of the Claims or Interests in the Reorganization Case and any Claims under the federal securities laws, provided, however, such release shall not apply to Excluded Claims (as defined below) against the Company (the release described in subparagraphs (ii) and (iii) above is hereinafter referred to as the "Creditor/Shareholder Release") and no holder of a Claim shall be released until such Claim is allowed. Notwithstanding the foregoing, to the extent that a holder of a Claim or Interest elects not to grant a Creditor/Shareholder Release and receive a Debtor Release, such holder may make such election by indicating its election to opt out of such releases in the space provided for such election on the Ballot for accepting or rejecting the Prepackaged Plan. If a holder makes such election, the Creditor/Shareholder Release will not be enforceable against such holder, and such holder will not be released under the Debtor Release. "Excluded Claims" mean any obligation that arises under the Prepackaged Plan or any document, instrument or agreement to be executed, delivered or assumed under the Prepackaged Plan, including without limitation, the obligations of the Reorganized Debtor under the New Senior Notes, the New Senior Note Indenture, the New Collateral Documents (as defined in the New Senior Note Indenture) and all documents, instruments and agreements delivered or to be delivered in connection therewith. Conditions to Effectiveness. The following are conditions to the effectiveness of the Prepackaged Plan: (i) the Prepackaged Plan has been accepted by the requisite holders of Claims in Class 2 pursuant to section 1126 of the Bankruptcy Code; (ii) the clerk of the Bankruptcy Court has entered the Confirmation Order, in form and substance satisfactory to the Company and to the Principal Holders and (unless otherwise agreed to by the Principal Holders) such order has become a Final Order; (iii) no court will have entered an order modifying or staying the enforcement of the Confirmation Order or such order shall have been vacated; (iv) the New Senior Note Indenture will have been qualified under the Trust Indenture Act of 1939, as amended, and no stop order shall have been issued with respect thereto; (v) the New Senior Note Indenture and the New Collateral Documents will have been executed and delivered by the Reorganized Debtor and each of its subsidiaries, and the New Indenture Trustee; and (vi) all other material documents, instruments or agreements including, without limitation, the Amended and Restated Declaration of Trust shall have been executed and delivered by the parties thereto and shall have become effective. 52 MEANS FOR IMPLEMENTATION OF THE PREPACKAGED PLAN The Effective Date of the Prepackaged Plan shall be a business day selected by the Debtor (i) that is at least 11 calendar days after the Confirmation Date or, with the consent of the Principal Holders, at least one business day after the Confirmation Date if the Bankruptcy Court enters an order making Bankruptcy Rule 7062 inapplicable to the proceedings respecting the Confirmation Order or otherwise determining that the Effective Date may occur immediately following the Confirmation Date, and (ii) on which (a) no stay of the Confirmation Order is in effect, and (b) all conditions to the Effective Date set forth in the Prepackaged Plan have been satisfied or waived pursuant to the Prepackaged Plan. On the Effective Date, the Prepackaged Plan will be implemented by the Company as described below. Objections to Claims or Interests and Prosecution of Disputed Claims. Except as otherwise provided, applications of professionals for compensation and reimbursement of expenses under the Prepackaged Plan, and except as otherwise ordered by the Bankruptcy Court after notice and a hearing, objections to Claims or Interests, including Administrative Claims, or to requests for payment of Class 2 Expense Claims, shall be filed and served upon the holder of such Claim or upon the Wilmington Trust Company, as trustee under the Outstanding Note Indenture or any predecessor or successor trustee (the "Outstanding Indenture Trustee"), or other relevant party as applicable, not later than the later of (i) 90 days after the Effective Date, and (ii) 90 days after a proof of Claim or Interest or request for payment of such Claim, Interest, Administrative Claim or Class 2 Expense Claims is filed, unless this period is extended by the Bankruptcy Court. After the Effective Date, the Reorganized Debtor shall have the exclusive right to object to Claims, Interests or Class 2 Expense Claims. Notwithstanding any other provisions in the Prepackaged Plan, no payments or distributions, if any, will be made on account of a Claim or Interest until such Claim or Interest becomes an Allowed Claim or Allowed Interest. With respect to any Disputed Claim (as hereinafter defined) or Disputed Interest (as hereinafter defined) that becomes an Allowed Claim or Allowed Interest, all payments due or distributions on account of such Claim or Interest that becomes an Allowed Claim or Allowed Interest shall be made pursuant to the Prepackaged Plan as soon as practicable after the date on which such Claim or Interest becomes an Allowed Claim or Allowed Interest. See "--Distributions" below. Distributions. Subject to the provisions of the Prepackaged Plan described below, and except as otherwise provided in the Prepackaged Plan, property to be distributed under the Prepackaged Plan to an impaired class (i) will be distributed on or as soon as practicable after the Effective Date to each holder of an Allowed Claim or an Allowed Interest of that class that is an Allowed Claim or Allowed Interest as of the Effective Date, and (ii) will be distributed to each holder of an Allowed Claim or an Allowed Interest of that class that is allowed after the Effective Date, to the extent allowed, as soon as practicable after such Claim or Interest becomes an Allowed Claim or Allowed Interest. Property to be distributed under the Prepackaged Plan to a class that is not impaired or on account of a Claim of a kind described in Bankruptcy Code section 507(a)(1) or Class 2 Expense Claims will be distributed on the later of (i) the later of the two dates specified in the preceding sentence, and (ii) the date on which the distribution to the holder of the Allowed Claim would have been due and payable under the terms of the Allowed Claim in the absence of the Reorganization Case. Holders of Outstanding Securities Entitled to Receive Distribution. Any distribution under the Prepackaged Plan on account of an Allowed Claim under or evidenced by Outstanding Notes will be made to the holders of record of such Outstanding Notes as of the Effective Date. At the close of business on the Effective Date, the transfer ledgers for the Outstanding Securities will be closed, and there will be no further changes in the record holders of the Outstanding Notes. The Company, the Reorganized Debtor and the Outstanding Indenture Trustee will have no obligation to recognize any transfer of the Outstanding Notes occurring on or after the Effective Date. The Company, the Reorganized Debtor and the Outstanding Indenture Trustee will be entitled instead to recognize and deal for all purposes hereunder with only those record holders stated on the transfer ledgers for the Outstanding Notes, as of the close of business on the Effective Date. 53 Cancellation of Outstanding Securities and Related Agreements. Except as expressly provided in the Prepackaged Plan or in the Confirmation Order, on the Effective Date, the Outstanding Notes, the Outstanding Note Indenture, the Outstanding Collateral Agreement, those certain pledge agreements executed in connection with the Outstanding Note Indenture (the "Outstanding Pledge Agreement"), the Prior Plan, the Outstanding Stock Rights, and all obligations of the Company under any of the foregoing will be terminated and cancelled. New Securities and Indenture. On or before the Effective Date, the Reorganized Debtor, the New Indenture Trustee and Wilmington Trust Company and William J. Wade, as collateral agent under the New Collateral Documents (the "New Collateral Agent") will have executed the New Senior Note Indenture and the New Collateral Documents, as applicable. On the Effective Date or as soon as practicable thereafter, the Reorganized Debtor and each holder of Allowed Class 2 Claims receiving 5% or more of the New Common Shares or of the New Senior Notes will be entitled to execute and deliver the Registration Rights Agreement. All of the documents described in this paragraph will become effective and binding on the Reorganized Debtor on and as of the Effective Date. On and after the Effective Date, the Reorganized Debtor will issue the New Securities in accordance with the Prepackaged Plan. Amended and Restated Declaration of Trust; Reverse Stock Split and Indemnification. To effect the Reverse Stock Split and certain other changes to the Company's Declaration of Trust, on the Effective Date, the Amended and Restated Declaration of Trust (which is attached hereto as Annex B) will be filed with the State Department of Assessments and Taxation of Maryland. Pursuant to the Amended and Restated Declaration of Trust, each 33.33 Outstanding Common Shares will be automatically converted into one Common Share and the authorized number of Common Shares will be 20,000,000. See "Description of Capital Stock." No fractional shares of Common Shares shall be issued upon such conversion, but in lieu thereof, fractions of 1/2 or greater shall be rounded to the next greater whole number and fractions of less than 1/2 shall be rounded to the next lower whole number. No consideration will be paid in respect of such fractional interests that are rounded down. The Amended and Restated Declaration of Trust will continue to prohibit the issuance of nonvoting equity securities to the extent required by section 1123(a)(6) of the Bankruptcy Code. In addition, certain restrictions on transfer will be included in the Amended and Restated Declaration of Trust. See "Description of Capital Stock." Pursuant to the Amended and Restated Declaration of Trust and other relevant agreements, and notwithstanding any other term or provision of the Prepackaged Plan to the contrary, the Company will indemnify and hold harmless its current and former officers, trustees and employees to the fullest extent permitted by applicable law with respect to any such officer's, trustee's or employee's acts, conduct and omissions whether arising before or after the Petition Date. The Amended and Restated Declaration of Trust will become effective upon (i) confirmation of the Prepackaged Plan, (ii) the occurrence of the Effective Date and (iii) the filing with the State Department of Assessments and Taxation of Maryland of the Amended and Restated Declaration of Trust. Disbursing Agent. The Reorganized Debtor, or such other entity or entities as the Reorganized Debtor may employ (the "Disbursing Agents"), subject to the reasonable consent of the Principal Holders, will make all distributions required under the Prepackaged Plan. Any Disbursing Agent may employ or contract with other entities to assist in or perform the distribution of property under the Prepackaged Plan. Unless otherwise determined by the Reorganized Debtor, each Disbursing Agent will serve without bond. Each third- party Disbursing Agent will receive, without further Bankruptcy Court approval, reasonable compensation for distribution services rendered pursuant to the Prepackaged Plan and reimbursement of reasonable out-of-pocket expenses incurred in connection with such services from the Reorganized Debtor on terms agreed to with the Reorganized Debtor. Disputed Claims or Interests. Notwithstanding any other provisions of the Prepackaged Plan, no payments or distributions will be made on account of any Disputed Claim (as defined below) or Disputed Interest (as defined below) until such Claim or Interest becomes an Allowed Claim or Allowed Interest, and then only to the extent that it becomes an Allowed Claim or Allowed Interest. "Disputed Claim" or "Disputed Interest" means a Claim or Interest as to which a proof of Claim or Interest, as applicable, (i) has 54 been filed or deemed filed under applicable law, or by reason of an order of the Bankruptcy Court, but as to which an objection has been or may be timely filed and which objection, if timely filed, has not been withdrawn on or before any date fixed for filing such objections by the Prepackaged Plan or order of the Bankruptcy Court and has not been overruled or denied by a final order, or (ii) has not been timely filed, if such proof of Claim or Interest was required to be filed. Prior to the time that an objection has been or may be deemed timely filed, a Claim or Interest shall be considered a Disputed Claim or Disputed Interest, as applicable, in its entirety if (i) the amount of the Claim or Interest specified in the proof of Claim or Interest exceeds the amount of any corresponding Claim or Interest scheduled by the Company in its schedules or its list of equity security holders, as applicable, (ii) any corresponding Claim or Interest scheduled by the Company in its schedules or its list of equity security holders, as applicable, has been scheduled as disputed, contingent or unliquidated, irrespective of the amount scheduled, or (iii) no corresponding Claim or Interest has been scheduled by the Company in its schedules or its list of equity security holders, as applicable. Manner of Payment Under the Prepackaged Plan. Cash payments made pursuant to the Prepackaged Plan will be in U.S. dollars by checks drawn on a domestic bank selected by the Reorganized Debtor, or by wire transfer from a domestic bank, at the Reorganized Debtor's option, except that payments made to foreign trade creditors holding Allowed Claims may be paid, at the option of the Reorganized Debtor in such funds and by such means as are necessary or customary in a particular foreign jurisdiction. Distributions of cash pursuant to the Prepackaged Plan will be made by mail as set forth above or, upon request of a holder of a Class 2 Claim that is also an Allowed Claim, by wire transfer in accordance with written instructions received therefrom. Surrender of Instruments. As a condition to the receipt of any distribution under the Prepackaged Plan, (i) each holder of an Outstanding Note will deliver to the Outstanding Indenture Trustee or its designee such transaction instructions or other documents of transfer or exchange as the Outstanding Indenture Trustee requests, and (ii) each holder of a document or instrument of the Company other than an Outstanding Note will surrender the document or instrument to the Disbursing Agent or its designee. However, holders of Outstanding Common Shares are not required to surrender such document or instrument. Prior to the Effective Date, each holder of a document or instrument will receive specific instructions regarding the time and manner in which the document or instrument is to be surrendered or delivered. Immediately upon the Effective Date and until such surrender or delivery, such document or instrument will be deemed cancelled and represent only the right to receive the distributions to which the holder is entitled under the Prepackaged Plan. Any bond, debenture, share of stock, other security or note, whether or not a security (collectively, the "Instruments"), or transaction instruction, that is lost, stolen, mutilated or destroyed will be deemed surrendered when the holder of a Claim or Interest based thereon delivers to the Outstanding Indenture Trustee, or Disbursing Agent or their respective designee, (i) evidence satisfactory to the Outstanding Indenture Trustee, Disbursing Agent or its designee of the loss, theft, mutilation or destruction of such Instrument, or (ii) such security or indemnity as may be required by the Outstanding Indenture Trustee, Disbursing Agent or its designee to hold each of them harmless with respect thereto. Any holder of an Instrument of the Company that fails to surrender or deliver or be deemed to have surrendered or delivered the Instrument or relevant transaction instruction or other document within two years after the Effective Date will be forever barred from receiving any distribution under the Prepackaged Plan. In such cases, any property held for distribution on account of a Claim or Interest based on such Instrument will become property of the Reorganized Debtor, in the manner provided in the Prepackaged Plan for unclaimed distributions. To the extent that any such property is held by a Disbursing Agent other than the Reorganized Debtor, such Disbursing Agent will return such property to the Reorganized Debtor. Delivery of Distributions and Undeliverable or Unclaimed Distributions. Except as provided below for undeliverable distributions, distributions to holders of Allowed Claims and Allowed Interests will be distributed by mail as follows: (a) except in the case of the holder of an Instrument for which there is an 55 indenture trustee, security registrar or stock transfer agent, (1) to the addresses set forth on the respective proofs of claim or proofs of interest filed by such holders, (2) to the addresses set forth in any written notices of address changes delivered to the Disbursing Agent(s) after the date of any related proof of claim, or (3) to the address reflected on the Schedule of Assets and Liabilities filed with the clerk of the Bankruptcy Court in the Reorganization Case by the Company if no proof of Claim or proof of Interest is filed and the Disbursing Agent(s) have not received a written notice of a change of address; and (b) in the case of the holder of an Instrument for which there is an indenture trustee, security registrar or stock transfer agent, to the latest mailing address maintained of record by the pertinent indenture trustee, security registrar or stock transfer agent, or, if no mailing address is maintained of record, to the pertinent indenture trustee, security registrar or stock transfer agent. Distribution of cash pursuant to section 3.3 of the Prepackaged Plan will be made by mail as set forth above or, upon request of a holder of a Class 2 Claim that is also an Allowed Claim, by wire transfer in accordance with written instructions received therefrom. If the distribution to the holder of a Claim or Interest is returned to a Disbursing Agent as undeliverable, no further distribution will be made to such holder unless and until the Reorganized Debtor or the applicable Disbursing Agent is notified in writing of such holder's then current address. Except as provided below, undeliverable distributions will remain in the possession of the applicable Disbursing Agent until such times as a distribution becomes deliverable. Unclaimed cash (including interest, dividends and other consideration, if any, distributed on or received for undeliverable New Securities) will be held in trust in a segregated bank account in the name of the applicable Disbursing Agent, for the benefit of the potential claimants of such funds, and will be accounted for separately. Such funds will be held in interest-bearing accounts to the extent practicable and the parties entitled to such funds will be entitled to any interest earned on such funds. Undeliverable New Securities will be held in trust for the benefit of the potential claimants of such securities by the applicable Disbursing Agent in principal amount of notes and number of shares sufficient to fund the unclaimed amounts of such securities, and will be accounted for separately. Within 30 days after the end of each calendar quarter following the Effective Date, the applicable Disbursing Agents will make distributions of all property that has become deliverable during the preceding quarter. Each such distribution will include any dividends, interest payments or other distributions made on account of the distributed property. Any holder of an Allowed Claim or an Allowed Interest who does not assert a claim for an undeliverable distribution held by a Disbursing Agent within one year after the Effective Date will no longer have any claim to or interest in such undeliverable distribution, and will be forever barred from receiving any distributions under the Prepackaged Plan. In such cases, any property held for distribution on account of such Allowed Claims or Allowed Interests will be returned to and/or retained by the Reorganized Debtor, as follows: (1) any cash will be the property of the Reorganized Debtor, free from any restrictions thereon; (2) any New Senior Notes will be canceled; and (3) any New Common Shares reserved for issuance will be held by the Reorganized Debtor as unrestricted treasury shares. Nothing contained in the Prepackaged Plan will require the Company, the Reorganized Debtor or any Disbursing Agent to attempt to locate any holder of an Allowed Claim or an Allowed Interest. Compliance With Tax Requirements. In connection with the Prepackaged Plan, to the extent applicable, each Disbursing Agent will comply with all withholding and reporting requirements imposed on it by any governmental unit, and all distributions pursuant to the Prepackaged Plan will be subject to such withholding and reporting requirements. Setoffs. The Reorganized Debtor may, but will not be required to, set off against any Allowed Claim and the distributions to be made pursuant to the Prepackaged Plan on account of such Allowed Claim, claims of any nature that the Company or the Reorganized Debtor may have against the holder of such Allowed Claim; provided, however, that neither the failure to effect such a setoff nor the allowance of any Claim against the 56 Company or the Reorganized Debtor will constitute a waiver or release by the Company or the Reorganized Debtor of any claim that the Company or the Reorganized Debtor may possess against such holder. MODIFICATION OF THE PREPACKAGED PLAN Subject to the restrictions on plan of reorganization modifications set forth in section 1127 of the Bankruptcy Code or as otherwise permitted by law without additional disclosure pursuant to section 1125 of the Bankruptcy Code, except as the Bankruptcy Court may otherwise order, the Company, subject to the approval of the Principal Holders, reserves the right to alter, amend or modify the Prepackaged Plan before its substantial consummation. The potential impact of any such amendment, modification or supplement on the holders of Claims and Interests cannot presently be foreseen, but may include a change in the economic impact of the Prepackaged Plan on some or all of the classes of Claims and Interests. If any of the terms of the Prepackaged Plan are amended, modified or supplemented in a manner determined to constitute a material adverse change, the Company will promptly disclose any such amendment, modification or supplement in a manner reasonably calculated to inform the holders adversely affected thereby, and the Company will extend the Plan Solicitation period for Ballots and Master Ballots for an appropriate period, depending upon the significance of the amendment, modification or supplement and the manner of disclosure to holders of Claims and Interests if the Plan Solicitation period would otherwise expire during such period. REVOCATION OF THE PREPACKAGED PLAN Subject to certain limitations contained in the Prepackaged Plan, the Company reserves the right to revoke and withdraw the Prepackaged Plan at any time and solely within its discretion prior to the Confirmation Date, with the consent of the Principal Holders. If the Company revokes or withdraws the Prepackaged Plan, or if confirmation of the Prepackaged Plan does not occur or if the Prepackaged Plan does not become effective, then the Prepackaged Plan will be null and void, and nothing contained in the Prepackaged Plan will (1) constitute a waiver or release of any Claims by or against, or any interests in, the Company, (2) constitute an admission of any fact or legal conclusion by the Company, the Company as debtor in possession in the Reorganization Case (the "Debtor in Possession") or any other individual, corporation, limited liability company, partnership, association, joint stock company, joint venture, estate, trust, unincorporated organization, government or any political subdivision thereof, governmental unit, Creditors' Committee, unofficial committee of creditors or equity holders or other entity (an "Entity"), or (3) prejudice in any manner the rights of the Company or the Debtor in Possession in any further proceedings involving the Company or the Debtor in Possession. CONFIRMATION OF THE PREPACKAGED PLAN If the Requisite Plan Acceptances are received and the Company seeks to implement the Prepackaged Plan by commencing the Reorganization Case under Chapter 11 of the Bankruptcy Code, the Company will request that the Bankruptcy Court hold a confirmation hearing as promptly as practicable, upon such notice to the parties in interest as is required by the Bankruptcy Code, the Bankruptcy Rules and the Bankruptcy Court. Parties in interest, including all holders of Claims and Interests, will receive notice of the date and time fixed by the Bankruptcy Court for the confirmation hearing. The Bankruptcy Court will also establish procedures for the filing and service of objections to confirmation of the Prepackaged Plan. For the Prepackaged Plan to be confirmed, the Bankruptcy Code requires that the Bankruptcy Court determine that the Prepackaged Plan complies with the requirements of section 1129 of the Bankruptcy Code. Section 1129 provides that the Bankruptcy Court must find, among other things, that (i) the Prepackaged Plan has been accepted by all classes of impaired Claims and impaired Interests entitled to vote on the Prepackaged Plan, except to the extent that confirmation, despite the rejection of one or more classes, is available under the "cramdown" provisions of section 1129(b) of the Bankruptcy Code, (ii) the Prepackaged Plan has been accepted by at least one class of impaired Claims without considering the votes of "insiders," (iii) the Prepackaged Plan is feasible (i.e., that there is a reasonable probability that the Company will be able 57 to perform its obligations under the Prepackaged Plan and continue to operate its business without further financial reorganization or liquidation), and (iv) the Prepackaged Plan meets the requirements of section 1129(a)(7) of the Bankruptcy Code, which requires that, with respect to each impaired class, each holder of a Claim or Interest either (a) accepts the Prepackaged Plan, or (b) receives at least as much under the Prepackaged Plan as such holder would receive in a liquidation of the Company under Chapter 7 of the Bankruptcy Code. There are several other confirmation standards that must be met including, without limitation, (i) the Prepackaged Plan is proposed in good faith, (ii) the Prepackaged Plan and its proponent comply with the Bankruptcy Code, (iii) payments for services in or in connection with the Bankruptcy Case or the Prepackaged Plan are approved by or subject to court approval, (iv) the identity of management, officers or trustees of the Company have been disclosed, including their compensation and their continuation in office is consistent with the interests of creditors, shareholders and public policy, (v) all statutory fees have been or will be paid, and (vi) if there has been a modification, there is a continuation of retiree benefits at certain levels. Although the Company believes that the Company and the Prepackaged Plan will meet such tests, as well as the other requirements of section 1129 of the Bankruptcy Code, there can be no assurance that the Bankruptcy Court will reach the same conclusion and confirm the Prepackaged Plan. Moreover, even if the Requisite Plan Acceptances have been obtained from the holders of Claims and Interests prior to the commencement of the Reorganization Case, the Bankruptcy Court may determine that such holders have not validly accepted the Prepackaged Plan by finding that the Solicitation did not comply with all of the applicable provisions of the Bankruptcy Code. See "Special Factors and Certain Considerations--Considerations Relating to the Prepackaged Plan." In such event, the Bankruptcy Court may order the Company to resolicit acceptances and, therefore, confirmation of the Prepackaged Plan would be delayed and possibly jeopardized. Although the Company believes that the Solicitation complies with the applicable provisions of the Bankruptcy Code and that the acceptances received will be accepted as votes for the Prepackaged Plan by the Bankruptcy Court, there can be no assurance that the Bankruptcy Court will reach the same conclusion. Nonconsensual Confirmation. If any impaired class of Claims or Interests (other than Class 2) entitled to vote on the Prepackaged Plan, does not vote to accept the Prepackaged Plan, the Company intends to use "cramdown" procedures with respect to any such impaired classes (other than Class 2), if necessary. In the event that any impaired class of Claims or Interests does not accept the Prepackaged Plan, the Bankruptcy Court may nevertheless confirm the Prepackaged Plan at the Company's request by applying "cramdown" procedures under section 1129(b) if the requirements of section 1129(b) of the Bankruptcy Code are satisfied. To invoke such "cramdown" procedures, at least one non-insider impaired class of Claims must accept the Prepackaged Plan, and if, as to each impaired class which has not accepted the Prepackaged Plan, the Bankruptcy Court determines that the Prepackaged Plan "does not discriminate unfairly" (as discussed below) and is "fair and equitable" (as discussed below) with respect to such nonaccepting class, the Bankruptcy Court may confirm the Prepackaged Plan. Under the Prepackaged Plan, Classes 2, 3, 4, 5 and 6 constitute classes of impaired Claims or Interests. If the class of holders of Outstanding Common Shares do not vote to accept the Prepackaged Plan, all Outstanding Common Shares will be cancelled and holders of Outstanding Common Shares will not receive or retain anything under the Prepackaged Plan. See "Special Factors and Certain Considerations--Considerations Relating to the Prepackaged Plan-- Nonconsensual Confirmation." The Company reserves the right to request nonconsensual confirmation of the Prepackaged Plan if any such classes (other than Class 2) rejects the Prepackaged Plan. No Unfair Discrimination. A plan of reorganization "does not discriminate unfairly" if (a) the legal rights of a nonaccepting class are treated in a manner that is consistent with the treatment of other classes whose legal rights are identical with those of the nonaccepting class, and (b) no class receives payments in excess of that which it is legally entitled to receive for its claims or equity interests. The Company believes that under the Prepackaged Plan (x) all classes of Claims and Interests are treated in a manner that is consistent with the treatment of other classes of Claims and Interests, if any, with which their legal rights are identical, and 58 (y) no class of Claims or Interests will receive payments or property with an aggregate value greater than the aggregate value of the Allowed Claims and Allowed Interests in such class. Accordingly, the Company believes the Prepackaged Plan does not discriminate unfairly with respect to any impaired class of Claims or Interests. Fair and Equitable Test. The Bankruptcy Code establishes the following different "fair and equitable" tests for secured creditors, unsecured creditors and equity holders: (a) Secured Creditors. Either (i) each secured creditor in an impaired class of claims retains the liens securing its secured claim and receives on account of its secured claim deferred cash payments having a present value equal to the amount of its allowed secured claim, (ii) each impaired secured creditor realizes the "indubitable equivalent" of its allowed secured claim, or (iii) the property securing the claim is sold free and clear of liens with such liens to attach to the proceeds, and the liens against such proceeds are treated in accordance with clause (i) or (ii) of this subparagraph (a). (b) Unsecured Creditors. Either (i) each unsecured creditor in an impaired class of claims receives or retains under the plan of reorganization property of a value equal to the amount of its allowed claim, or (ii) the holders of claims that are senior to the claims of the nonaccepting class do not receive more than 100% (present value) for their claims and the holders of claims and equity interests that are junior to the claims of the nonaccepting class do not receive any property under the plan of reorganization on account of such claims and equity interests. (c) Equity Holders. Either (i) each holder of an equity interest will receive or retain, under the plan of reorganization, property of a value equal to the greater of (a) the fixed liquidation preference or redemption price, if any, of such stock or (b) the value of the stock, or (ii) the holders of interests that are junior to the nonaccepting class will not receive any property under the plan of reorganization. THE COMPANY RESERVES THE ABSOLUTE RIGHT TO SEEK NONCONSENSUAL CONFIRMATION OF A PLAN WITH RESPECT TO ANY CLASS OF CLAIMS OR INTERESTS (OTHER THAN CLASS 2) VOTING ON THE PREPACKAGED PLAN IN THE EVENT THE REQUISITE PLAN ACCEPTANCES ARE NOT RECEIVED WITH RESPECT TO ANY SUCH CLASS AND TO REVOKE THE PREPACKAGED PLAN OR MAKE ANY MODIFICATIONS OR AMENDMENTS TO TREATMENTS PROVIDED IN THE PREPACKAGED PLAN SUBJECT TO THE CONDITIONS CONTAINED IN THE PREPACKAGED PLAN THAT ARE NECESSARY TO OBTAIN SUCH NONCONSENSUAL CONFIRMATION. Acceptance of the Prepackaged Plan. Under section 1129(a)(10) of the Bankruptcy Code, if a class of claims or interests is impaired under a plan, the plan must be accepted by holders of at least one class of "impaired" claims or interests without considering the votes of "insiders" within the meaning of the Bankruptcy Code. The classes consisting of the Outstanding Notes, Outstanding Common Shares, Other Secured Claims and Unsecured Claims are the only classes of impaired Claims or Interests under the Prepackaged Plan that are entitled to vote to accept or reject the Prepackaged Plan. No "insiders" own Outstanding Notes, Other Secured Claims or Unsecured Claims. Outstanding Common Shares are owned by "insiders" within the meaning of section 1129(a)(10) and such insiders' votes will not be counted for purposes of determining whether Class 5 accepts the Prepackaged Plan. Feasibility Test. The Bankruptcy Code requires that the Bankruptcy Court must find that a plan passes the Feasibility Test. For the Prepackaged Plan to meet the Feasibility Test, the Bankruptcy Court must find that the Company, as reorganized, will possess the resources and working capital necessary to provide all creditors with the treatment specified in the Prepackaged Plan and to continue to operate its business upon and after the consummation of the Prepackaged Plan. The Company believes the Prepackaged Plan satisfies the Feasibility Test. 59 As of the Effective Date, the Company will retain assets sufficient to pay all Claims against the Company and to pay all principal and interest on the New Senior Notes when and as due. Assuming holders of Outstanding Common Shares vote to accept the Prepackaged Plan, such holders will retain their interests in the Company, subject to the Reverse Stock Split and dilution upon issuance of New Common Shares to the holders of Outstanding Notes. The Company has analyzed its ability to meet its obligations under the Restructuring. As part of this analysis, the Company has prepared projections of its financial performance for the five-year period ending September 30, 2000. These projections, and the significant assumptions on which it is based, are included in the "Financial Projections." The Company believes, based on this analysis, that the Restructuring provides a feasible means of reorganization and operation from which there is a reasonable expectation that, subject to the risks disclosed in this Disclosure Statement, the Company will be able to make all payments required to be made pursuant to the Restructuring. Because financial projections are inherently imprecise, holders of Outstanding Securities are cautioned not to place undue reliance on the projections. There can be no assurance that a Bankruptcy Court will agree with the Company's determination. See "Financial Projections." Best Interests of Creditors Test; Liquidation Value. In addition, the Bankruptcy Code requires that, to confirm a plan of reorganization, each holder of a claim or equity interest in an impaired class must either (i) accept the plan, or (ii) receive or retain under the plan cash or property of a value, as of the effective date of the plan, that is not less than the value such holder would receive or retain if the debtor were liquidated under Chapter 7 of the Bankruptcy Code. To calculate what holders of each impaired class of claims and equity interests would receive if the debtor were liquidated under Chapter 7 of the Bankruptcy Code, the Bankruptcy Court must determine the "liquidation value" of the debtor, which would consist primarily of the proceeds from a sale of the debtor's assets by a Chapter 7 trustee. The proceeds from a Chapter 7 liquidation that would be available to all claims would be reduced by, first, the secured claims to the extent of the value of their collateral, by the costs and expenses of liquidation, and by other administrative expenses and costs of the Chapter 7 case and the costs and expenses of a Chapter 11 case, if any. Costs of liquidation under Chapter 7 of the Bankruptcy Code would include the fees of a trustee, and of counsel and other professionals (including financial advisors and accountants) retained by the trustee, asset disposition expenses, litigation costs and claims arising from the operations of the Company's business during the Chapter 7 liquidation case. The liquidation itself could trigger certain "priority claims," such as claims for severance pay, and could accelerate other priority payments that otherwise would be due in the ordinary course of business. Those priority claims would be paid in full out of the liquidation proceeds before the balance would be made available to pay all unsecured claims or to make any distributions in respect of equity interests. To determine if the Prepackaged Plan is in the best interests of each impaired class, the present value of the distributions of the proceeds from the liquidation of the Company's assets and properties, after subtracting the amounts attributable to the foregoing Claims, are compared with the value of the property offered to such classes of Claims and Interests under the Prepackaged Plan. Provided that the present values offered to such classes of Claims and Interests under the Prepackaged Plan are equal to or exceed what would be realized in a Chapter 7 liquidation, the Prepackaged Plan is in the best interest of each impaired class. In applying the "best interests test," it is possible that Claims and Interests in the Chapter 7 case may not be classified as provided in the Prepackaged Plan. In the absence of a contrary determination by the Bankruptcy Court, all pre-Chapter 11 unsecured claims that have the same rights upon liquidation would be treated as one class for purposes of determining the potential distribution of the liquidation proceeds resulting from the Company's Chapter 7 case. The distributions from the liquidation proceeds would be calculated ratably according to the amount of the Claim held by each creditor. The Company believes that the most likely outcome of liquidation proceedings under Chapter 7 would be that no class junior to the Outstanding Notes will receive any distribution. 60 Applying the "best interests test" to the Outstanding Notes, the Outstanding Common Shares, Other Secured Claims and Unsecured Claims, the Company believes that the confirmation of the Prepackaged Plan will provide each holder of the Outstanding Notes, Outstanding Common Shares, Other Secured Claims and Unsecured Claims with a greater recovery than it would receive if the Company were liquidated under Chapter 7. In the Company's view, a Chapter 7 liquidation is uncertain as to timing and amounts of payments to the holders of the Outstanding Notes and would leave nothing for holders of Unsecured Claims or Outstanding Common Shares. The Prepackaged Plan provides as much certainty as is possible regarding these matters. The Company's analysis of estimated recoveries under the Prepackaged Plan and in the context of a Chapter 7 liquidation is set forth below. Chapter 7 Liquidation Analysis. The Bankruptcy Court will determine whether the Prepackaged Plan meets the "best interests" test. Accordingly, the Chapter 7 liquidation analysis set forth herein is provided solely to disclose to holders of Claims and Interests the effects of a hypothetical Chapter 7 liquidation of the Company, subject to the assumptions set forth herein. There can be no assurance that such assumptions would be made or accepted by the Bankruptcy Court. The Chapter 7 liquidation analysis was completed on or about May 15, 1995. The Company is not aware of any events subsequent to such date that would materially impact the Chapter 7 liquidation analysis. The table below sets forth the computation of liquidation values as of March 31, 1995. See "Special Purpose Valuation Report of Kenneth Leventhal & Company on Range of Liquidation Values" included herein as Annex D. MORTGAGE AND REALTY TRUST RANGE OF LIQUIDATION VALUES AS OF MARCH 31, 1995
RANGE ----------------- LOW HIGH -------- -------- (DOLLARS IN THOUSANDS) Extrapolated Liquidation Value of Portfolio (A)............ $192,600 $218,100 Adjustments: Add: Cash on Hand (B)................................... 1,500 1,500 Marketable Securities (B).......................... 71,600 71,600 Accounts Receivables and Other Assets (A)(B)....... 1,800 3,700 -------- -------- 267,500 294,900 Less: Outstanding Debt--Imperial (B)..................... 17,600 17,600 Deferred Compensation (B).......................... 400 400 Accounts Payable and Accrued Expenses (B).......... 3,400 3,400 Termination Pay Plan (A)(B)........................ 1,400 1,400 Wind Down G&A Expenses (A)......................... 5,000 5,000 Legal, Liquidation Costs, etc. (A)................. 10,000 8,000 -------- -------- $229,700 $259,100 ======== ======== Range of Liquidation Values as of March 31, 1995........... $220,000 $260,000 ======== ========
SEE ACCOMPANYING NOTES 61 NOTES TO RANGE OF LIQUIDATION VALUES AS OF MARCH 31, 1995 (A) For the purposes of determining a range of liquidation values, the following assumptions were utilized. .All assets in the portfolio were disposed of within a 12 month period under a judicially mandated process. .The assets were sold in discrete individual transactions, not in a bulk sale. .The Extrapolated Liquidation Value of the Portfolio was determined by applying capitalization rates of 14 percent (high) and 16 percent (low) to the net operating income for selected assets for the 12 month period from April 1996 to March 1997. These capitalized values were extrapolated to the entire MRT portfolio. Real estate assets with outstanding offers for sale at the valuation date were included at their offer price. Sales proceeds were reduced by estimated selling expenses of five percent. .Performing real estate loans were assumed sold at discounts from book value of 10 percent (high) and 20 percent (low). .Accounts Receivable and Other Assets are considered 50 percent collectible (low) or 100% collectible (high). .Termination Pay Plan has been estimated at approximately $1.4 million. .Wind Down G&A expenses were assumed to be $5 million. .Legal, accounting and other costs associated with the judicial liquidation were assumed to be between $8 million (high) and $10 million (low). (B) Amount per Mortgage and Realty Trust Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. Comparative Analysis The Company believes that holders of impaired Claims and Interests will realize a greater recovery under the Prepackaged Plan than they would under a Chapter 7 liquidation because of (i) the increased costs and expenses of a liquidation under Chapter 7 arising from the fees payable to a trustee in bankruptcy and professional advisors to such trustee, (ii) the erosion in the value of assets during the expeditious liquidation required under a Chapter 7 liquidation and the "forced sale" atmosphere that would prevail, (iii) the adverse effects on the saleability of the Company's real estate assets in the current depressed market for real estate, and (iv) the substantial increase in Administrative Claims in a Chapter 7 case that would be satisfied on a priority basis or on parity with existing Unsecured Claims. 62 The table below sets forth a comparison of the estimated distributions to holders of impaired Claims and Interests under the Prepackaged Plan with the estimated recoveries of such holders in a Chapter 7 liquidation of the Company. The comparison should be read in conjunction with all other information set forth under "--Chapter 7 Liquidation Analysis" above.
LOW HIGH -------- -------- (DOLLARS IN THOUSANDS) Net Liquidation Value (a). $241,000 $281,000
APPROXIMATE DESCRIPTION OF CLAIM CLAIMS AMOUNT (b) - -------------- ----------- Outstanding Notes........... $341,324 Other Secured Claims (e)...... 17,600 Unsecured Claims (f)............. 3,400 Outstanding Com- mon Shares...... N/A -------- Total......... $362,324 ======== CHAPTER 7 PREPACKAGED PLAN --------------------------------------------------- ----------------------------------------------------------- LOW HIGH LOW HIGH ------------------------- ------------------------- ----------------------------- ----------------------------- DESCRIPTION OF ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED CLAIMS DISTRIBUTION RECOVERY (c) DISTRIBUTION RECOVERY (c) DISTRIBUTION (d) RECOVERY (c) DISTRIBUTION (d) RECOVERY (c) - -------------- ------------ ------------ ------------ ------------ ---------------- ------------ ---------------- ------------ (DOLLARS IN THOUSANDS) Outstanding Notes........... $223,400 65.5% $263,400 77.2% $261,850 76.7% $281,250 82.4% Other Secured Claims (e)...... 17,600 100% 17,600 100% 17,600 100% 17,600 100% Unsecured Claims (f)............. 0 0.0% 0 0.0% 3,400 100% 3,400 100% Outstanding Com- mon Shares...... 0 N/A 0 N/A 3,150 N/A 3,750 N/A ------------ ------------ ------------ ------------ ---------------- ------------ ---------------- ------------ Total......... $241,000 66.5% $281,000 77.6% $286,000 78.9% $306,000 84.5% ============ ============ ============ ============ ================ ============ ================ ============
(a) Based on Liquidation Analysis as of March 31, 1995, before the deduction of the Imperial Bank Debt equal to approximately $17.6 million and accounts payable and accruals of approximately $3.4 million. See "Special Purpose Valuation Report of Kenneth Leventhal & Company on Range of Liquidation Values" included herein as Annex D. (b) Includes accrued interest through March 31, 1995. (c) Percentage shown in the table is the quotient of the available distribution divided by the estimated amount of claims in such class. (d) For purposes of computing available distribution under the Prepackaged Plan, securities are valued based upon a reorganization value between $265 million and $285 million, and a reorganization equity value between $105 million and $125 million. See "Special Purpose Valuation Report of Kenneth Leventhal & Company on Range of Going Concern Values" and "Special Purpose Valuation Report of Kenneth Leventhal & Company on Range of Liquidation Values" included herein as Annexes C and D, respectively. It should be noted that depending on general market conditions, the size of the block of New Common Stock that may trade and other factors prevailing at the relevant times, the securities may trade at prices lower than those reflected above. Accordingly, no representation can be or is being made with respect to whether the percentage recoveries shown above will actually be realized by the holder of claims in any particular Class under the Prepackaged Plan. (e) Represents Debt of a wholly-owned Subsidiary, which is a California limited partnership, of the Company. The assets of such subsidiary are included in the Net Liquidation Value described above. (f) Represents accounts payable and accrued expenses as of March 31, 1995. 63 Accordingly, the Company believes that the Prepackaged Plan meets the requirements of section 1129(a)(7) of the Bankruptcy Code because each holder of a Claim or Interest impaired under the Prepackaged Plan will have accepted the Prepackaged Plan or will recover at least as much under the Prepackaged Plan as such holder would recover in a Chapter 7 liquidation of the Company. EFFECTS OF PREPACKAGED PLAN CONFIRMATION Discharge and Injunction. On the Effective Date, the Company will be discharged from all Claims and Interests that exist prior to confirmation of the Prepackaged Plan, except as provided for in the Prepackaged Plan or the Confirmation Order. Except as otherwise provided in the Prepackaged Plan, the rights afforded under the Prepackaged Plan and the treatment of all Claims and Interests therein will be in exchange for and in complete satisfaction, discharge and release of all Claims and Interests of any nature whatsoever, including any interest accrued on such Claims from and after the Petition Date, against the Company and the Debtor in Possession, or any of their assets or properties. Except as otherwise provided in the Prepackaged Plan or the Confirmation Order, (i) on the Effective Date, the Company will be deemed discharged and released to the fullest extent permitted by section 1141 of the Bankruptcy Code from all Claims and Interests, including, but not limited to, demands, liabilities, Claims and Interests that arose before the Confirmation Date and all debts of the kind specified in sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not, (a) a proof of Claim or proof of Interest based on such debt or Interest is filed or deemed filed pursuant to section 501 of the Bankruptcy Code, (b) a Claim or Interest based on such debt or Interest is allowed pursuant to section 502 of the Bankruptcy Code, or (c) the holder of a Claim or Interest based on such debt or Interest has accepted the Prepackaged Plan, and (ii) all entities will be precluded from asserting against the Reorganized Debtor, its successors or its assets or properties any other or further Claims or Interests based upon any act or omission, transaction or other activity of any kind or nature that occurred prior to the Confirmation Date. Except as otherwise provided in the Prepackaged Plan or the Confirmation Order, the Confirmation Order will act as a discharge of any and all Claims against and all debts and liabilities of the Company, as provided in sections 524 and 1141 of the Bankruptcy Code, and such discharge will void any judgment against any of the Company at any time obtained to the extent that it relates to a Claim discharged. Except as otherwise provided in the Prepackaged Plan or the Confirmation Order, on and after the Effective Date, all entities who held, currently hold or may hold a debt, Claim or Interest discharged under the Prepackaged Plan are permanently enjoined from taking any of the following actions on account of any such discharged debt, Claim or Interest: (1) commencing or continuing in any manner any action or other proceeding against the Company, the Reorganized Debtor, their successors or their respective property; (2) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order against the Company, the Reorganized Debtor, their successors or their respective property; (3) creating, perfecting or enforcing any lien or encumbrance against the Company, the Reorganized Debtor, their successors or their respective property; (4) asserting any setoff, right of subrogation or recoupment of any kind against any obligation due to the Company, the Reorganized Debtor, their successors or their respective property; and (5) commencing or continuing any action, in any manner, in any place that does not comply with or is inconsistent with the provisions of the Prepackaged Plan or the Confirmation Order. Any Entity injured by any willful violation of such injunction will recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages, from the willful violator. Revesting. Except as otherwise provided in the Prepackaged Plan, the Company will, as the Reorganized Debtor, continue to exist after the Effective Date, with all the powers of a REIT under applicable law and without prejudice to any right to alter or terminate such existence under applicable state law. Without limiting the foregoing, the Company as the Reorganized Debtor may pay the charges that it incurs after the Effective Date for professionals' fees, disbursements, expenses or related support services without application to the Bankruptcy Court. Except as otherwise provided in the Prepackaged Plan, on the Effective Date, all property of the Estate of the Company will revest in the Reorganized Debtor, free and clear of all Claims, liens, encumbrances and 64 other interests of holders of Claims and Interests. From and after the Effective Date, the Reorganized Debtor may operate its business and use, acquire and dispose of property and settle and compromise Claims or Interests without supervision by the Bankruptcy Court and free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly imposed by the Prepackaged Plan, the Confirmation Order, the New Senior Note Indenture, the New Collateral Documents (as defined in the New Senior Note Indenture) and any document, agreement or instrument delivered in connection therewith. Retention of Jurisdiction. Notwithstanding the entry of the Confirmation Order or the occurrence of the Effective Date, the Bankruptcy Court will retain such jurisdiction over the Reorganization Case after the Effective Date as is legally permissible, including, without limitation, to (a) allow, disallow, determine, liquidate, classify or establish the priority or secured or unsecured status of or estimate of any Claim or Interest, including, without limitation, the resolution of any request for payment of any Administrative Claim or Class 2 Expense Claims and the resolution of any and all objections to the allowance or priority of Claims or Interests, (b) grant or deny any and all applications for allowance of compensation or reimbursement of expenses authorized pursuant to the Bankruptcy Code or the Prepackaged Plan, for periods ending on or before the Effective Date, (c) resolve any motions pending on the Effective Date to assume, assume and assign or reject any executory contract or unexpired lease to which the Company is a party or with respect to which the Company may be liable and to hear, determine and, if necessary, liquidate, any and all Claims arising therefrom, (d) ensure that distributions to holders of Allowed Claims and Allowed Interests are accomplished pursuant to the provisions of the Prepackaged Plan, (e) decide or resolve any and all applications, motions, adversary proceedings, contested or litigated matters and any other matters, and grant or deny any applications involving the Company that may be pending on the Effective Date, (f) enter such orders as may be necessary or appropriate to implement or consummate the provisions of the Prepackaged Plan and all contracts, instruments, releases, and other agreements or documents created in connection with the Prepackaged Plan or this Disclosure Statement, (g) resolve any and all controversies, suits or issues that may arise in connection with consummation of the Prepackaged Plan, (h) modify the Prepackaged Plan before or after the Effective Date pursuant to section 1127 of the Bankruptcy Code, or to modify this Disclosure Statement or any contract, instrument, release or other agreement or document created in connection with the Prepackaged Plan or this Disclosure Statement in accordance with section 1127 of the Bankruptcy Code; or remedy any defect or omission or reconcile any inconsistency in any Bankruptcy Court order, the Prepackaged Plan, this Disclosure Statement or any contract, instrument, release or other agreement or document created in connection with the Prepackaged Plan or this Disclosure Statement, in such manner as may be necessary or appropriate to consummate the Prepackaged Plan, to the extent authorized by the Bankruptcy Code, (i) issue injunctions, enter and implement other orders or take such other actions as may be necessary or appropriate to restrain interference by any entity with consummation or enforcement of the Prepackaged Plan, (j) enter and implement such orders as are necessary or appropriate if the Confirmation Order is for any reason modified, stayed, reversed, revoked or vacated, and (k) enter an order on a final decree concluding the Reorganization Case. If the Bankruptcy Court abstains from exercising jurisdiction or is otherwise without jurisdiction over any matter arising out of the Reorganization Case, including, without limitation, the matters set forth above, the Prepackaged Plan will have no effect upon and will not control, prohibit or limit the exercise of jurisdiction by any other court having competent jurisdiction with respect to such matter. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PREPACKAGED PLAN If the Company commences the Reorganization Case and the Prepackaged Plan is not subsequently confirmed and consummated, the alternatives to the Prepackaged Plan include (a) the proposal of an alternative plan of reorganization, or (b) liquidation of the Company under Chapter 11 or 7 of the Bankruptcy Code or otherwise. Alternative Plans. If the Prepackaged Plan is not confirmed, the Company or, if the Company's exclusive period in which to file a plan of reorganization has expired or is terminated, any other party in interest could 65 attempt to formulate a different plan. Such a plan might involve either a reorganization and continuation of the Company's business or an orderly liquidation of its assets. With respect to an alternative plan, the Company has explored various other alternatives in connection with the extensive negotiation process involved in the formulation and development of the Prepackaged Plan. The Company believes that the Prepackaged Plan enables holders of Claims and Interests to realize the most value under the circumstances. Liquidation Under Chapter 7. If no plan is confirmed, the Reorganization Case may be converted to a case under Chapter 7 of the Bankruptcy Code, pursuant to which a trustee would be elected or appointed to liquidate the assets of the Company for distribution to creditors in accordance with the priorities established by the Bankruptcy Code. A discussion of the effects that a Chapter 7 liquidation would have on the recovery of holders of Claims and Interests is set forth under "--Confirmation of the Prepackaged Plan--Best Interests of Creditors Test; Liquidation Value" above. The Company believes that holders of impaired Claims would realize a greater recovery under the Prepackaged Plan than would be realized under a Chapter 7 liquidation. Based upon the liquidation value, holders of Outstanding Common Shares would not receive or retain anything under a Chapter 7 liquidation. INSIDER AND AFFILIATE CLAIMS The Company is not aware of any claims that may be asserted by its former affiliate or by any of its subsidiaries. Members of the Board of Trustees are currently parties to a deferred compensation plan. The Company does not anticipate any insider claims to be asserted based on this plan. However, the Company cannot guarantee that such claims may not be asserted in the future. HOLDERS OF OUTSTANDING NOTES, OUTSTANDING COMMON SHARES, OTHER SECURED CLAIMS AND UNSECURED CLAIMS AND ALL OTHER INTERESTED PARTIES ARE URGED TO READ THE PREPACKAGED PLAN IN ITS ENTIRETY SO THAT THEY MAY MAKE AN INFORMED JUDGMENT CONCERNING THE PREPACKAGED PLAN. APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS TO RESALES OF NEW COMMON SHARES AND NEW SENIOR NOTES After completion of the Restructuring, there will be approximately 11,226,000 New Common Shares outstanding and approximately $110 million in principal amount of New Senior Notes outstanding. The New Common Shares and New Senior Notes to be issued pursuant to the Prepackaged Plan may be freely transferred by most recipients thereof and all resales in the New Common Shares and New Senior Notes are exempt from registration under federal and state securities laws, unless the holder is an "underwriter" with respect to such securities. Section 1145(b) of the Bankruptcy Code defines four types of "underwriters:" (i) persons who purchase a claim against, an interest in, or a claim for administrative expense against the debtor with a view to distributing any security received in exchange for such a claim or interest; (ii) persons who offer to sell securities offered under a plan for the holders of such securities; (iii) persons who offer to buy such securities for the holders of such securities, if the offer to buy is (a) with a view to distributing such securities or (b) made under a distribution agreement; and (iv) a person who is an "issuer" with respect to the securities, as the term "issuer" is defined in section 2(11) of the Securities Act. Under section 2(11) of the Securities Act, an "issuer" includes any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer. ANY PERSON OR GROUP OF PERSONS, WHO ACT IN CONCERT OR WHO RECEIVE A SUBSTANTIAL AMOUNT OF NEW COMMON SHARES PURSUANT TO THE PREPACKAGED PLAN, MAY BE DEEMED TO BE AN "ISSUER" AND THEREFORE AN "UNDERWRITER" UNDER THE FOREGOING DEFINITION. 66 To the extent that persons deemed to be "underwriters" receive New Common Shares or New Senior Notes pursuant to the Prepackaged Plan, resales by such persons would not be exempted by section 1145 of the Bankruptcy Code from registration under the Securities Act or other applicable law. Persons deemed to be underwriters, however, may be able to sell such securities without registration subject to the provisions of Rule 144 under the Securities Act, which permits the public sale of securities received pursuant to the Prepackaged Plan by "underwriters," subject to the availability to the public of current information regarding the issuer and to volume limitations and certain other conditions. In addition, each holder of Allowed Class 2 Claims that receives sufficient New Common Shares such that it and its affiliates own 5% or more of the total New Common Shares outstanding or 5% or more of New Senior Notes may enter into the Registration Rights Agreement which will permit registration of the sale of their New Common Shares or New Senior Notes in certain circumstances. The Registration Rights Agreement requires the Company to file a registration statement under the Securities Act for the offering on a continuous or delayed basis in the future of the New Common Shares and New Senior Notes (the "Shelf Registration") within 60 days from the Effective Date. Pursuant to the Registration Rights Agreement, the Company will use its best efforts to cause to be declared effective as soon as possible after such filing and to keep the Shelf Registration continuously effective for the period beginning on the date on which the Shelf Registration is declared effective and ending on the earlier of (i) the third anniversary of such date plus the number of days of any suspension of the holders' right to sell thereunder, and (ii) the first date that there are no securities for which a right of registration exists. A group of holders of at least 10% of the New Common Shares or New Common Notes may demand registration beginning at the end of the Shelf Registration period and ending on the earlier of (i) the seventh anniversary thereof and (ii) the first date on which there are no securities for which a right of registration exists. Whether or not any particular person would be deemed to be an "underwriter" with respect to any security to be issued pursuant to the Prepackaged Plan would depend upon various facts and circumstances applicable to that person. Accordingly, the Company expresses no view as to whether any person would be an "underwriter" with respect to any security to be issued pursuant to the Prepackaged Plan. GIVEN THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A PARTICULAR PERSON MAY BE AN "UNDERWRITER," THE COMPANY MAKES NO REPRESENTATION CONCERNING THE RIGHT OF ANY PERSON TO TRADE IN THE SECURITIES TO BE DISTRIBUTED PURSUANT TO THE RESTRUCTURING. THE COMPANY RECOMMENDS THAT POTENTIAL RECIPIENTS OF THE NEW COMMON SHARES AND NEW SENIOR NOTES CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH SECURITIES. No precise predictions can be made as to the effect, if any, that market sales of New Common Shares and New Senior Notes or the availability of New Common Shares for sale will have on the market prices of the Common Shares and New Senior Notes prevailing from time to time. Nevertheless, sales of substantial amounts of the New Common Shares and New Senior Notes in the public market could adversely affect the then prevailing market prices of the Common Shares and New Senior Notes and could impair the Company's ability to raise capital at that time through the sale of securities. THE PLAN SOLICITATION; VOTING PROCEDURES GENERAL This Disclosure Statement, together with the accompanying Ballot, Master Ballot and the related materials delivered together herewith, is being furnished to each Record Holder (as defined below) of Outstanding Notes, Outstanding Common Shares, Other Secured Claims and Unsecured Claims in connection with the Restructuring. The term "Record Holder" with respect to a vote on the Prepackaged Plan means any person holding the beneficial interest in a Claim or Interest on the Record Date. Holders 67 who purchase Claims or Interests or whose purchase of Claims or Interests is registered after the Record Date who wish to vote on the Prepackaged Plan must arrange with the seller of such Claims or Interests to receive a Ballot from the Record Holder on such date. Abstentions will not be counted as votes for or against the Prepackaged Plan, since only votes actually cast will be counted. Therefore, the Prepackaged Plan could be approved by an affirmative vote of (i) holders holding significantly less than two-thirds in amount and one-half in number of each of the classes of holders of Outstanding Notes, Other Secured Claims and Unsecured Claims and (ii) holders of Outstanding Common Shares holding significantly less than two-thirds in amount of the Outstanding Common Shares. See "--Required Votes" below. "Record Holders" do not include brokerage firms, commercial banks, trust companies or other nominees that do not hold Outstanding Securities for their own account. Such entities should provide copies of this Disclosure Statement, the Ballots and all of the related materials to their customers and to beneficial owners of such Outstanding Securities. Any beneficial owner who has not received a Disclosure Statement or Ballot should contact its brokerage firm or nominee, the Solicitation Agent, the Information Agent or the Company. If, by the Expiration Date, the Requisite Plan Acceptances have been received from the holder of Outstanding Notes, the Company currently intends to commence the Reorganization Case by filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code and to use the Plan Acceptances, as evidenced by the Ballots and Master Ballots solicited pursuant to this Disclosure Statement, to seek confirmation of the Prepackaged Plan under Chapter 11 of the Bankruptcy Code as promptly as possible. Under section 1126(b) of the Bankruptcy Code, a holder of a claim or equity interest that has accepted or rejected a plan of reorganization before the commencement of the Chapter 11 case will be deemed to have accepted or rejected such plan for purposes of confirmation of such plan under Chapter 11 of the Bankruptcy Code if the solicitation of such acceptance or rejection is in compliance with any applicable non-bankruptcy law, rule or regulation governing the adequacy of disclosure in connection with the solicitation. Rule 3018(b) of the Bankruptcy Rules prescribes the conditions that must be satisfied in order to count the ballots solicited with respect to a plan of reorganization prior to the commencement of a Chapter 11 case. The rule requires that the Bankruptcy Court must determine, after notice and a hearing, that (i) such Chapter 11 plan was disseminated to substantially all holders of impaired claims and equity interests, (ii) the time prescribed for voting on such a plan was not unreasonably short, and (iii) the solicitation was conducted in compliance with all applicable non-bankruptcy laws, rules and regulations, or, if there are no such applicable laws, rules or regulations, then the disclosure statement must contain "adequate information," or such pre- petition solicitation will not be considered. Section 1125(a) of the Bankruptcy Code defines "adequate information" as information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of a company and the condition of such company's books and records, that would enable a hypothetical reasonable investor typical of holders of claims or equity interests of the relevant class to make an informed judgment about the plan of reorganization. The Company believes that this Disclosure Statement and the Plan Solicitation comply with applicable non-bankruptcy law and section 1125(a) of the Bankruptcy Code and, therefore, with the requirements of the Bankruptcy Code and applicable Bankruptcy Rules, including section 1126(b) of the Bankruptcy Code and Rule 3018(b) of the Bankruptcy Rules, for the purpose of soliciting acceptances or rejections of the Prepackaged Plan and that duly executed Ballots and Master Ballots will be in compliance with the applicable provisions of the Bankruptcy Code. This Disclosure Statement and the Prepackaged Plan (delivered herewith as Annex A) are being transmitted to all known Record Holders. The solicitation period for voting on the Prepackaged Plan is more than 20 business days, which is the time prescribed by the Commission for an exchange offer pursuant to Rule 14e-1 under the Exchange Act. The Company has filed with the Commission proxy materials relating to Common Share acceptances solicited hereby. Moreover, the Company believes that this Disclosure Statement contains adequate information for all Holders to cast an informed vote to accept or reject the Prepackaged Plan. 68 IF THE PREPACKAGED PLAN IS CONFIRMED BY THE BANKRUPTCY COURT, EACH HOLDER OF AN OUTSTANDING NOTE WILL RECEIVE THE SAME CONSIDERATION AS OTHER HOLDERS OF OUTSTANDING NOTES, EACH HOLDER OF OTHER CLAIMS WILL RECEIVE THE SAME CONSIDERATION AS OTHER CLAIMS IN THE SAME CLASS AND EACH HOLDER OF OUTSTANDING COMMON SHARES WILL RETAIN THE SAME PROPERTY AS OTHER HOLDERS OF OUTSTANDING COMMON SHARES WHETHER OR NOT SUCH HOLDER VOTED TO ACCEPT THE PREPACKAGED PLAN. MOREOVER, UPON CONFIRMATION, THE PREPACKAGED PLAN WILL BE BINDING ON ALL CREDITORS AND INTEREST HOLDERS OF THE COMPANY REGARDLESS OF WHETHER SUCH CREDITORS AND INTEREST HOLDERS VOTED TO ACCEPT THE PREPACKAGED PLAN. VOTING RECORD DATE Consistent with the provisions of Rule 3018(b) of the Bankruptcy Rules and Rule 14e-1 under the Exchange Act, the Company has fixed the close of business (New York City time) on July 7, 1995 as the Record Date for determining which Holders are eligible to vote on the Prepackaged Plan. REQUIRED VOTES To confirm the Prepackaged Plan without utilizing the "cramdown" provisions of Chapter 11 of the Bankruptcy Code as to a class of Claims or Interests entitled to vote on the Prepackaged Plan, it is necessary, among other things, for the Company to receive Plan Acceptances from (i) holders of Claims constituting at least two-thirds in dollar amount and more than one-half in number of the allowed Claims in each impaired class voting on the Prepackaged Plan and (ii) holders of at least two-thirds in amount of the Outstanding Common Shares in such class voting on the Restructuring. Ballots not cast in favor of or against the Prepackaged Plan are not counted as votes for or against the Prepackaged Plan. Therefore, the Prepackaged Plan could be approved by (i) holders with an affirmative vote of significantly less than the holders of two-thirds in dollar amount and one-half in number of each of the Outstanding Notes, Other Secured Claims and Unsecured Claims and (ii) holders of Outstanding Common Shares with an affirmative vote of significantly less than two-thirds of the holders of the Outstanding Common Shares. If necessary, the Company intends to use "cramdown" procedures with respect to all impaired classes which reject the Prepackaged Plan other than the class of holders of Outstanding Notes. In any event, confirmation of the Prepackaged Plan will require, among other things, the acceptance (as indicated above) of at least one impaired non-insider class of Claims. See "The Prepackaged Plan-- Confirmation of the Prepackaged Plan--Nonconsensual Confirmation." The Company reserves the right to request nonconsensual confirmation of the Prepackaged Plan in the event any impaired class entitled to vote (other than the class of Outstanding Notes) fails to vote to accept the Prepackaged Plan. HOW TO VOTE Persons Entitled to Vote. The following classes of Claims and Outstanding Common Shares are impaired under the Prepackaged Plan and holders of allowed Claims or Interests in such classes, as of the Record Date, are entitled to vote to accept or reject the Prepackaged Plan upon the terms and subject to the conditions set forth herein and in the Prepackaged Plan: Class 2--Claims of Holders of Outstanding Notes Class 3--Other Secured Claims Class 4--Unsecured Claims Class 5--Interests of Holders of Outstanding Common Shares The class of holders of Outstanding Stock Rights Claims (Class 6) is also impaired under the Prepackaged Plan; however, no distribution shall be made to holders of such Claims and, therefore, such class is deemed to have rejected the Prepackaged Plan and is not being solicited to vote to accept or reject the Prepackaged Plan. 69 Voting Procedure. The Company will not hold a meeting to vote on the Prepackaged Plan. Rather, the Company is soliciting acceptance of the Prepackaged Plan by means of Ballots and Master Ballots. All votes to accept or reject the Prepackaged Plan must be cast by using the Ballot or, in the case of a brokerage firm or other nominee holding Outstanding Securities in its own name on behalf of a beneficial owner, the Master Ballot, enclosed with this Disclosure Statement (or original, manually executed facsimiles thereof). Brokerage firms or other nominees holding Outstanding Notes for the account of only one beneficial owner may use the Ballot. Purported votes that are cast in any other manner will not be counted. Ballots and Master Ballots must be received by the solicitation agent no later than 12:00 Midnight, New York City time, on the Expiration Date. ONLY BALLOTS AND MASTER BALLOTS ARE BEING REQUESTED AT THIS TIME. DO NOT DELIVER ANY OTHER DOCUMENTS PERTAINING TO THE PLAN SOLICITATION TO THE COMPANY, THE SOLICITATION AGENT OR ANY OTHER AGENT UNLESS AND UNTIL REQUESTED TO DO SO BY THE COMPANY. Beneficial Owners. Any beneficial owner holding Outstanding Securities in its own name that is reflected on the register (maintained with respect to the Outstanding Notes by the Outstanding Note Trustee pursuant to the Outstanding Note Indenture and maintained with respect to the Outstanding Common Shares by the transfer agent for the Company's Common Shares) on the applicable Record Date can vote by completing and signing the enclosed Ballot and returning it directly to the Solicitation Agent (using the enclosed pre-addressed, stamped envelope) prior to the Expiration Date. For purposes of voting to accept or reject the Prepackaged Plan, such beneficial owners of Outstanding Securities will be deemed to be the "holders" of such Outstanding Securities. Any broker or other intermediary having power of attorney or a proxy to vote on behalf of a beneficial owner or a beneficial owner holding Outstanding Securities in "street names" (i.e., through a brokerage firm, bank, trust company or other nominee) can vote by following the instructions set forth below: 1. Fill in all the applicable information on the Ballot. 2. Sign the Ballot (unless the Ballot has already been signed by the bank, trust company or other nominee). 3. Return the Ballot to the addressee in the pre-addressed, stamped envelope enclosed with the Ballot. If no envelope was enclosed, contact the Solicitation Agent for instructions. Any Ballot submitted to a brokerage firm or proxy intermediary will not be counted until such brokerage firm or proxy intermediary (i) properly executes and delivers such Ballot to the Solicitation Agent or (ii) properly completes and delivers a corresponding Master Ballot to the Solicitation Agent prior to the Expiration Date. Brokerage Firms, Banks, and Other Nominees. A brokerage firm, commercial bank, trust company or other nominee that is the Record Holder of Outstanding Securities for a beneficial owner can vote on behalf of such beneficial owner by (i) distributing a copy of this Disclosure Statement, the Ballot and all of the related materials and all appropriate Ballots to such beneficial owner, (ii) collecting all such Ballots, (iii) completing a Master Ballot compiling the votes and other information from the Ballots collected, and (iv) transmitting such completed Master Ballot to the Solicitation Agent prior to the Expiration Date. A proxy intermediary acting on behalf of a brokerage firm or bank may follow the procedures outlined in the preceding sentence to vote on behalf of such beneficial owner. Alternatively, a brokerage firm, commercial bank, trust company or other nominee that is the Record Holder of Outstanding Securities for only one beneficial owner may arrange for such beneficial owner to vote by distributing a copy of this Disclosure Statement and a Ballot to such beneficial owner for such beneficial owner to execute and return to the Solicitation Agent. Other. If a Ballot is signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should indicate such capacity when signing and, unless otherwise determined by the Company, must submit proper evidence satisfactory to the Company of their authority to act in such capacity. 70 AGREEMENTS UPON FURNISHING BALLOTS ACCEPTING THE RESTRUCTURING The delivery of a Ballot or Master Ballot accepting the Prepackaged Plan pursuant to one of the procedures set forth herein will constitute the agreement of the Holder to accept all the terms of, and conditions to, the Prepackaged Plan (or any modification thereof that does not materially and adversely affect the treatment of the class of Claims or Interests of which such Holder is a member). WAIVERS OF DEFECTS, IRREGULARITIES, ETC. Unless otherwise directed by the Bankruptcy Court, all questions regarding the validity, form, eligibility (including the time of receipt), acceptance and revocation or withdrawal of Ballots and Master Ballots will be determined by the Company in its sole discretion (subject to applicable law), whose determinations will be final and binding. As indicated below under "Revocation Rights," effective revocation of Ballots and Master Ballots must be delivered to the Solicitation Agent prior to 12:00 Midnight (New York City time) on the Expiration Date. The Company reserves the right to contest the validity of any such revocation. The Company also reserves the right (subject to applicable law) to reject any and all Ballots and Master Ballots not in proper form, the acceptance of which would, in the opinion of the Company or its counsel, be unlawful. The Company further reserves the right (subject to applicable law) to waive any defects or irregularities or conditions of delivery with respect to any particular Ballot or Master Ballot. The interpretation of defects or irregularities (including the Ballot or Master Ballot and the respective instructions thereto) by the Company, unless otherwise directed by the Bankruptcy Court, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with deliveries of Ballots or Master Ballots must be cured within such time as the Company (or the Bankruptcy Court) determines. Neither the Company nor any other person will be under any duty to provide notification of defects or irregularities with respect to deliveries of Ballots or Master Ballots nor will any of them incur any liabilities for failure to provide such notification. Unless otherwise directed by the Bankruptcy Court, delivery of such Ballots and Master Ballots will not be deemed to have been made until such irregularities have been cured or waived. Ballots and Master Ballots with irregularities that have not been cured or waived will be invalidated. EXPIRATION DATE; EXTENSION; AMENDMENTS The Solicitation will expire at 12:00 Midnight, New York City Time, on August 17, 1995, unless extended by the Company, in its sole discretion, in which case the term "Expiration Date" will mean the latest time and date to which the Solicitation is extended. Except to the extent the Company so determines or as permitted by the Bankruptcy Court pursuant to Rule 3018 of the Bankruptcy Rules, Ballots and Master Ballots that are received after the Expiration Date will not be accepted or used by the Company in connection with the Company's request for confirmation of the Prepackaged Plan. The Company reserves the absolute right, in its sole discretion, at any time or from time to time, to extend the Solicitation during which Ballots and Master Ballots will be accepted by making a public announcement of such extension no later than 9:00 a.m., New York City time, on the business day next succeeding any previously announced Expiration Date. Without limiting the manner in which the Company may choose to make any public announcement, the Company will not have any obligation to publish, advertise or otherwise communicate any such public announcement, except as may be required by applicable law, other than by issuing a news release to the Dow Jones News Service. During any extension, all Ballots and Master Ballots previously delivered will remain subject to all the terms and conditions of the Solicitation as modified or amended, including the withdrawal and revocation rights specified herein and therein. The Company reserves the right to amend, modify or supplement the Prepackaged Plan prior to effectiveness, subject to the conditions contained in the Prepackaged Plan. The Company also reserves the right to cancel the Solicitation at any time prior to the Expiration Date and revoke the Prepackaged Plan, subject to the conditions contained in the Prepackaged Plan. The Company will give the Record Holders 71 notice of any amendments, modifications or supplements as may be required by applicable law. See "The Prepackaged Plan--Modification of the Prepackaged Plan" and "The Prepackaged Plan--Revocation of the Prepackaged Plan." REVOCATION RIGHTS Any Record Holder that previously submitted to the Solicitation Agent prior to the Expiration Date a properly completed Ballot or Master Ballot, may revoke such Ballot or Master Ballot and change its vote by submitting to the Solicitation Agent prior to 12:00 Midnight (New York City time) on the Expiration Date, a properly completed Ballot or Master Ballot for acceptance or rejection of the Restructuring. In the event that more than one timely, properly completed Ballot or Master Ballot is received, only the Ballot or Master Ballot which bears the latest date will be counted for purposes of determining whether the Requisite Plan Acceptances have been received. After commencement of the Reorganization Case, revocation may be effected only with the approval of the Bankruptcy Court. To be valid, a notice of revocation prior to the Expiration Date must (i) contain the description of the Claim or the Outstanding Securities to which it relates and the aggregate principal amount represented by such Claim or Outstanding Securities, (ii) be signed by the Record Holder, in the same manner as the Ballot or Master Ballot was signed, and (iii) be received prior to the Expiration Date by the Solicitation Agent at the address set forth in this Disclosure Statement. Prior to the Expiration Date, the Company intends to consult with the Solicitation Agent to determine whether any revocations of Ballots or Master Ballots were received and whether the Requisite Plan Acceptances have been received. The Company expressly reserves the absolute right to contest the validity of any such revocation of Ballots or Master Ballots. Unless otherwise directed by the Bankruptcy Court, a purported notice of revocation of Ballots or Master Ballots that is not received in a timely manner by the Solicitation Agent will not be effective to revoke a previously furnished valid Ballot or Master Ballot. SOLICITATION AGENT The Company, or its designee, will act as Solicitation Agent for the Solicitation. All correspondence in connection with the Plan Solicitation, the Ballots and the Master Ballots should be addressed to the Company at 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania 19027-1590, attention: Daniel F. Hennessey (telephone: (215) 881-1525). INFORMATION AGENT The Company, or its designee, will act as Information Agent in connection with the Solicitation. Questions and requests for assistance may be directed to the Company at 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania 19027- 1590, attention: Daniel F. Hennessey (telephone: (215) 881-1525). OTHER MATTERS The cost of soliciting Ballots and Master Ballots will be borne by the Company. Ballots and Master Ballots may be solicited by personal interview, telephone and telegraph as well as by use of the mails. It is anticipated that banks, brokerage houses and other custodians, nominees or fiduciaries will be requested to forward soliciting material to their principals and to obtain authorization for the execution of Ballots and Master Ballots. The Company will not pay any commission or other remuneration to any broker, dealer, salesman or other persons for soliciting acceptances. Employees of the Company participating in the solicitation of Ballots and Master Ballots will not receive any additional remuneration. The Company estimates that the total cost to the Company of soliciting Ballots and Master Ballots will be approximately $200,000. Proposals of holders of Common Shares intended to be presented at the next annual meeting of shareholders must be received by the Company on or prior to September 1, 1995 in order to be considered for inclusion in the Company's proxy statement relating to the 1996 annual meeting. 72 FINANCIAL PROJECTIONS (UNAUDITED) In connection with the preparation of the Prepackaged Plan, the following financial projections (the "Projections") were prepared in May 1995 by management of the Company in a manner consistent with the special purpose valuation reports prepared by Kenneth Leventhal and the valuations prepared by Houlihan Lokey, based on assumptions considered reasonable by the management of the Company, but SUCH PROJECTIONS DO NOT REFLECT A BUSINESS PLAN. NO BUSINESS PLAN HAS BEEN APPROVED AS OF THE DATE THESE PROJECTIONS WERE PREPARED. THE PROJECTIONS ASSUME THAT THE PREPACKAGED PLAN WILL BE APPROVED AND IMPLEMENTED IN ACCORDANCE WITH ITS TERMS. See "Summary--Purposes of the Restructuring" and "--Effect of the Prepackaged Plan" and "The Prepackaged Plan." The Projections assume the Company is operated on a "going concern" basis with only a limited number of assets liquidated in the ordinary course of business. IT DOES NOT CONTEMPLATE AN ORDERLY LIQUIDATION STRATEGY. If the Prepackaged Plan is approved, the Board of Trustees of the reorganized Company and its management will be responsible for the preparation of a business plan, the results of which may differ materially from those projected herein. As a result, management and the Board of Trustees of the Company caution that NO REPRESENTATION CAN BE MADE WITH RESPECT TO THE ACCURACY OF THESE PROJECTIONS OR THE ABILITY OF THE COMPANY TO ACHIEVE THE PROJECTED RESULTS. The following projected balance sheets, statements of operations and statements of cash flow are based upon many assumptions, including, without limitation, assumptions relating to industry performance, general business and economic conditions and the assumption that excess cash flow will be used to prepay debt and not to pay dividends except to the extent required to retain REIT status under the Internal Revenue Code. The Projections are only estimates, and actual results may vary considerably from the Projections. In addition, uncertainties that are inherent in the Projections increase for later years in the projection period due to the increased difficulty associated with forecasting levels of economic activity and corporate performance at more distant points in the future. Holders are cautioned not to place undue reliance on the Projections. After the Effective Date, the Board of Trustees of the reorganized Company may, within the limitations of the New Senior Note Indenture, adopt a different policy and there can be no assurance that any of these assumptions can be met. As a result, there can be no assurance that the future performance of the reorganized Company will not be materially different than projected herein. The future performance of the Company's portfolio of assets will be subject to prevailing economic conditions including the future performance of the real estate market, the availability of financing in the real estate market and other factors beyond the control of the Company. The Projections were not prepared with a view towards compliance with the published guidelines of the American Institute of Certified Public Accountants regarding financial projections. The Projections have not been reviewed, examined or compiled by the Company's independent auditors or any other independent certified public accountants or by Houlihan Lokey or Kenneth Leventhal. The Company does not, in the normal course of its business, prepare multi-year projections as to future revenues or earnings. Accordingly, the Company does not intend to update or otherwise revise the Projections to reflect circumstances existing since the date of their preparation in May 1995 or to reflect the occurrence of unanticipated events. Furthermore, the Company does not intend to update or revise the Projections to reflect changes in general economic or industry conditions. For purposes of the Projections, the effective date of the Prepackaged Plan is assumed to occur as of September 30, 1995. Projections through 2000 are based upon economic assumptions used by the Company for each year during the projection period and are included in the notes to the projected financial statements. See Note 2--"Accounting Treatment" for a discussion of "fresh start" accounting principles used by the Company in preparing the Projections. The Projections should be read together with the information contained in "Pro Forma Financial Information," "Accounting Treatment" and "Business" and the Company's financial statements referred to under "Additional Information Concerning the Company." 73 MORTGAGE AND REALTY TRUST UNAUDITED PROJECTED BALANCE SHEET AT SEPTEMBER 30, (DOLLARS IN THOUSANDS)
1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- Assets Mortgage loans--net............ $ 49,165 $ 44,886 $ 41,714 $ 36,436 $ 18,578 Real estate owned--net......... 163,104 158,659 154,606 151,363 146,514 Allowance for losses........... 0 0 0 0 0 -------- -------- -------- -------- -------- Invested assets................ 212,269 203,545 196,320 187,799 165,092 Cash and cash equivalents...... 8,039 8,255 6,545 5,682 6,022 Interest receivable and other assets........................ 4,778 4,778 4,778 4,778 4,778 -------- -------- -------- -------- -------- Total Assets................... $225,086 $216,578 $207,643 $198,259 $175,892 ======== ======== ======== ======== ======== Liabilities New Senior Notes............... $ 86,419 $ 69,084 $ 50,704 $ 31,880 $ 0 Loan on equity investment...... 13,899 13,826 13,746 13,657 13,556 Accounts payable and accrued expenses...................... 3,514 3,514 3,514 3,514 3,514 -------- -------- -------- -------- -------- Total Liabilities.............. 103,832 86,424 67,964 49,051 17,070 -------- -------- -------- -------- -------- Shareholders' equity Reorganized capital............ 115,889 115,889 115,889 115,889 115,889 Retained earnings.............. 5,365 14,265 26,158 39,785 56,410 Cumulative dividends paid...... 0 0 (2,368) (6,466) (13,477) -------- -------- -------- -------- -------- Total Shareholders' Equity..... 121,254 130,154 139,679 149,208 158,822 -------- -------- -------- -------- -------- Total Liabilities and Share- holders' Equity............... $225,086 $216,578 $207,643 $198,259 $175,892 ======== ======== ======== ======== ========
SEE ACCOMPANYING NOTES 74 MORTGAGE AND REALTY TRUST UNAUDITED PROJECTED STATEMENT OF OPERATIONS FISCAL YEARS ENDED SEPTEMBER 30 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1997 1998 1999 2000 ------- ------- ------- ------- ------- Income Interest and fee income on mortgage loans................................. $ 6,512 $ 6,517 $ 6,292 $ 5,860 $ 4,428 Net operating income from real estate owned................................. 21,856 23,252 24,113 24,376 25,816 Interest on short-term investments..... 703 626 611 564 622 ------- ------- ------- ------- ------- Total Income......................... 29,071 30,395 31,016 30,800 30,866 ------- ------- ------- ------- ------- Expenses Interest............................... 12,614 10,498 8,418 6,402 3,232 Depreciation and amortization on real estate owned.......................... 7,892 7,997 7,805 7,971 8,309 Provision for losses................... 0 0 0 0 0 Other operating expenses............... 3,200 3,000 2,900 2,800 2,700 ------- ------- ------- ------- ------- Total Expenses....................... 23,706 21,495 19,123 17,173 14,241 ------- ------- ------- ------- ------- Net Income............................. $ 5,365 $ 8,900 $11,893 $13,627 $16,625 ======= ======= ======= ======= ======= Dividend distributions................. $ 0 $ 0 $ 2,368 $ 4,098 $ 7,011 ======= ======= ======= ======= ======= Earnings per share (based upon 11,226,215 shares outstanding)........ $ 0.48 $ 0.79 $ 1.06 $ 1.21 $ 1.48
SEE ACCOMPANYING NOTES 75 MORTGAGE AND REALTY TRUST UNAUDITED PROJECTED STATEMENT OF CASH FLOWS FISCAL YEARS ENDED SEPTEMBER 30 (DOLLARS IN THOUSANDS)
1996 1997 1998 1999 2000 ------- ------- ------- ------- ------- Operating activities Net income.................... $ 5,365 $ 8,900 $11,893 $13,627 $16,625 (Decrease) increase in deferred income on mortgage loans........................ (123) 397 0 (370) (226) Depreciation/amortization..... 7,892 7,997 7,805 7,971 8,309 ------- ------- ------- ------- ------- Net cash provided by operating activities................... 13,134 17,294 19,698 21,228 24,708 ------- ------- ------- ------- ------- Investing activities Investments in real estate owned........................ (9,163) (3,552) (3,752) (4,728) (3,460) Mortgage loan advances........ 0 0 0 0 0 Sale of real estate owned..... 6,847 0 0 0 0 Principal repayments on mort- gage loans................... 9,577 3,882 3,172 5,648 18,084 ------- ------- ------- ------- ------- Net cash provided by (used in) investing activities......... 7,261 330 (580) 920 14,624 ------- ------- ------- ------- ------- Cash flow from financing ac- tivities Repayment of New Senior Notes due 2002..................... (23,581) (17,335) (18,380) (18,824) (31,880) Repayment of loan on equity investment................... (65) (73) (80) (89) (101) Dividends..................... 0 0 (2,368) (4,098) (7,011) ------- ------- ------- ------- ------- Net cash used in financing ac- tivities..................... (23,646) (17,408) (20,828) (23,011) (38,992) ------- ------- ------- ------- ------- Net increase (decrease) in cash equivalents............. (3,251) 216 (1,710) (863) 340 Cash and cash equivalents at beginning of period.......... 11,290 8,039 8,255 6,545 5,682 ------- ------- ------- ------- ------- Cash and cash equivalents at end of period................ $ 8,039 $ 8,255 $ 6,545 $ 5,682 $ 6,022 ======= ======= ======= ======= ======= Supplemental Schedule of Non-Cash Investing Activities Transfer of mortgage loans to real estate owned............ $26,481 $ 0 $ 0 $ 0 $ 0 ======= ======= ======= ======= =======
SEE ACCOMPANYING NOTES 76 NOTES TO PROJECTED FINANCIAL STATEMENTS 1. THE PREPACKAGED PLAN. See "The Prepackaged Plan" and "Description of New Senior Notes" for a discussion of the terms and conditions of the Restructuring and the New Senior Notes and the proposed treatments of holders of Outstanding Notes. The projections assume that excess cash is used to optionally redeem outstanding New Senior Notes and thereby reduce the outstanding principal amount of New Senior Notes except to the extent needed to pay dividends in order to maintain REIT status under the Internal Revenue Code. 2. ACCOUNTING TREATMENT. See "Accounting Treatment" for a discussion of how the Company proposes to account for the Restructuring. 3. MORTGAGE LOAN AND REAL ESTATE OWNED PORTFOLIO. In preparing the projections, each mortgage loan was individually analyzed taking into account property type, property location, building age and condition, leasing, local market conditions, and other pertinent factors, including but not limited to environmental factors. In determining the projected payoff dates for the Company's mortgage loans, external factors such as the current state of the real estate markets in which the properties are located, as well as the amount of potential refinancing dollars for each property available to take out the Company's current loan balances, were taken into account. As a result, those loans that are not projected to pay-off are either assumed extended beyond their contractual maturity date or foreclosed upon. The projection assumes that all earning loans remain current on their monthly interest payments throughout the five-year period. Each property owned by the Company was analyzed using similar criteria employed in reviewing the mortgage loan portfolio. Specific analysis of current rent rolls and projected leasing assumptions determined projected amounts for capital expenditures for items such as building improvements, tenant improvements and leasing commissions. Current market conditions were taken into account in determining rental rates for vacant space which is assumed to be leased during the five-year projection. Two owned properties are projected to be sold in fiscal 1996; in addition, several land sales are projected to occur in fiscal 1996. No other real estate owned is projected to be sold during the remainder of the projection. 4. NEW INVESTMENTS. No new investments have been assumed during the five-year projections. The projection assumes that excess cash flow will be utilized to prepay the New Senior Notes. 5. PROVISION FOR LOSSES: GAINS OR LOSSES ON SALES No provision for losses are assumed during the five-year projection. Mortgage loan payoffs and real estate asset sales are liquidated at the values established under "fresh start" accounting. As a result, no gains or losses are projected from sales of real estate or from mortgage loan payoffs. 6. DIVIDENDS/TAXABLE INCOME. The New Senior Note Indenture will restrict the payment of dividends, other than such declaration and making of dividend payments that the Company deems necessary to preserve its status as a REIT, unless the consolidated net worth of the Company at the time of such payment and after giving effect thereto is at least $50 million; provided, however, that the Company shall in no event declare or make any such dividend payment or other distribution if a default or event of default under the New Senior Note Indenture has occurred and is continuing. Under the Internal Revenue Code, the Company must distribute 95% of its "REIT taxable income" to its shareholders to continue to qualify as a REIT. See "Certain Federal Income Tax Consequences-- REIT Status and Taxation of Company Under the Prepackaged Plan--Annual REIT Distribution Requirements." Taxable income required to be distributed will be materially less than generally accepted accounting principles ("GAAP") accounting 77 income due to differences related to depreciation, use of NOLs and timing differences related to bad debt deductions. It is assumed in the projections that the Company will use NOLs (subject to limitations under section 382 of the Internal Revenue Code) to reduce taxable income. See "Certain Federal Income Tax Consequences--Additional Tax Consequences to the Company from the Prepackaged Plan." Notwithstanding the foregoing, the Company expects that the Board of Trustees of the reorganized Company will, when appropriate, declare and cause dividends to be made to holders of Common Shares. 7. OTHER OPERATING EXPENSES. Other operating expenses are based upon 1.25% of invested assets at the beginning of each fiscal year. 8. INVESTMENT INCOME. The projections assume that excess cash is invested in commercial paper rated A-1/P-1 or better, with a rate of 5.75% throughout the projection period. 9. OTHER ASSETS. Other assets include accounts receivable, accrued interest receivable and prepaid assets. It is assumed these amounts remain constant throughout the projection period. 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES. It is assumed that these amounts remain constant throughout the projection period. 11. SHAREHOLDERS' EQUITY. Retained earnings increase throughout the projection period due to differences between GAAP accounting income and taxable income (discussed above in Note 5). These differences, which are material, allow the Company to retain earnings and thus, the required dividend distributions are projected to be less than GAAP accounting income. It should be noted that retained earnings could decline significantly from the figures shown in the projection if (1) the projected rental rates and/or projected occupancy levels are not achieved resulting in lower cash flow, (2) there is an increase in the level of non-performing mortgage loans, or (3) additional provisions for losses are incurred above the levels projected. 78 ACCOUNTING TREATMENT The Company proposes to account for the Restructuring using the principles of "fresh start" accounting as required by Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90- 7"). Pursuant to such principles, in general, the Company's assets and liabilities will be revalued. The assets will be stated at their "Reorganization Value" which is defined as value of the Company on a going concern basis following the Restructuring. The Company based its Reorganization Value on the midpoint of the going concern valuation prepared by Kenneth Leventhal as of March 31, 1995. The liabilities will be stated at their fair value. The difference between the Reorganization Value of the assets and the fair value of the liabilities will be recorded as stockholders' equity with retained earnings restated to zero. PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma statement of operations for the year ended September 30, 1994, and the six months ended March 31, 1995, were prepared as if consummation of the Prepackaged Plan had occurred at October 1, 1993. The unaudited pro forma balance sheet as of March 31, 1995, was prepared as if the consummation of the Prepackaged Plan had occurred as of March 31, 1995. The adjustments set forth in the unaudited Pro Forma Statement of Operations for the year ended September 30, 1994 and the six months ended March 31, 1995, and the unaudited Pro Forma Balance Sheet as of March 31, 1995, under the caption "Proposed Reorganization," reflect the assumed effects of the Restructuring. The adjustments set forth in the unaudited Pro Forma Balance Sheet as of March 31, 1995, under the caption "Fresh Start" reflect the assumed effects of the adoption of the "fresh start" accounting prescribed by SOP 90-7. The unaudited pro forma financial information should be read in conjunction with the financial statements of the Company and the related notes thereto referred to under "Additional Information Concerning the Company" and management's discussion thereof contained elsewhere in this Disclosure Statement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In management's opinion, all adjustments necessary to reflect the effects of the Restructuring and "fresh start" accounting have been included. The unaudited pro forma balance sheet is not necessarily indicative of what the actual financial position would have been at March 31, 1995, nor does it purport to represent the future financial position of the Company. The unaudited pro forma statement of operations is not necessarily indicative of what the actual financial results of the Company would have been for the year ended September 30, 1994, and the six months ended March 31, 1995, nor does it purport to represent the future financial results of the Company. 79 PRO FORMA BALANCE SHEET AS OF MARCH 31, 1995 (UNAUDITED)
PROPOSED FRESH PRO HISTORICAL REORGANIZATION START FORMA ---------- -------------- --------- -------- (DOLLARS IN THOUSANDS) Assets Cash and marketable $ 73,140 ($ 60,000)(A) $ 11,267 securities.............. 0 (B) (1,873)(C) Loans and owned real estate, net............. 287,418 ($ 66,218)(F) 221,200 Interest receivable and other assets............ 6,390 (2,690)(G) 3,700 --------- --------- --------- -------- Total assets.......... $ 366,948 ($ 61,873) ($ 68,908) $236,167 ========= ========= ========= ======== Liabilities Outstanding Notes....... $ 290,000 ($290,000)(D) $ 0 New Senior Notes........ 0 110,000 (D) 110,000 Loan on REO--bank debt.. 17,593 17,593 Interest payable........ 51,324 (51,324)(D) 0 Accounts payable and other................... 3,715 0 (B) (315)(G) 3,400 --------- --------- --------- -------- Total Liabilities..... 362,632 (231,324) (315) 130,993 --------- --------- --------- -------- Shareholders' Equity Common stock at par..... 11,226 11,226 Additional paid in capital................. 182,375 171,324 (E) (259,751)(I) 93,948 Retained earnings (deficit)............... (189,285) (1,873)(C) 191,158 (H) 0 --------- --------- --------- -------- Total shareholders' equity................ 4,316 169,451 (68,593) 105,174 --------- --------- --------- -------- Total liabilities and shareholders' equity.. $ 366,948 ($ 61,873) ($ 68,908) $236,167 ========= ========= ========= ========
SEE ACCOMPANYING NOTES 80 NOTES TO UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENT TO REFLECT PROPOSED REORGANIZATION (A) Reflects a $60.0 million payment to creditors being made at implementation of the Prepackaged Plan (including the $25.0 million payment made on April 11, 1995 pursuant to the Agreement of Understanding), provided that such payment may be increased based upon the amount of cash held by the Company in excess of its short-term obligations following confirmation of the proposed plan. Note: Cash and marketable securities includes $1.4 million of restricted cash related to the Company's termination pay plan and $1.6 million relating to borrower's deposits. (B) Reflects cash payments to unsecured creditors totalling $0. (C) Reflects cash payments for reorganization expenses totalling $1.9 million. (D) Reflects the cancellation of Outstanding Notes in the face amount of $290.0 million and the related interest payable on these notes of $51.3 million and the recording of the New Senior Notes due 2002 in the face amount of $110.0 million. (E) Reflects the conversion of amounts previously owed on the Outstanding Notes converted to a 97% interest in the common shares of the reorganized Company as follows:
(DOLLARS IN THOUSANDS) Face amount of Outstanding Notes................................. $290,000 Interest payable at 3/31/95...................................... 51,324 -------- Total amount payable to creditors at 3/31/95..................... 341,324 Less: New Senior Notes due 2002.................................. (110,000) Less: Cash payment to creditors.................................. (60,000) -------- Amount previously due creditors converted to equity.............. $171,324 ========
ADJUSTMENT TO REFLECT "FRESH START" ACCOUNTING (F) Reflects adjustment made to carrying value of loans and owned real estate to estimated reorganization values.
3/31/95 AMOUNT -------------- ($000 OMITTED) Invested assets (mortgage loans and real estate owned)...... $298,449 Less: Allowances for losses................................. (11,031) -------- Invested assets, net of allowance for losses................ 287,418 -------- Extrapolated Valuation of Portfolio as of March 31, 1995 (see Footnote 1 below)..................................... 248,500 Less: Net present value of operating expenses............... (27,300) -------- 221,200 -------- Adjustment made to carrying value of invested assets, net... $ 66,218 ========
(G) Reflects adjustment made to carrying values of accounts receivable/other assets and accounts payable/accrued expenses to adjust to estimated reorganization values of $3.7 million and 3.4 million, respectively. (H) Reflects the adjustment of the retained earnings/deficit to zero required by "Fresh Start" Accounting. 81 (I) Reflects the adjustment of the additional paid in capital as follows:
(DOLLARS IN THOUSANDS) Adjust deficit to reset to zero (see H)........................... ($191,158) Adjustment to carrying value of invested assets (see F)........... (66,218) Adjustment to carrying value of receivables (see G)............... (2,690) Adjustment to carrying value of payables/accrued expenses (see G). 315 --------- ($259,751) =========
FOOTNOTE 1 For purposes of determining enterprise value it was assumed that operating expenses (G&A) would be incurred at the following levels in the future:
AMOUNT FISCAL YEAR ------ ----------- $4,000,000 Year 1 $3,500,000 Year 2 $3,000,000 Year 3 $3,000,000 Year 4 $3,000,000 Year 5 $3,000,000 Year 6
The valuation of the asset portfolio assumes continued operation of the portfolio for several years. Sales and pay-offs of certain assets occur throughout the analysis period. Property cash flows, loan payments and pay-offs, and reversion amounts (based on normalized capital expenditures in the reversion year) were discounted to present value at 12% per year. Amounts DO NOT include extraordinary expenses for reorganization or litigation. The enterprise valuation assumes the portfolio is operated during the projection period and that no additional investments are made. An alternative enterprise valuation could be presented wherein the proceeds from portfolio operations are used for alternative business purposes, i.e., new mortgages, other real estate investments, etc., and general and administrative expenses are incurred to sustain such operations. Such alternative valuation has not been presented herein. The impact of general and administrative expenses has been reflected as a direct reduction of total value. The present value of the general and administrative expenses was calculated by applying a capitalization rate of 10% to year 6 stabilized general and administrative expenses and discounting both the capitalized, stabilized year 6 expenses and the annual expenses at 12%. 82 PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1994 (UNAUDITED)
PRO FORMA PRO HISTORICAL ADJUSTMENTS FORMA ---------- ----------- ------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue Interest Income............................... $ 14,709 $14,709 Real estate owned net operating income........ 10,372 10,372 Investment income............................. 1,238 (494)(J) 744 Other income.................................. 131 131 -------- ------- ------- Total income................................. 26,450 (494) 25,956 -------- ------- ------- Expenses Interest expense--Outstanding Notes........... 31,302 (31,302)(K) 0 Interest expense--New Senior Notes............ 0 12,238 (K) 12,238 Interest expense--bank debt................... 1,700 1,700 Provision for losses.......................... 2,000 (2,000)(L) 0 Depreciation and amortization................. 5,840 (731)(M) 5,109 Administrative expenses....................... 4,838 4,838 Reorganization expenses....................... 2,360 (2,360)(N) 0 -------- ------- ------- Total expenses............................... 48,040 (24,155) 23,885 -------- ------- ------- Net income (loss)............................. ($21,590) $23,661 $ 2,071 ======== ======= ======= Earnings per share............................ ($ 1.92) $ 0.18 Weighted Average Shares Outstanding........... 11,226 11,226
SEE ACCOMPANYING NOTES 83 PRO FORMA STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1995 (UNAUDITED)
PRO FORMA PRO HISTORICAL ADJUSTMENTS FORMA ---------- ----------- ------- (AMOUNTS IN THOUSANDS, EXCEPT PER DATA) Revenue Interest income............................... $ 5,181 $ 5,181 Owned real estate net operating income........ 7,212 7,212 Investment income............................. 1,864 (1,253)(O) 611 Other income.................................. 47 47 -------- ------- ------- Total income................................. 14,304 (1,253) 13,051 -------- ------- ------- Expenses Interest expense--Outstanding Notes 18,759 (18,759)(P) 0 Interest expense--New Senior Notes 0 6,119 (P) 6,119 Interest expense--bank debt................... 1,073 1,073 Provision for losses.......................... 3,000 (3,000)(Q) 0 Depreciation & amortization................... 3,486 (681)(R) 2,805 Administrative expenses....................... 2,198 2,198 Reorganization expenses....................... 1,505 (1,505)(S) 0 -------- ------- ------- Total expenses............................... 30,021 (17,826) 12,195 -------- ------- ------- Net income (loss)............................. ($15,717) $16,573 $ 856 ======== ======= ======= Earnings per share............................ ($ 1.40) $ 0.08 ======== ======= Weighted Average Shares Outstanding........... 11,226 11,226
SEE ACCOMPANYING NOTES 84 NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS PRO FORMA ADJUSTMENTS--9/30/94 (J) Reflects adjustment to investment income based upon a reduced cash position of approximately $11.2 million (pre-confirmation cash balance of $73.1 million less $60.0 million payment to secured creditors and $1.9 million payment for reorganization expenses) at an average investment rate of 3.5% for fiscal 1994. (K) Reflects the reversal of interest expense related to the Outstanding Notes which were cancelled and the addition of interest expense for the New Senior Notes which bear interest at a fixed rate of 11.125%. (L) Reflects the reversal of the $2.0 million provision for losses which would be eliminated as a result of the adjustment of invested assets to projected restructured value. (M) Reflects the adjustment to depreciation and amortization resulting from the reduced basis in owned real estate as a result of the adjustment of invested assets to projected restructured value. (N) Reflects the reversal of reorganization expenses of $2.4 million based upon the assumption that the Restructuring was completed and no expenses related to the Restructuring were incurred. PRO FORMA ADJUSTMENTS--3/31/95 (O) Reflects adjustment to investment income based upon a reduced cash position of approximately $11.2 million (pre-confirmation cash balance of $73.1 million less $60.0 million payment to secured creditors and $1.9 million payment for reorganization expenses) at an average investment rate of 5.75% for the six months ended March 31, 1995. (P) Reflects the reversal of interest expense related to the Outstanding Notes which were cancelled and the addition of interest expense for the New Senior Notes which bear interest at a fixed rate of 11.125%. (Q) Reflects the reversal of the $3.0 million provision for losses which would be eliminated as a result of the adjustment of invested assets to projected restructured value. (R) Reflects the adjustment to depreciation and amortization resulting from the reduced basis in owned real estate as a result of the adjustment of invested assets to projected restructured value. (S) Reflects the reversal of reorganization expenses of $1.5 million based upon the assumption that the Restructuring was completed and no expenses related to the Restructuring were incurred. 85 SELECTED FINANCIAL DATA The following selected financial data for the five years ended September 30, 1994, are derived from the audited consolidated financial statements of the Company. The financial data for the six month periods ended March 31, 1995, and 1994 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of only normal recurring accruals, which the Company considers necessary for fair presentation of the financial position and the results of operations for these periods. Operating results for the six months ended March 31, 1995, are not necessarily indicative of the results that may be expected for the entire year ended September 30, 1995. The data should be read in conjunction with the consolidated financial statements and the related notes referred to in "Additional Information Concerning the Company" and the other financial information included herein.
SIX MONTHS ENDED YEARS ENDED SEPTEMBER 30, MARCH 31, ----------------------------------------------------- -------------------- 1990 1991 1992 1993 1994 1995 1994 --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA Total income............ $ 68,233 $ 56,253 $ 42,009 $ 38,342 $ 36,277 $ 19,776 $ 17,266 Interest and operating expenses............... 47,601 51,736 42,077 43,967 47,668 27,502 22,824 Depreciation and amorti- zation................. 2,391 3,062 4,470 5,500 5,839 3,486 2,833 Income (loss) before provision for losses, reorganization expenses and gain on sales of real estate............ 18,241 1,455 (4,538) (11,125) (17,230) (11,212) (8,391) Provision for losses.... 23,790 33,000 32,000 37,000 2,000 3,000 -- Reorganization expenses, net.................... 5,051 4,352 934 5,844 2,360 1,505 1,417 Gain on sales of real estate................. 244 244 -- -- -- -- -- Net loss................ (10,356) (35,653) (37,472) (53,969) (21,590) (15,717) (9,808) PER SHARE DATA Net loss................ ($ .94) ($ 3.22) ($ 3.38) ($ 4.87) ($ 1.92) ($ 1.40) ($ .87) Dividends declared (1).. .45 -0- -0- -0- -0- -0- -0- Book value.............. 15.23 12.01 8.63 3.71 1.79 .38 2.83 BALANCE SHEET DATA Total assets............ $595,640 $514,754 $427,268 $353,874 $364,244 $366,948 $359,465 Invested assets......... 547,480 505,600 424,394 347,526 309,477 298,449 327,546 Allowance for losses.... 10,792 14,707 19,353 11,808 13,430 11,031 11,050 Creditor Obligations.... 403,884 374,000 312,000 290,000 290,000 290,000 290,000 Loans on equity invest- ment................... -- -- 15,515 17,572 17,593 17,593 17,593 Shareholders' equity.... 168,717 133,064 95,592 41,623 20,033 4,316 31,815
- -------- (1) Dividends shown are those attributable to earnings for the period indicated. 86 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Due to continued overcapacity and illiquidity in the real estate markets, the Company has not been able to meet payment and other obligations on its outstanding debt. As of May 31, 1995, the Company owed $322.9 million in overdue principal and interest payments on its Outstanding Notes. See "Summary--Background of the Restructuring" and "The Prepackaged Plan-- Background of the Restructuring" for additional information regarding the Company's 1991 Plan, current debt service requirements and events of default. For the six months ended March 31, 1995, cash provided by operating activities increased the cash balance by approximately $10.4 million. This was due primarily to an increase in interest payable as no payments were made in respect of the Outstanding Notes during such period. Cash provided by investing activities increased the cash balance by approximately $2.4 million. This was due to higher repayments, net of advances, on (1) mortgage loans of $835,000, and (2) in-substance foreclosures of $7.5 million. Offsetting these increases were advances, net of repayments, on (1) properties acquired through foreclosure of $2.8 million, (2) real estate equities of $1.3 million, and (3) investment in partnerships of $1.8 million. Under the financial covenants of the Outstanding Note Indenture, the Company was required to maintain a ratio of outstanding securities to its Capital Base (as such terms are defined below pursuant to the Outstanding Note Indenture) of 515% at March 31, 1993. In addition, under the Outstanding Note Indenture the Company was required to maintain a ratio of outstanding securities to its Capital Base of 438% at June 30, 1993, and September 30, 1993, 358% at December 31, 1993, and March 31, 1994, and 313% at June 30, 1994, and September 30, 1994, and a ratio of Earning Assets (as defined in the Outstanding Note Indenture) to outstanding securities of 113% at June 30, 1993, and September 30, 1993, 116% at December 31, 1993, and March 31, 1994, 117% at June 30, 1994, and September 30, 1994, and 120% at December 31, 1994, and March 31, 1995. For a more detailed description of the financial covenants under the Outstanding Note Indenture, see "Description of Outstanding Notes--Certain Covenants of the Company." The Company failed to meet each of these ratios and such failures constituted events of default under the Outstanding Note Indenture. On May 26, 1993, the Company received from the holders of more than 66-2/3% in principal amount of Outstanding Notes a waiver relating to the March 31, 1993 default. No waivers have been received with respect to the subsequent events of default. See "The Prepackaged Plan--Background of the Restructuring--Current Defaults." Pursuant to the Outstanding Note Indenture, outstanding securities refers to the $290 million of Outstanding Notes. Capital Base means the amount equal to the Company's Shareholders' Equity less 50% of non-earning assets. Non-Earning Assets means the aggregate of non-earning loans (as defined in the Outstanding Note Indenture) and non-earning properties (properties that do not produce and maintain an annualized return of 5% or greater cash flow yield), and earning assets means an amount equal to between the aggregate amount of invested assets and aggregate amount of non-earning assets. For a more detailed description of the definitions of the foregoing terms under the Outstanding Note Indenture, see "Description of Outstanding Notes--Certain Definitions." In April 1995, the Company and the Principal Holders entered into the Agreement of Understanding pursuant to which, among other things, the Principal Holders (who hold in excess of 80% of the Outstanding Notes) agreed to vote when solicited in favor of the Prepackaged Plan. On April 11, 1995, pursuant to the Agreement of Understanding, the Company paid $25.0 million, with such payment to be credited against the cash payment of at least $50.0 million to be made to the holders of the Outstanding Notes pursuant to the Prepackaged Plan. In the event the Company does not receive the Requisite Plan Acceptances, the Company will have to consider other alternatives, including the filing of a voluntary petition under Chapter 11. The Company does not currently have any agreement with the holders of the Outstanding Notes precluding such 87 holders, the Outstanding Note Trustee or the Outstanding Collateral Agent from taking remedial or enforcement action with respect to the Outstanding Notes, including acceleration of the Outstanding Notes and foreclosure on the Company's bank accounts and other properties. At May 31, 1995, the Company had cash and cash equivalents of $49.0 million. Cash and cash equivalents include $1.3 million of restricted cash, which represents the funding of the employee retention plan, and $1.2 million related to borrowers' deposits. The Company's unfunded loan commitments totalled $617,000 at May 31, 1995. RESULTS OF OPERATIONS Six months ended March 31, 1995 compared with six months ended March 31, 1994. The Company reported a net loss for the six months ended March 31, 1995 of $15.7 million or $1.40 per share compared to a net loss of $9.8 million or $.87 per share for the six months ended March 31, 1994. The six months ended March 31, 1995 loss included a provision for losses of $3 million or $.27 per share compared to no provision for the six months ended March 31, 1994. The Company's spread (interest income on mortgage loans plus net operating income from real estate owned less interest expense) decreased from a deficit of $3.2 million for the six months ended March 31, 1994 to a deficit of $7.4 million for the six months ended March 31, 1995. Offsetting these decreases was an increase in interest income on short-term investments which was $1.86 million for the six months ended March 31, 1995 compared to $.23 million for the six months ended March 31, 1994. Interest and fee income on mortgage loans decreased $2.49 million to $5.18 million for the six months ended March 31, 1995 from $7.66 million for the six months ended March 31, 1994. The decrease was due primarily to a reduction in earning mortgage loans (including earning in-substance foreclosures) which totalled $89.2 million at March 31, 1995 compared to $149.9 million at March 31, 1994. During the six months ended March 31, 1995, there were two mortgage loans totalling $15.4 million that were transferred into investment in partnerships. In addition, advances of $1.8 million on investment in partnerships were made during the period. During the six months ended March 31, 1995, no advances were made on mortgage loans. Prepayments on mortgage loans of approximately $6 million were received during the six months ended March 31, 1994. There were no prepayments on mortgage loans received during the six months ended March 31, 1995. The average interest rate on mortgage loans for the six months ended March 31, 1995 was 7.90% compared to 7.58% for the six months ended March 31, 1994. Rental income increased $3.05 million to $11.51 million in the six months ended March 31, 1995 from $8.47 million for the six months ended March 31, 1994. In addition to rental income, the Company received reimbursement of certain operating expenses totalling $1.17 million and $.85 million for the six months ended March 31, 1995 and 1994, respectively. Operating expenses, depreciation and amortization on rental properties increased $1.4 million to $9 million for the six months ended March 31, 1995 from $7.6 million for the six months ended March 31, 1994, primarily from continued growth in real estate equities and properties acquired through foreclosure and held for sale. Interest on short-term investments increased due to the continuing accumulation of available cash. Available cash increased due to no payment of principal and interest on the Secured Notes since September 30, 1993. Interest expense increased $4.37 million to $19.83 million in the current period from $15.46 million for the six months ended March 31, 1994. This increase was due primarily to an increase in the average borrowing rate from 10.01% for the six months ended March 31, 1994 to 12.97% for the six months ended March 31, 1995. 88 Other operating expenses decreased $.43 million to $2.2 million for the six months ended March 31, 1995 from $2.63 million for the six months ended March 31, 1994. The decrease was due to decreases in professional fees and expenses, insurance costs, trustees expenses and tax (other than income). Reorganization expenses related to the prior Bankruptcy Case and debt restructuring expenses were $1.5 million for the six months ended March 31, 1995 compared to $1.42 million for the six months ended March 31, 1994. These expenses reflect professional fees incurred by the representatives of the creditors, shareholders and the Company. Fiscal year ended September 30, 1994 compared with fiscal year ended September 30, 1993. The Company reported a net loss for fiscal 1994 of $21.6 million or $1.92 per share compared to a net loss of $54.0 million, or $4.87 per share for fiscal 1993. The 1994 loss includes a provision for losses of $2.0 million, or $.18 per share, and net expense for reorganization and debt restructuring items of $2.4 million, or $.21 per share, compared to a provision for losses of $37 million, or $3.34 per share, and net expense for reorganization and debt restructuring items of $5.8 million, or $.53 per share, for the 1993 loss. Interest and fee income on mortgage loans was $14.7 million and $19.0 million for fiscal 1994 and 1993, respectively. Earning mortgage loans (including earning in-substance foreclosures) totalled $131.4 million at September 30, 1994 and $168.7 million at September 30, 1993. Non-earning mortgage loans (including non-earning in-substance foreclosures) totalled $10.2 million at September 30, 1994 and $22.7 million at September 30, 1993. Average mortgage loans outstanding (including in-substance foreclosures) were $172.2 million during fiscal 1994 and $253 million during fiscal 1993. The average yield was 8.5% for fiscal 1994 and 7.5% for fiscal 1993. Interest and fee income for 1994 declined by $4.3 million as compared to 1993. The decline in income is primarily attributable to (1) mortgage loans repaid totalling $25.5 million in 1994 and (2) transfers of mortgage loans and in-substance foreclosures to properties acquired through foreclosure and held for sale which totalled $23.4 million in 1994. During the quarter ended December 31, 1994, there were two mortgage loans totalling $15.4 million that were transferred into investment in partnerships. In addition, advances of $1.7 million on investment in partnerships were made during the quarter. Rental income was $18.4 million for fiscal 1994 compared to $17.4 million for fiscal 1993. In addition to rental income, the Company received reimbursement of certain operating expenses totalling $1.7 million and $1.6 million for fiscal 1994 and 1993, respectively. Operating expenses, depreciation and amortization on rental properties was $15.7 million for both fiscal 1994 and 1993. The increase in income on rental properties resulted from continued growth in real estate equities and properties acquired through foreclosure and held for sale. Interest on short-term investments was $1.2 million for fiscal 1994 and $237,000 for fiscal 1993. The increase was due to the continuing accumulation of available cash. Available cash increased due to (1) no payment of principal and interest on the Outstanding Notes since September 30, 1993, and (2) a net increase of $32.4 million in cash provided by investing activities. Interest expense increased from $28.5 million in fiscal 1993 to $33.0 million in fiscal 1994. This was due primarily to an increase in the average borrowing rate from 9.23% in 1993 to 10.73% in 1994. Offsetting the increase, the average borrowings decreased from $293.2 million in 1993 to $290 million in 1994. At September 30, 1994, the blended interest rate on the Outstanding Notes was 12.12%, composed of interest at 11.50% on $200 million of Outstanding Notes (including default interest at 1%) and 13.50% on $90 million of deferred amounts of Outstanding Notes (including default interest at 1%). The entire unamortized costs of 89 restructuring the Outstanding Notes were charged off during fiscal 1993 as a result of the monetary default. The Company expensed $3.4 million in fiscal 1993, of which $2.4 million related to the acceleration of costs due to the June 1993 monetary default. Prior to the default, these costs were being amortized using the interest method over the term of the debt. Other operating expenses were $4.8 million for fiscal 1994 compared to $5.3 million for fiscal 1993. The decrease in other operating expenses was due primarily to decreases in professional fees and expenses. Reorganization expenses related to the prior Bankruptcy Case and debt restructuring expenses were $2.4 million for the fiscal year ended September 30, 1994, which reflects professional fees incurred by the Creditors' Committee, the Equity Committee and the Company. Reorganization expenses were $5.8 million for the fiscal year ended September 30, 1993, which reflects professional fees and restructuring fees charged off as a result of the monetary defaults on the Outstanding Notes. A $2 million provision for losses was established in fiscal 1994 compared to a provision of $37 million in fiscal 1993. Continued deterioration in many real estate markets during the past years, the continuing liquidity crisis in the real estate industry and the Company's requirement to generate cash and liquidate investments contributed in 1993 to the establishment of a large provision for losses based on the Company's regular analysis of the portfolio. The Board of Trustees believes the allowance for losses to be adequate at September 30, 1994. The Board of Trustees reviews the investment portfolio quarterly using current estimates and assumptions to determine the adequacy of the allowance for losses. The estimates and assumptions used in the valuation process are subject to changes which may be material. Non-earning loans (including non-earning in-substance foreclosures) and non- earning properties acquired through foreclosure and held for sale were $42.5 million at September 30, 1994 compared to $58.8 million at September 30, 1993. Fiscal year ended September 30, 1993 compared with fiscal year ended September 30, 1992. The Company reported a net loss for fiscal 1993 of $54.0 million, or $4.87 per share, compared to a net loss of $37.5 million, or $3.38 per share, for fiscal 1992. The 1993 loss includes a provision for losses of $37 million, or $3.34 per share, and net expense for reorganization and debt restructuring items of $5.8 million, or $.53 per share, compared to a provision for losses of $32.0 million, or $2.89 per share, and net expense for reorganization and debt restructuring items of $934,000, or $.08 per share, for the 1992 loss. Interest and fee income on mortgage loans was $19.0 million for fiscal 1993 compared to $26.2 million for fiscal 1992. The decrease results primarily from a reduction in average mortgage loans (including in-substance foreclosures), which decreased from $336.3 million in 1992 to $253.0 million in 1993. The average yield was 2.5% for fiscal 1993 and 7.8% for fiscal 1992. The decrease in average mortgage loans was due to (a) repayment of mortgage loans (net of advances) of $24.0 million and (b) transfer of $72.0 million of mortgage loans to foreclosed properties and investments in partnerships. Rental income was $17.4 million for fiscal 1993 compared to $13.7 million for fiscal 1992. In addition to rental income, the Company received reimbursement of certain operating expenses totalling $1.6 million and $1.3 million for fiscal 1993 and 1992, respectively. Operating expenses, depreciation and amortization on rental properties increased to $15.7 million for fiscal 1993 compared to $12.3 million for fiscal 1992. The increases in income and expenses on rental properties result from continued growth in real estate equities and properties acquired through foreclosure and held for sale. For fiscal 1993 and 1992, additional interest and fee income was $30,000 and $26,000, respectively, which was generated from participating in gross income produced by the properties securing these loans. Interest expense was $28.5 million in 1993 compared to $29.0 million in 1992 resulting from a decrease in average borrowings from $336.4 million in 1992 to $293.2 million in 1993. Partially offsetting the decrease, 90 the average borrowing rate increased from 8.34% in 1992 to 9.23% in 1993. At September 30, 1993, the blended interest rate on the Outstanding Notes was 9.87%, composed of interest at 9.25% on $200 million of Outstanding Notes (including default interest at 1%) and 11.25% on $90 million of deferred amounts of Outstanding Notes (including default interest at 1%). The entire unamortized costs of restructuring of the Outstanding Notes was charged off during fiscal 1993 as a result of the monetary default. The Company expensed $3.4 million in fiscal 1993, of which $2.4 million related to the acceleration of costs due to the June 1993 monetary default. Prior to the default, these costs were being amortized using the interest method over the term of the debt. Other operating expenses were $5.3 million for both fiscal 1993 and 1992. Reorganization expenses related to the prior Bankruptcy Case and debt restructuring expenses were $5.8 million for the fiscal year ended September 30, 1993, which reflects professional fees incurred by the Creditors' Committee, the Equity Committee and the Company and restructuring fees charged off as a result of the monetary defaults on the Outstanding Notes. Reorganization expenses were $934,000 for the fiscal year ended September 30, 1992. A $37 million provision for losses was established in fiscal year ended September 30, 1993 compared to a provision of $32 million in fiscal year ended September 30, 1992. Continued deterioration in many real estate markets during the past years, the continuing overcapacity and illiquidity crisis in the real estate industry and the Company's requirement to generate cash and liquidate investments contributed in fiscal 1993 and fiscal 1992 to the establishment of large provision for losses based on the Company's regular analysis of the portfolio. Non-earning loans (including non-earning in-substance foreclosures) and non- earning properties acquired through foreclosure and held for sale were $58.8 million at September 30, 1993 compared to $76.3 million at September 30, 1992. 91 BUSINESS GENERAL The Company is a Maryland real estate investment trust organized in 1970 under the Declaration of Trust. As of May 31, 1995, the Company had available cash of approximately $46.5 million and invested assets consisting of 34 mortgage loans and 37 investments in real estate located throughout the United States. The Company is currently managed by a Board of Trustees comprised of seven trustees, and has six executive officers, two of whom are also trustees. Historically, the Company has engaged in the business of investing in a portfolio of mortgage loans and real estate. However, since April 12, 1990, when the Company filed the prior Bankruptcy Case, the Company has focused its efforts on generating sufficient liquidity to meet its obligations under the Prior Plan and the Outstanding Note Indenture and to maximize shareholder value. To date, liquidity has been generated from operating cash flow as well as through asset sales and mortgage loan repayments. The Company conducts its business so as to qualify as a REIT. Its approximately 11 million shares are traded on both the NYSE and PSE, and are owned by approximately 15,000 shareholders. Its portfolio contains approximately 71 investments in approximately 18 different states. Based upon the committed amounts of its investments as of March 31, 1995, approximately 49% of the Company's portfolio was in investments in California, 23% in Pennsylvania and 10% in New England states. Nationally, 38% of the committed amounts of its investments are in industrial or research and development properties, 26% in office buildings, 28% in shopping centers, 7% in apartments and 1% in other types of real estate investments. The Company has a variety of investments in income-producing properties located in or near major metropolitan areas in the United States. These investments include acquisition and rehabilitation loans with terms of two to five years. Prior to the filing of the prior Bankruptcy Case, the Company financed these variable rate loans with variable rate capital consisting primarily of commercial paper. The Company also made direct investments in real property ("Equities") as well as in participating loans that share many of the features of pure real estate Equities. Because real estate Equities and participating loans may have lengthy holding periods, the Company funded these investments with long-term debt and equity capital. The Company's investment activities included not only an initial investment underwriting analysis, but also the ongoing asset management of its short-term and long-term investments. The Company is a limited partner of (1) TPIP II Limited Partnership, a Washington limited partnership, (2) Paseo Padre Associates, a California limited partnership, of which MRT West, Inc., a California corporation and wholly-owned subsidiary of the Company, is a general partner, (3) Creekside Center Associates, a California limited partnership, of which MRT Creekside, Inc., a California corporation and wholly-owned subsidiary of the Company, is a general partner, and (4) Newark C & C Associates, a California limited partnership, of which MRT Newark, Inc., a California corporation and wholly- owned subsidiary of the Company, is a general partner. In addition, MRT Santa Monica, Inc., a California corporation and wholly-owned subsidiary of the Company, is a general partner of Bay City Holdings, L.P., a California limited partnership, and 150 Rittenhouse Circle, Inc., a Maryland corporation and wholly-owned subsidiary of the Company, is a general partner of Keystone Venture I, a Pennsylvania general partnership. Each of these partnerships owns certain real estate on which the Company formerly held a loan. The Company was organized in 1970 as PNB Mortgage and Realty Investors ("PNB"), and operated as a REIT located in Pennsylvania until 1979, when it combined with a California REIT, Sutro Mortgage Investment Trust ("Sutro"). The combined entity retained the PNB name until 1984 when the name was changed to "Mortgage and Realty Trust." Both PNB and Sutro engaged in similar business activities, in that both were active makers of construction and development loans, although operating in different geographic regions. The combination provided the combined entity with a sufficient equity capital base to allow it access to the capital markets on a competitive basis. The Company does not currently issue commercial paper. 92 INVESTMENTS Although the Company has continued to fund previously existing investment commitments, tenant improvements and similar investments necessary to retain or obtain tenants, the Company has not made any new investments since the prior Bankruptcy Case. It does continue, however, to manage its investment portfolio. The Company's investments include short- and intermediate-term standing loans, long-term participating loans and investments in real estate Equities. See "-- General" above. Loans may be secured by first or junior mortgages as well as mortgages secured by leaseholds. The Company's investments in long-term participating loans generally permit the Company to receive the following: interest at a fixed rate; additional interest as a participation in gross income above a predetermined base rental amount; a portion of the net proceeds upon the sale or refinancing of the property securing the debt; and an option to convert the participating loans into an ownership interest. Loans made by the Company are secured by mortgages on income-producing properties, including office buildings, shopping centers, industrial projects, apartments and condominium projects. In making investments, the Company utilized various guidelines consisting principally of loan-to-value ratios, investment ranges and percentage of total assets invested in loans to a single borrower. The Company's investments are primarily located in major metropolitan areas throughout the United States. As of March 31, 1995, the Company held investments in mortgage loans, investments in real estate equities and other interests in real properties located in 18 states. Total loans and investment commitments outstanding at March 31, 1995, were $299,400,000, of which $690,000 remained to be disbursed. The following pages contain summaries of the Company's commitments and investments at March 31, 1995, and certain information pertaining to non- earning loans, delinquent earning loans, in-substance foreclosures and foreclosed properties. 93 MORTGAGE AND REALTY TRUST SUMMARY OF INVESTMENTS AT MARCH 31, 1995
AMOUNT AMOUNT COMMITTED OUTSTANDING ---------------- ------------ TYPE OF INVESTMENTS SHORT AND INTERMEDIATE-TERM Mortgage Loans................................ $ 54,863,000 $ 54,373,000 Properties Acquired Through Foreclosure and Held for Sale: Earning...................................... 72,642,000 72,642,000 Non-Earning.................................. 34,417,000 34,417,000 In-Substance Foreclosures: Earning...................................... 30,408,000 30,408,000 Non-Earning.................................. 18,048,000 18,048,000 Notes Receivable.............................. 842,000 642,000 ------------ ------------ Total Short and Intermediate-Term............ 211,220,000 210,530,000 ------------ ------------ LONG-TERM Participating Loans........................... 2,010,000 2,010,000 Amortizing Loans.............................. 2,719,000 2,719,000 Investment in Real Estate Equities............ 56,940,000 56,940,000 Investment in Partnerships.................... 26,511,000 26,511,000 ------------ ------------ Total Long-Term.............................. 88,180,000 88,180,000 ------------ ------------ Total Invested Assets......................... $299,400,000 298,710,000 ============ ------------ Less Deferred Fees............................ (261,000) ------------ Total Invested Assets......................... $298,449,000 ============
MORTGAGE AND REALTY TRUST NON-EARNING IN-SUBSTANCE FORECLOSURES AND NON-EARNING FORECLOSED PROPERTY HELD FOR SALE (BY GEOGRAPHIC DISTRIBUTION AND PROPERTY TYPE) MARCH 31, 1995 (IN THOUSANDS)
INDUSTRIAL RETAIL CENTER CENTER OFFICE BUILDING TOTAL ------------- ---------- --------------- ------- California..................... $ -- $18,018 $3,953 $21,971 Massachusetts.................. 7,548 5,931 -- 13,479 New Hampshire.................. -- 5,173 -- 5,173 New Jersey..................... -- -- 5,333 5,333 Pennsylvania................... -- 3,012 3,467 6,479 ------ ------- ------- ------- $7,548 $32,134 $12,753 $52,435 ====== ======= ======= =======
94 MORTGAGE AND REALTY TRUST GEOGRAPHIC DISTRIBUTION OF INVESTMENTS BY COMMITTED AMOUNTS* MARCH 31, 1995
RETAIL RESEARCH & STATE APARTMENTS HOTEL INDUSTRIAL OFFICE RESIDENTIAL BUILDINGS DEVELOPMENT TOTALS % - ---------------- ----------- ---------- ----------- ----------- ----------- ----------- ----------- ------------ ------ Arizona......... $ 4,384,479 $ 4,384,479 1.47% California...... $ 234,631 51,991,487 $17,118,279 $ 70,235 $61,800,071 $15,448,626 146,663,329 49.12% Colorado........ 186,345 186,345 0.06% Delaware........ 200,190 200,190 0.07% Georgia......... 59,977 59,977 0.02% Indiana......... 4,296,330 4,296,330 1.44% Maine........... 7,605,269 7,605,269 2.55% Maryland........ 6,822,064 753,479 7,575,543 2.54% Massachusetts... 6,966,038 2,322,563 7,547,467 16,836,068 5.64% Minnesota....... 2,336,759 2,812,959 5,149,718 1.72% Missouri........ 9,022,369 9,022,369 3.02% Nevada.......... $3,060,000 3,060,000 1.02% New Hampshire...... 6,560,712 6,560,712 2.20% New Jersey...... 5,333,713 5,333,713 1.79% Oregon.......... 7,641,272 7,641,272 2.56% Pennsylvania.... 15,644,930 37,696,622 13,862,363 2,009,867 69,213,782 23.18% Virginia........ 135,505 135,505 0.05% Washington...... 4,633,272 4,633,272 1.55% ----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------ ------ Totals.......... $21,158,599 $3,060,000 $92,517,677 $76,934,513 $1,219,386 $83,396,246 $20,271,452 $298,557,873 =========== ========== =========== =========== ========== =========== =========== ============ Percentage...... 7.09% 1.02% 30.99% 25.77% 0.41% 27.93% 6.79% 100.00% =========== ========== =========== =========== ========== =========== =========== ======
- -------- *Does not include notes receivable committed amount of $842,000 at 3/31/95. NON-EARNING INVESTMENTS, DELINQUENT EARNING LOANS AND FORECLOSED PROPERTIES Earning Mortgage Loans More Than 60 Days Delinquent. The Company generally considers a loan delinquent if payment of interest and/or principal, as required by the term of the note, is more than 60 days past due. At March 31, 1995, there were no loans which were so delinquent as to principal and/or interest. Non-Earning Mortgage Loans. At March 31, 1995, there was one loan totalling $25,000 classified as non-earning. Non-Earning In-Substance Foreclosures. A loan is considered an in-substance foreclosure if (1) the debtor has little or no equity considering the fair value of the collateral, (2) proceeds for the repayment can be expected to come only from the operation or sale of collateral, and (3) the debtor has either formally or effectively abandoned control of the collateral. In-substance foreclosures are classified as non-earning if they do not produce a minimum annualized return of 5% or greater cash flow yield for two consecutive calendar quarters. At March 31, 1995, there were four loans classified as non-earning in-substance foreclosures, which totalled $18,018,000. Descriptions of the four investments are as follows: (1) The Company has a first mortgage loan on 6 industrial buildings containing 157,480 square feet located in Chula Vista, California. The loan was classified as a non-earning in-substance foreclosure in April 1994. The property is currently 74% leased and occupied. (2) The Company has a first mortgage loan on 10 industrial buildings containing 106,663 square feet located in Chino, California. The loan was placed on non-earning status in June 1993 and reclassified as a non-earning in- substance foreclosure in September 1994. The property is currently 77% leased and occupied. (3) The Company has a first mortgage loan on an industrial building containing 114,375 square feet located in Santa Monica, California. The loan was classified as a non-earning in-substance foreclosure in March 1995. The property is currently 96% leased and occupied. (4) The Company has a first mortgage loan on an industrial building containing 27,095 square feet located in San Dimas, California. The loan was classified as a non-earning in-substance foreclosure in March 1995. The property is currently 85% leased and occupied. 95 Non-Earning Properties Acquired Through Foreclosure and Held For Sale. At March 31, 1995, there were ten non-earning properties acquired through foreclosure and held for sale, which totalled $34,417,000. Descriptions of the ten investments are as follows: (1) The Company had a first mortgage loan on an office/warehouse building containing 119,000 square feet located in Hopkinton, Massachusetts. The Company acquired title to this property in January 1991. The project is currently unleased. (2) The Company had a first mortgage loan on a retail shopping center containing 111,339 square feet located in Fairhaven, Massachusetts. The Company acquired title to this property in April 1991. The project is currently 30% leased and occupied. Subsequent to September 1994, a 20-year lease with Shaw's Supermarkets, Inc. for a 65,000 square feet supermarket anchor store was completed, with occupancy expected in mid-1995, which will result in the project being 88% leased and occupied. (3) The Company had a first mortgage loan on a 3-story office building containing 37,800 square feet located in Piscataway, New Jersey. The Company acquired title to this property in August 1991. The project is currently 77% leased and occupied. (4) The Company had a first mortgage loan on an industrial building containing 57,900 square feet located in Framingham, Massachusetts. The Company acquired title to this property in April 1992. The property is currently 65% leased and occupied. (5) The Company had a first mortgage loan on two adjoining office buildings containing 39,087 square feet located in Woodland Hills, California. The Company acquired title to this property in May 1992. The property is currently 85% leased and occupied. (6) The Company had first and second mortgage loans on two office/industrial buildings containing 91,710 square feet and a 33,600 square foot warehouse building located in Salem, New Hampshire. The Company acquired title to this property in August 1992. The project is currently 72% leased and occupied. (7) The Company had a first mortgage loan on a 4-story office building containing 99,666 square feet located in Cherry Hill, New Jersey. The Company acquired title to this property in November 1992. The project is currently 54% leased and occupied. (8) The Company had a first mortgage loan on an industrial building containing 120,000 square feet located in Willow Grove, Pennsylvania. The Company acquired title to this property in June 1993. The project is currently unleased. (9) The Company had a first mortgage loan on an industrial building containing 50,972 square feet located in Canton, Massachusetts. The Company acquired title to this property in January 1991. The project is currently 100% leased and occupied. (10) The Company had a first mortgage loan on an office building containing 49,953 square feet located in Philadelphia, Pennsylvania. The Company acquired title to this property in January 1991. The project is currently 82% leased and occupied. ALLOWANCE FOR LOSSES An allowance for losses is maintained based upon the Board of Trustees' evaluation of the Company's investments. A review of all investments is made quarterly to determine the adequacy of the allowance for losses. During the six months ended March 31, 1995, there were additions of $3,000,000 to the allowance for 96 losses and charges of $5,399,000, net of recoveries, against the allowance. The amount of the allowance for losses at March 31, 1995, was $11,031,000 (3.7% of the Company's invested assets). For a description of the Company's method of determining the allowance for losses, see Notes 1 and 3 as set forth under "Notes to the Financial Statements." PROPERTIES The Company's real estate portfolio consists primarily of equity investments in completed, income-producing properties such as industrial/research and development buildings, office buildings and retail buildings located primarily in southern California, Pennsylvania and the New England states. The Company's real estate portfolio at March 31, 1995 (net of accumulated depreciation) consists of the following investments:
NUMBER OF INVESTMENT % OF TYPE OF PROPERTIES PROPERTIES AMOUNT TOTAL ------------------ ---------- ---------- ----- (IN THOUSANDS) Apartments....................................... 3 $ 20,924 11% Office Buildings................................. 11 54,102 28% Industrial Buildings............................. 14 53,233 28% Retail Buildings................................. 5 56,236 30% Research and Development Buildings............... 2 6,015 3% --- -------- --- 35 $190,510 100% === ======== ===
The Company does not own any real property for use in connection with its day-to-day operations. Office space for the Company's principal office at 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania is leased for a 3-year term ending August 31, 1995. The Company's only other office, located at 3500 West Olive Avenue, Suite 600, Burbank, California, is leased for a 5-year term ending October 31, 1995. The total rental expended for the fiscal year ended September 30, 1994 for both properties was $345,000. The Company has become, and may from time to time become, the owner or lessor of real estate in connection with its investment activities. See "--Investments" above. LEGAL PROCEEDINGS A discussion of events surrounding the Company's bankruptcy filing and an explanation of the material terms of the Company's reorganization under the 1991 Plan are set forth under "Summary--Background of the Restructuring-- Previous Chapter 11 Case and 1991 Plan of Reorganization" and "The Prepackaged Plan--Background of the Restructuring--Previous Chapter 11 Reorganization." The bankruptcy case relating to the Prior Plan was closed on November 4, 1994 pursuant to a final order of the Bankruptcy Court. 97 MANAGEMENT The Company is governed by a board of seven trustees who meet at least once a month, either in Pennsylvania or California. The trustees approve all material transactions undertaken by the Company. In advance of each meeting of the trustees, a written agenda is prepared, and each transaction to come before the trustees is summarized in writing and presented to the trustees for consideration. Each sale of real estate, loan modification, loan or prepayment compromise, increase in a loan and loan workout is submitted for approval by the trustees. The following sets forth certain information regarding the executive officers and trustees of the Company.
NAME AGE POSITIONS AND OFFICES WITH THE COMPANY ---- --- -------------------------------------- Victor H. Schlesinger. 70 Chairman and Trustee C.W. Strong, Jr....... 65 President, Chief Executive Officer and Trustee James A. Dalton....... 52 Executive Vice President and Chief Operating Officer Daniel F. Hennessey... 54 Treasurer and Chief Financial Officer Donald W. Burnes, Jr.. 45 Senior Vice President Douglas R. Eckard..... 49 Senior Vice President Jeffrey M. Bucher..... 62 Trustee Kent L. Colwell....... 64 Trustee James M. Gassaway..... 73 Trustee John E. Krout......... 75 Trustee Gerhard N. Rostvold... 75 Trustee
The officers of the Company generally serve a one-year term of office and are elected to their positions each year by the Board of Trustees at the annual organization meeting of the Board of Trustees, which normally immediately follows the annual meeting of shareholders. Messrs. Schlesinger, Strong, Dalton, Hennessey, Burnes and Eckard were elected as officers at the last annual organization meeting held on February 10, 1993, with Mr. Eckard being promoted to Senior Vice President on August 17, 1993. Messrs. Schlesinger, Strong, Dalton, Hennessey and Eckard have served as officers of the Company for more than the past five years. Mr. Burnes was first elected as an officer of the Company on February 14, 1990. The Company has a total of 26 employees. In connection with the Prepackaged Plan, the following persons have been designated by the Principal Holders to serve on the Board of Trustees of the reorganized Company: Carl A. Mayer, Jr., 57, founded The Mayer Group in 1990, an advisor group offering consulting and marketing expertise and services to real estate investment companies who are seeking investment capital from the pension fund community. Mr. Mayer continues to serve as a principal of The Mayer Group. Martin Bernstein, 58, is a private investor who has been managing family funds since 1988. Prior to this period, Mr. Bernstein served as the founding General Partner of Halcyon Investments and Alan B. Slifka & Co. (investments). Mr. Bernstein also currently serves on the Board of Directors of Astro Communications and MBO Properties, Inc. John B. Levy, 47, is currently the President of John B. Levy & Company, Inc., a real estate consulting firm based in Richmond, Virginia, and has served in this capacity since June 1995. Mr. Levy was an Executive Vice President of Republic Realty Mortgage Corporation from 1993 to June 1995. Prior to 1993, Mr. Levy acted as the Senior Vice President of Nationsbanc Mortgage Corporation, and was charged with lender relations, production of new income property loans and management of the production offices. Richard B. Jennings, 51, is currently the President of Realty Capital International Inc., a real estate investment banking firm, and has served in this capacity since 1991. Prior to 1991, Mr. Jennings acted as a Senior Vice President of Landauer Associates, Inc., a real estate management and advisory firm based in New York, New York. Mr. Jennings also currently serves on the board of directors of MBO Properties, Inc. 98 Richard S. Frary, 47, is currently the founding partner and majority shareholder of Tallwood Associates, Inc., a private merchant banking firm specializing in corporate restructurings and real estate, and has served in this capacity since 1990. In connection with the Prepackaged Plan, the Principal Holders have chosen George R. Zoffinger to be the new President and Chief Executive Officer of the reorganized Company. It is anticipated that Mr. Zoffinger will begin his term of office upon ratification of such term by the Board of Trustees of the reorganized Company after the Effective Date. Mr. Zoffinger is 47 years old and has served as Chairman of the Board of Corestates New Jersey National Bank since April 1994. From December 1991 to April 1994, he served as President and Chief Executive Officer of Constellation Bankcorp and Constellation Bank. From March 30, 1990 to December 1991, Mr. Zoffinger served as the Commissioner for the New Jersey State Department of Commerce and Economic Development, as well as Chairman of the Board of the New Jersey Economic Development Authority. The seventh member of the Board of Trustees will be selected by the New Major Holder on or before the Effective Date. The foregoing persons have consented to serve as trustees of the reorganized Company. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION TABLES The following table provides information about the compensation for the Chief Executive Officer and the four other most highly compensated officers of the Company for the fiscal years ended September 30, 1994, 1993, 1992 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION --------------------------- ANNUAL COMPENSATION(1) AWARDS PAYOUTS ---------------------------------------- ------------------- ------- OTHER ANNUAL RESTRICTED OPTIONS/ ALL OTHER FISCAL SALARY BONUS COMPENSATION SHARES SARS LTIP COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($)(2) ($) ($) ($) (#) PAYOUTS ($)(3) - --------------------------- ------ -------- ------- ------------ ---------- -------- ------- ------------ C.W. Strong, Jr., Chief 1994 $175,000 -- -- -- -- -- $3,000 Executive Officer....... 1993 175,000 -- -- -- -- -- 3,000 1992 250,000 -- -- -- 25,000 -- 3,000 Victor H. Schlesinger, 1994 $100,000 -- -- -- -- -- $3,000 Chairman................ 1993 100,000 -- -- -- -- -- 3,000 1992 27,500(4) -- -- -- 23,500 -- 1,650 James A. Dalton, 1994 $188,348 $25,000(5) -- -- -- -- $3,000 Executive Vice 1993 181,104 20,000 -- -- -- -- 3,000 President............... 1992 177,511 90,000(6) -- -- 25,000 -- 3,000 Daniel F. Hennessey, 1994 $129,488 $20,000(5) -- -- -- -- $3,000 Chief Financial Officer. 1993 124,508 20,000 -- -- -- -- 3,000 1992 122,038 65,000(6) -- -- 20,000 -- 3,000 Donald W. Burnes, Jr., 1994 $120,595 $30,000(5) -- -- -- -- $3,000 Senior Vice President... 1993 114,448 30,000 -- -- -- -- 3,000 1992 113,114 65,000(6) -- -- 15,000 -- 3,000
- -------- (1) In the fiscal year ended September 30, 1993, the Company provided certain personal benefits to its executive officers. The amount of such benefits to each of the named individuals did not exceed the lesser of $50,000 or 10% of salary and bonus for such fiscal year. (2) Includes salary deferrals and employee contributions to the Company's Savings Incentive Plan. See "Savings Incentive Plan" below. (3) Includes the Company's matching contributions under the Company's Savings Incentive Plan. See "Savings Incentive Plan" below. (4) Represents fees received as Chairman and trustee. (5) Does not include bonus for calendar year 1994, which was paid in November 1994. The bonuses were $25,000 for Mr. Dalton, $20,000 for Mr. Hennessey, and $25,000 for Mr. Burnes. (6) Includes retention bonus of $75,000, $50,000 and $35,000 for Messrs. Dalton, Hennessey and Burnes, respectively. 99 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUES The following table sets forth information with respect to the Outstanding Stock Rights held by the Named Executive Officers at September 30, 1994. The Prepackaged Plan provides that Outstanding Stock Rights will be canceled.
VALUE OF UNEXERCISED SHARES ACQUIRED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/ ON EXERCISE VALUE REALIZED OPTIONS/SARS AT FY-END SARS AT FY-END NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ------------------------ --------------- -------------- ------------------------- ------------------------- C.W. Strong, Jr......... -- -- 34,000/-0- 0/0 Victor H. Schlesinger... -- -- 29,500/-0- 0/0 James A. Dalton......... -- -- 74,000/-0- 0/0 Daniel F. Hennessey..... -- -- 57,500/-0- 0/0 Donald W. Burnes, Jr.... -- -- 35,000/-0- 0/0
PENSION PLANS On September 20, 1989, the Board of Trustees adopted an Employees' Retirement Plan effective September 30, 1989. On December 16, 1992, the Board of Trustees amended and restated the Employees' Retirement Plan effective January 1, 1992 (as amended on July 20, 1994, and as may be further amended, the "Retirement Plan"). The Retirement Plan continues the benefits provided to employees of the Company who were formerly employees of GMAC Realty Advisors, Inc. (these employees were acquired pursuant to a settlement agreement entered into between and among the Company, GMAC Mortgage Corporation of PA, and GMAC Realty Advisors, Inc., which, among other things, transferred the GMAC Realty Advisors, Inc. employees to the Company). All other employees are eligible to participate in the Retirement Plan provided that they are at least 21 years old and have been employed for 12 consecutive months, during which period the employee has completed at least 1,000 hours of service. Under the Retirement Plan, after completing five years of service, each eligible employee becomes 100% vested and entitled to a retirement pension. Benefits can be paid as a lump sum or as an annual retirement income for life equal to the greater of (a) the sum of (i) 1.3% of the highest five-year average annual base salary, multiplied by the number of years of credited service up to and including 35 years thereof and (ii) 0.4% of the highest five-year average annual base salary in excess of Social Security covered compensation (as adjusted every five years), multiplied by the number of years of credited service up to and including 35 years thereof or (b) the sum of (i) 1.3% of the highest five-year average annual base salary, multiplied by the number of years of credited service up to and including 15 years thereof, (ii) 1.5% of the highest five- year average annual base salary, multiplied by the number of years of credited service from 16 to 25 years inclusive, (iii) 0.5% of the highest five-year average annual base salary, multiplied by the number of years of credited service from 26 to 35 years inclusive, and (iv) 0.4% of the highest five-year average annual base salary in excess of Social Security covered compensation (as adjusted every five years), multiplied by the number of years of credited service up to and including 25 years thereof. Unreduced retirement benefits may begin to be paid at normal retirement (age 65 and five years of participation in the Retirement Plan), late retirement or five years prior to Social Security retirement age with 20 years of service. The table below shows the estimated annual benefits payable upon retirement under the Company's Retirement Plan. Retirement benefits shown are based upon retirement at age 65 and the payment of a straight life annuity to the employee. The annual benefit under the Retirement Plan shall not exceed the lesser of $112,221 or 100% of the participant's average compensation for three consecutive Fiscal Years (as defined in the Retirement Plan) in which such eligible employee is an active participant in the Retirement Plan. 100 PENSION PLAN TABLE
AVERAGE OF 5 YEARS OF CREDITED SERVICE HIGHEST ANNUAL --------------------------------------------------------- COMPENSATION LEVELS 15 20 25 30 35 - ------------------- ------- ------- ------- -------- -------- $125,000 $29,427 $40,486 $51,545 $ 58,854 $ 68,663 150,000 35,802 49,236 62,670 71,604 83,538 175,000 42,177 57,986 73,795 84,354 98,413 200,000 48,552 66,736 84,920 97,104 113,288 225,000 54,927 75,486 96,045 109,854 128,163
For the fiscal year ended September 30, 1994, the base salary for purposes of the Retirement Plan for the Named Executive Officers in the Summary Compensation Table is set forth in the salary column of the Summary Compensation Table. Officers named in the Summary Compensation Table have been credited with years of service under the Retirement Plan as follows: Mr. Dalton, 12 years; Mr. Hennessey, 23 years; and Mr. Burnes, 5 years. Mr. Schlesinger and Mr. Strong do not participate in the Retirement Plan. The benefits listed in the Pension Plan Table are not subject to reduction for Social Security or other offset amounts. TRUSTEE COMPENSATION During the fiscal year ended September 30, 1994, the trustees, other than Messrs. Strong and Schlesinger, received the following as compensation for their service on the Board of Trustees: (i) an annual retainer of $10,000 plus $800 for each regular, monthly Board of Trustees meeting attended in person or conducted by telephone conference; (ii) $600 for each committee meeting attended in person; and (iii) $400 for any Board of Trustees or committee meeting, other than the regular, monthly Board of Trustees meeting, convened by telephone conference; provided that no additional compensation was paid for attendance at any committee meeting held on the same day as any Board of Trustees meeting. An additional $100 fee was payable per meeting to the chairman of any committee. On September 29, 1989, the Board of Trustees adopted a Pension Plan for trustees, effective October 1, 1989 (as amended on April 5, 1995, and as may be further amended, the "Pension Plan"). Trustees become eligible for plan benefits upon completion of five years of service as trustee, including years served prior to the plan's effective date. Under the plan, each eligible trustee will be entitled to a normal retirement benefit equal to the annual retainer for trustees at the rate in effect on the trustee's normal retirement date or, if earlier, the trustee's last day of board membership. For purposes of this plan, normal retirement date is the first day of the month following the trustee's 75th birthday. Plan benefits will generally begin on the normal retirement date, but eligible former trustees may elect to have reduced payments commence up to five years earlier. The reduction will be 10 percent for each year by which commencement precedes the normal retirement date. Plan benefits will be paid for a period equal to the number of years served as trustee after January 1, 1980, except that payments will cease upon the death of the trustee. On April 5, 1995, the Board of Trustees amended the pension plan for trustees to provide that should any trustee's service terminate for any reason within one year after the Effective Date of the Prepackaged Plan, such terminated trustee shall receive a one-time single-sum cash payment equal in amount to the net present value of the maximum aggregate projected benefit obligation of the Company to that trustee. No other death benefits shall become payable on behalf of any trustee under the plan. SAVINGS INCENTIVE PLAN On September 20, 1989, the Board of Trustees adopted a Savings Incentive Plan effective September 30, 1989, to provide retirement benefits for eligible employees of the Company. On December 16, 1992, the Board of Trustees amended and restated the Savings Incentive Plan effective January 1, 1992 (as amended and restated, the "Savings Plan"). The Savings Plan continues the benefits provided under the GMAC Mortgage Corporation Savings Incentive Plan to employees of the Company who were formerly employees of GMAC Realty Advisors, Inc. All other employees of the Company are eligible to participate in the Savings Plan 101 provided that they have been employed for 12 consecutive months, during which period the employee has completed at least 1,000 hours of service. Under the Savings Plan, each eligible employee may authorize payroll deductions not less than 1% nor more than 15% of the employee's earnings before bonus income, not to exceed the dollar limit permissible under the Internal Revenue Code ($9,240 in 1994). The Company will match each employee's contribution for the payroll period, subject to a limitation of 6% of the employee's compensation for the payroll period, with the maximum amount of contribution by the Company in any year being $3,000. Benefits will be paid to terminating participants as soon as possible following the participant's date of termination. Participants have a 100% nonforfeitable right to their contributions to the Savings Plan. The Company's matching contributions vest at the rate of 20% for each year of service, but will, in any event, be 100% vested at the later of age 65 or after five years of participation in the Savings Plan, or in the event of disability or death. Subject to certain limitations, hardship distributions of a participant's fully vested account balance are permitted when a demonstrable, immediate and heavy financial need has been shown. EMPLOYEE RETENTION PLAN The Board of Trustees adopted an Employee Retention Plan (as amended, the "Retention Plan"), dated October 17, 1990, as amended January 16, 1991, March 20, 1991 and March 15, 1995, designed to provide a financial incentive for key employees to successfully restructure the organization and maximize the net worth of the Company. The Retention Plan was approved in connection with the 1991 Plan by the Bankruptcy Court by order dated February 26, 1991 and will remain in effect after the Confirmation Date of the Prepackaged Plan. The Retention Plan is administered by the Compensation and Nominating Committee which determines the allocation of amounts among the participants. All full-time employees of the Company as of February 27, 1991 except the Chairman, the President and Chief Executive Officer are eligible to participate in the Retention Plan. The first portion of the Retention Plan provides for a termination pay plan that will remain in effect during the period ending on the later of (i) the date that the obligations (including, without limitation, interest accrued from and after January 31, 1991) payable by the Company to or for the benefit of any creditor holding a Class 3 Claim, which is defined under the Prior Plan as an Unsecured Claim that is also an Allowed Claim pursuant to the Prior Plan or the Outstanding Collateral Agreement (collectively, the "Class 3 Creditor Obligations") are no longer outstanding (the "Original Effective Period"), (ii) the maturity date of the New Senior Notes, or (iii) the date on which the New Senior Notes are repaid in full (periods set forth in (i)-(iii), collectively, shall be referred to as the "Effective Period"). Any eligible employee who is terminated without cause during the Effective Period will be entitled to termination pay of not less than three and not more than 18 months salary depending on the employee's years of employment and position with the Company. The number of months salary for Messrs. Dalton, Hennessey and Burnes are 18, 18 and 12, respectively. Medical and dental coverage will be continued during the termination pay period. An employee who is terminated for cause, voluntarily leaves, dies or becomes disabled during the Effective Period will not be entitled to benefits under the Retention Plan. The benefits that may be payable under the Retention Plan have been funded in a separate trust. The second portion of the Retention Plan includes a retention bonus plan that provides for the aggregate payment of up to $350,000 to employees who remained in the employ of the Company until February 27, 1992, a period of one year from the date of the confirmation of the 1991 Plan. A separate trust was funded for the payment of these benefits and such benefits were paid to the employees on February 28, 1992. The third portion of the Retention Plan provides for the grant, under the Company's 1984 Share Option Plan, of non-qualified stock options for up to an aggregate of 200,000 shares of Common Stock to participants. On March 29, 1991, options for 197,500 shares were granted at an exercise price of $4.15 per share, which was the greater of (i) the average of the closing price of the Company's Common Shares on the NYSE for the last five days of the 30-day period after the effective date of the 1991 Plan and (ii) the fair market value of the 102 Common Stock on the date of grant. Options will not vest to employees until three years after the date of grant and any employee who leaves voluntarily or is discharged for cause during the 3-year period will forfeit his or her rights under the option. After vesting, options can be exercised any time up to five years from the date of grant except that an employee with a vested option who leaves the employ of the Company must exercise the option within a 3-month period after resignation. If a change in control of the Company occurs, all options which have not previously been forfeited will vest immediately. All options granted prior to the Effective Date of the Prepackaged Plan will be cancelled under the Prepackaged Plan. See "The Prepackaged Plan." The final portion of the Retention Plan is an incentive program which may provide total incentive payments during the Original Effective Period of not more than $1,250,000. For calendar year 1991, the program was based on an incentive pool calculated as follows: At June 30, 1991, if the Class 3 Creditor Obligations were no greater than $380,000,000 (the maximum amount allowed under the 1991 Plan without any deferrals), $75,000 would be deposited in the pool with an added $5,000 for each full $1,000,000 that the Class 3 Creditor Obligations were reduced below $380,000,000. Voluntary repayments by the Company were eliminated from this calculation, reducing cash on hand below $15,000,000. As a result, $95,000 was deposited in the pool. At December 31, 1991, if the Class 3 Creditor Obligations were no greater than $340,000,000, $125,000 would be deposited in the pool with an added $5,000 for each full $1,000,000 that the Class 3 Creditor Obligations are below $340,000,000 after deducting any amounts credited at June 30, 1991. As a result, $125,000 was deposited in the pool. On September 16, 1992, the Compensation and Nominating Committee approved a continuation of the incentive program for calendar year 1993 based on a similar formula for reducing the Outstanding Notes. Under this incentive program, because the Outstanding Notes were no greater than $290,000,000 at December 31, 1992, $125,000 was deposited in the pool. The amounts paid from the pool to the Named Executive Officers for the fiscal years ended September 30, 1994, 1993 and 1992 are included in the Summary Compensation Table. The form and amount of this program for future years will be at the discretion of the reorganized Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Bucher, Colwell, Gassaway, Krout and Rostvold served as members of the Company's Compensation and Nominating Committee during the Company's fiscal year ended September 30, 1994. None of such individuals was, during such fiscal year, an officer or employee of the Company, was formerly an officer of the Company or had any relationship requiring disclosure by the Company. TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Under the Employee Retention Plan, Messrs. Dalton, Hennessey and Burnes are entitled to termination pay equal to 18, 18 and 12 months salary, respectively. In addition, all options granted to such individuals under the Employee Retention Plan that have not otherwise vested will vest automatically upon the occurrence of a change-in-control of the Company. See "--Employee Retention Plan" above. INDEMNIFICATION The Maryland General Corporation Law provides for indemnification of directors, trustees, officers, employees and agents, except to the extent that (i) it is proved that the person actually received an improper benefit or profit in money, property or services, or (ii) a judgment or other final adjudication is entered in a proceeding based on a finding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudication in the proceeding. (Md. Code, Title 2 Sec. 2-418 (1994)) Article 7.04 of the Declaration of Trust provides that the Company will indemnify, to the full extent permitted by Maryland law, now or hereafter in force, the trustees and officers of the Company. The Company is not aware of any pending legal proceedings for which any such person would be entitled to indemnification. 103 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT CURRENT HOLDERS The following table sets forth information at May 31, 1995 with respect to the beneficial ownership of shares of the Outstanding Common Shares by each Named Executive Officer and trustee of the Company and by all officers and trustees as a group. The information set forth below is based upon filings with the Commission, the Company's share records, and information obtained by the Company from the persons named below. As of May 31, 1995, no individual trustee or officer had beneficial ownership of 1% or more of the Outstanding Common Shares and all trustees and officers as a group beneficially owned 3.4% of the Outstanding Common Shares. To the Company's knowledge, as of May 31, 1995, no person or group (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) owned beneficially 5% or more of the Outstanding Common Shares of the Company.
NUMBER OF COMMON SHARES BENEFICIALLY NAME BENEFICIAL OWNER(1) OWNED ------------------------ ------------- Victor H. Schlesinger....................................... 32,038(2) C.W. Strong, Jr............................................. 29,914(3) Jeffrey M. Bucher........................................... 8,600(4) Kent L. Colwell............................................. 11,650(4)(5) James M. Gassaway........................................... 13,302(4) John E. Krout............................................... 8,612(4) Gerhard N. Rostvold......................................... 10,648(4) James A. Dalton............................................. 71,880(6)(7) Daniel F. Hennessey......................................... 50,569(8) Donald W. Burnes, Jr........................................ 35,000(9) All Officers and Trustees as a group (20 persons)........... 379,263(10)
- -------- (1) The address of all Named Executive Officers is in the care of the Company. (2) 23,500 of the shares reported as beneficially owned by Mr. Schlesinger are obtainable upon exercise of options. Such options will be canceled without consideration under the Prepackaged Plan. (3) 25,000 of the shares reported as beneficially owned by Mr. Strong are obtainable upon exercise of options. Such options will be canceled without consideration under the Prepackaged Plan. (4) 7,500 of the shares reported as beneficially owned by Messrs. Bucher, Colwell, Gassaway, Krout and Rostvold are obtainable upon exercise of options. Such options will be canceled without consideration under the Prepackaged Plan. (5) 3,500 of the shares reported as beneficially owned by Mr. Colwell are held in a family trust of which Mr. Colwell and his wife are co-trustees. (6) 65,000 of the shares reported as beneficially owned by Mr. Dalton are obtainable upon exercise of options. Such options will be canceled without consideration under the Prepackaged Plan. (7) 450 of the shares reported as beneficially owned by Mr. Dalton are owned by Mr. Dalton's wife. (8) 50,000 of the shares reported as beneficially owned by Mr. Hennessey are obtainable upon exercise of options. Such options will be canceled without consideration under the Prepackaged Plan. (9) All of the shares reported as beneficially owned by Mr. Burnes are obtainable upon exercise of options. Such options will be canceled without consideration under the Prepackaged Plan. (10) Includes 242,004 shares reported as beneficially owned by Trustees and Named Executive Officers as described in the footnotes above and 102,500 shares obtainable upon exercise of options by officers of the Company who are not named in the foregoing table. Such options will be canceled without consideration under the Prepackaged Plan. 104 CERTAIN HOLDERS AFTER RESTRUCTURING As of May 31, 1995, Mutual Series Funds is the beneficial owner of Outstanding Notes with an aggregate principal amount of $133.8 million (46.1%). Immediately upon consummation of the Restructuring, Mutual Series Funds will beneficially own approximately 5.0 million Common Shares (44.7%). Fidelity Investments, including its affiliates, is the beneficial owner of Outstanding Notes with an aggregate principal amount of $45.0 million (15.5%). Immediately upon consummation of the Restructuring, Fidelity Investments will beneficially own approximately 1.7 million Common Shares (15.0%). Intermarket Corporation, including its affiliates, is the beneficial owner of Outstanding Notes with an aggregate principal amount of $44.3 million (15.3%). Immediately upon consummation of the Restructuring, Intermarket Corporation will beneficially own approximately 1.7 million Common Shares (14.8%). Angelo Gordon & Co., L.P., including its affiliates, is the beneficial owner of Outstanding Notes with an aggregate principal amount of $27.8 million (9.6%). Immediately upon consummation of the Restructuring, Angelo Gordon & Co., L.P. will beneficially own approximately 1.0 million Common Shares (9.3%). Strome Susskind & Co., including its affiliates, is the beneficial owner of Outstanding Notes with an aggregate principal amount of $14.9 million (5.3%). Immediately upon consummation of the Restructuring, Strome Susskind & Co. will beneficially own approximately 558,941 Common Shares (5%). The percentages of ownership set forth above do not necessarily reflect either ownership or beneficial ownership as defined in the "Beneficial Attribution Rules" of the Internal Revenue Code (as hereinafter defined). 105 MARKET AND TRADING INFORMATION COMMON SHARES The Outstanding Common Shares are listed for trading on the NYSE and the PSE under the symbol MRT. The following table shows the high and low sales prices per share of Outstanding Common Shares on the NYSE for the first two quarters of the current fiscal year and for each quarter of the two fiscal years ending September 30, 1993, and September 30, 1994, respectively. There were no dividends declared attributable to such quarters. The last reported sales price of Outstanding Common Shares on the NYSE for July 5, 1995, the last practicable date on which such information was available prior to the date of this Disclosure Statement, was $.234375. The last reported sales price of Outstanding Common Shares on the NYSE for November 16, 1994, the last trading day before the Company announced that it had reached an agreement in principle relating to the Restructuring with the Creditors' Committee, was $.25. At the close of business May 31, 1995, there were approximately 15,000 record holders of Outstanding Common Shares. The following table sets forth the high and low sales prices for each fiscal quarter during the past two years. There were no dividends paid during any such quarter.
HIGH LOW ------ ------ 1995 First Quarter................................................. $ 3/8 $ 1/8 Second Quarter................................................ 1/4 1/8 1994 First Quarter................................................. $ 5/8 $ 3/8 Second Quarter................................................ 5/8 3/8 Third Quarter................................................. 1/2 3/8 Fourth Quarter................................................ 1/2 1/4 1993 First Quarter................................................. $1-3/8 $ 7/8 Second Quarter................................................ 2-1/2 1-1/4 Third Quarter................................................. 1-7/8 3/8 Fourth Quarter................................................ 7/8 3/8
On September 16, 1993, the NYSE notified the Company in a letter that a review of the Company's annual financial results for the fiscal year ended September 30, 1992 and for the nine months ended June 30, 1993 indicated that the Company had fallen below the continued listing criteria for the aggregate market value of outstanding shares (less than $8,000,000) and average earnings for the prior three years (less than $600,000 per year). On November 29, 1994, the NYSE notified the Company in a letter that a review of the Company's annual financial results for the fiscal year ended September 30, 1994 indicated that the Company still fell below the continued listing criteria for the aggregate market value of outstanding shares (less than $8,000,000) and average earnings for the prior three years (less than $600,000 per year), and that the Company had fallen below the continued listing criteria for the aggregate market value of publicly-held shares ($5,000,000). Also, the NYSE advised the Company that it would normally give consideration to delisting the securities of a company when an intent to file under any of the sections of the bankruptcy law has been announced. The NYSE indicated in its letter of November 29, 1994 that consideration is being given to the appropriateness of continued listing of the Common Shares. Management of the Company provided the NYSE with information to support a recommendation for the continued listing of the Common Shares on the NYSE and is awaiting a response from the NYSE. Although the Company is working with representatives of the NYSE to allow the Company to continue to be listed, there can be no assurance that the NYSE will not commence a formal delisting action. To date, to the Company's knowledge, the NYSE has taken no affirmative action to delist the Common Shares, but has reserved the right to do so in the future. If the Common Shares are delisted from the NYSE, (i) there can be no assurances that a public market will continue to exist for the Common Shares, (ii) the Company may be unable to obtain news coverage, have greater 106 difficulty in obtaining financing, suffer a significant decline in the market value of its Common Shares, and (iii) shareholders of the Company may subsequently have difficulty in selling their Common Shares should they desire to do so. See "Special Factors and Certain Considerations--Absence of Public Market" and "--Delisting of the Common Shares from Trading on the NYSE." The Company has not paid any dividends on the Outstanding Common Shares since February 20, 1990. The payment of dividends or other distributions to shareholders is restricted under the Outstanding Note Indenture to dividends required for the Company to maintain its REIT status and inadvertent overpayments of such dividends. The New Senior Note Indenture also restricts the payment of dividends and other distributions to shareholders on the Common Shares or any preferred stock which may be issued by the Company, other than such declaration and making of dividend payments that the Company deems necessary to preserve its status as a REIT, unless the Consolidated Net Worth (as defined in the New Senior Note Indenture) of the Company at the time of such payment and after giving effect thereto is at least $50.0 million; provided, however, that the Company shall in no event declare or make any such dividend payment or other distribution if a Default or Event of Default (as such terms are defined in the New Senior Note Indenture) has occurred and is continuing. In addition, the New Senior Note Indenture provides that the Company may not purchase, redeem or otherwise acquire for value its Common Shares or any preferred stock of the Company, whether outstanding on the Effective Date or thereafter issued and outstanding, unless the Consolidated Net Worth (as defined in the New Senior Note Indenture) of the Company at the time of such purchase, redemption or other acquisition and after giving effect thereto is at least $50 million; provided, however, that the Company shall in no event make any such purchase, redemption or other acquisition if a Default or Event of Default (as respectively defined in the New Senior Note Indenture) has occurred and is continuing. See "Special Factors and Certain Considerations--Restricted Payments." The Company incurred net operating losses of approximately $38 million, $31 million and $12 million for federal income tax purposes in fiscal 1993, 1992 and 1991, respectively, each of which will be available as a loss carryforward to future years' taxable income, subject to the limitations imposed by Section 382 of the Internal Revenue Code and the effects of the Restructuring. The Company estimates a net operating loss for tax purposes of approximately $35 million in fiscal 1994. To the extent that the loss carryforward used in future years eliminates taxable income, no dividend distribution will be required as a condition to preserving REIT status. OUTSTANDING NOTES There is not any active trading market for the Outstanding Notes. These securities are traded over the counter by certain dealers that are from time to time willing to effect transactions in these securities. Prior to April 1993, trading in these securities was extremely limited and sporadic. From April 1993 through May 26, 1995, approximately $429.5 million in principal amount of Outstanding Notes was traded in approximately 86 trades. Meaningful information regarding the current trading prices for the Outstanding Notes is not available. 107 DESCRIPTION OF NEW SENIOR NOTES GENERAL The New Senior Notes will be secured obligations governed by the New Senior Note Indenture, between the Company and Wilmington Trust Company, as trustee (the "New Indenture Trustee"), dated as of the Effective Date. The Company's obligations under the New Senior Note Indenture will be secured as provided in the New Collateral Documents (as hereinafter defined). See "Collateral and Security" below. The following summary of certain provisions of the New Senior Notes and the New Senior Note Indenture does not purport to be complete and is subject to and is qualified in its entirety by reference to all of the provisions of the New Senior Note Indenture and the New Collateral Documents (as hereinafter defined), including the definitions therein of certain terms. Capitalized terms used in the following summary and not otherwise defined herein shall have the meanings ascribed to them in the New Senior Note Indenture, the New Collateral Documents (as hereinafter defined) or the Prepackaged Plan, as applicable. The New Senior Notes will be limited to $110,000,000 aggregate principal amount and will mature on the anniversary of the Effective Date in 2002. Interest on the New Senior Notes will accrue at 11-1/8% per annum and will be payable semiannually in arrears on each June 30 and December 31, commencing after the Effective Date of the Prepackaged Plan, to holders of record of the New Senior Notes at the close of business on the immediately preceding June 1 and December 1, whether or not a Business Day. Interest will be computed on the basis of a 360-day year consisting of 12 30-day months. Interest will accrue from the most recent date to which interest has been paid for, or, if no interest has been paid, from the Effective Date. The Company will pay interest on overdue principal at the rate equal to 2% per annum in excess of the interest rate on the New Senior Notes to the extent lawful; and it will pay interest on overdue installments of interest (without regard to any applicable grace periods) at the same rate to the extent lawful. Regularly scheduled payments of principal and interest, are payable to holders of New Senior Notes at the office or agency of the Company in Philadelphia, Pennsylvania, or at the option of a holder of New Senior Notes, payment of interest may be made by check mailed to such holder at its address set forth in the register of holders or by wire to an account designated by such holder. Unless otherwise designated by the Company, the Company's office or agency in Philadelphia, Pennsylvania will be the office of the New Indenture Trustee maintained for such purpose. The New Senior Notes will be issued in registered form, without coupons, and only in denominations of $1,000 and integral multiples thereof. OPTIONAL REDEMPTION The Company will have the option to redeem the New Senior Notes, in whole or in part, upon not less than 30 nor more than 60 days' notice, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest, if any, thereon to the applicable redemption date. MANDATORY REDEMPTION Except as set forth below with respect to Asset Sale Proceeds and Change of Control, the Company will not be required to make mandatory redemption payments or sinking fund payments with respect to the New Senior Notes. NOTICE AND SELECTION If the Company elects to redeem New Senior Notes pursuant to the optional redemption provisions described above, it shall furnish to the New Indenture Trustee, at least 45 days but not more than 75 days before a redemption date, written notice setting forth (i) the redemption date, (ii) the principal amount of New Senior Notes to be redeemed and (iii) the redemption price. If less than all of the New Senior Notes are to be redeemed, the New Indenture Trustee shall select the New Senior Notes to be redeemed among the holders of New Senior Notes in compliance with the requirements of the principal national securities exchange, if any, on which the New Senior Notes are listed, or, if the New Senior Notes are not so listed, on 108 a pro rata basis, by lot or in accordance with any other method the New Indenture Trustee considers fair and appropriate (and in such manner as complies with applicable legal and stock exchange requirements, if any), provided that no New Senior Notes of $1,000 or less shall be redeemed in part. In the event of partial redemption by lot, the particular New Senior Notes to be redeemed shall be selected, unless otherwise provided in the New Senior Note Indenture, not less than 30 nor more than 60 days prior to the redemption date by the New Indenture Trustee from the outstanding New Senior Notes not previously called for redemption. The New Indenture Trustee will promptly notify the Company in writing of the New Senior Notes selected for redemption and, in the case of any New Senior Note selected for partial redemption, the principal amount thereof to be redeemed. New Senior Notes and portions of them selected shall be in amounts of $1,000 or whole multiples of $1,000; except that if all of the New Senior Notes of a holder are to be redeemed, the entire outstanding amount of New Senior Notes held by such holder, even if not a multiple of $1,000, will be redeemed. Except as provided in the preceding sentence, provisions of the New Senior Note Indenture that apply to New Senior Notes called for redemption also apply to portions of New Senior Notes called for redemption. GUARANTEE The due, punctual and full payment of the principal of and interest on the New Senior Notes will be jointly, severally and unconditionally guaranteed by the Subsidiaries of the Company. Each of the Guarantors will execute the New Senior Note Indenture and the guarantee to be endorsed on each New Senior Note. The Company currently has five Subsidiaries: MRT West, Inc., MRT Creekside, Inc., MRT Newark, Inc., MRT Santa Monica, Inc., and 150 Rittenhouse Circle, Inc. Each of the Subsidiaries is a single-asset entity created solely for the purpose of holding title to a specific property while insulating the Company from liabilities associated with the ownership of or investment in such property. As of March 31, 1995, the aggregate net book value of the Subsidiaries represented 2.6% of the aggregate net book value of the Company on a consolidated basis. ASSET SALE PROCEEDS If at any time the aggregate amount of Asset Sale Proceeds and the net cash proceeds of Indebtedness incurred pursuant to the New Senior Note Indenture that have not been applied in accordance with this provision (exclusive of any Asset Sale Proceeds or net cash proceeds which remain after the completion of any prior Asset Sale Offer) exceeds $10 million, the Company will make an offer to all holders of New Senior Notes (an "Asset Sale Offer") to purchase the maximum principal amount of New Senior Notes that, together with accrued and unpaid interest thereon, may be purchased with 80% of any such Asset Sale Proceeds or 100% of the net cash proceeds of such Indebtedness, at an offer price in cash in an amount equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest, if any, to the date fixed for the closing of such offer, in accordance with the procedures specified in the New Senior Note Indenture and summarized in the remainder of this section "Asset Sale Proceeds." The Asset Sale Offer will remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five Business Days after the termination of the Offer Period (the "Purchase Date"), the Company will purchase the maximum principal amount of New Senior Notes that may be purchased with 80% of such Asset Sale Proceeds or 100% of the net cash proceeds of such Indebtedness (the "Offer Amount"), or, if less than the Offer Amount has been tendered, all New Senior Notes tendered in response to the Asset Sale Offer. If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued interest will be paid to the person in whose name a New Senior Note is registered at the 109 close of business on such record date, and no additional interest will be payable to holders who tender New Senior Notes pursuant to the Asset Sale Offer. Upon the commencement of any Asset Sale Offer the Company will send, by first class mail, a notice to the New Indenture Trustee and each of the holders of the New Senior Notes, with a copy to the New Indenture Trustee. The notice will contain all instructions and materials necessary to enable such holders to tender New Senior Notes pursuant to the Asset Sale Offer. The notice, which will govern the terms of the Asset Sale Offer will state the following: (1) that such Asset Sale Offer is being made pursuant to this provision and that the length of time such Asset Sale Offer will remain open; (2) the Offer Amount, the purchase price and the Purchase Date; (3) that any New Senior Note not tendered or accepted for payment will continue to accrue interest in accordance with its terms; (4) that any New Senior Note accepted for payment pursuant to such Asset Sale Offer will cease to accrue interest after the Purchase Date; (5) that holders electing to have a New Senior Note purchased pursuant to such Asset Sale Offer will be required to surrender the New Senior Note at least three Business Days before the Purchase Date with the form entitled "Option of Holder to Elect Purchase" on the reverse of the New Senior Note completed, to the Company, a depositary, if appointed by the Company, or a paying agent at the address specified in the notice; (6) that holders of New Senior Notes will be entitled to withdraw their election if the Company, depositary or paying agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the holder of New Senior Notes, the principal amount of the New Senior Note the holder delivered for purchase and a statement that such holder is withdrawing his or her election to have the New Senior Note purchased; (7) that, if the aggregate principal amount of New Senior Notes surrendered by holders thereof exceeds the Offer Amount, the Company will select the New Senior Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only New Senior Notes in denominations of $1,000, or integral multiples thereof, will be purchased); and (8) that holders whose New Senior Notes were purchased only in part will be issued new New Senior Notes equal in principal amount to the unpurchased portion of the New Senior Notes surrendered. Any holder of New Senior Notes may at any time elect to deliver to the New Indenture Trustee written instructions (each a "Standing Instruction") stating that such holder desires to participate in any Asset Sale Offer by tendering the maximum permitted number of such holder's New Senior Notes for repurchase in such Asset Sale Offer. Upon receipt of such Standing Instruction, the New Indenture Trustee will deem the maximum permitted number of such holder's New Senior Notes tendered upon the commencement of any Asset Sale Offer. The issuing holder of New Senior Notes may withdraw such Standing Instruction at any time prior to the expiration of an Offer Period by so notifying the New Indenture Trustee in writing. Each holder of New Senior Notes electing not to deliver a Standing Instruction must respond to the notice of any Asset Sale Offer, as set forth above, prior to the termination of the Offer Period if such holder wishes to participate in an Asset Sale Offer. On or before the Purchase Date, the Company will, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of New Senior Notes or portions thereof tendered pursuant to the Asset Sale Offer, or, if less than the Offer Amount has been tendered, all New Senior Notes, and deliver to the New Indenture Trustee an Officers' Certificate stating that such New Senior Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this provision. The Company, depositary or paying agent, as the case may be, shall promptly (but in any case not later than five days after the Purchase Date) mail or deliver (or wire, if requested by a holder of New Senior Notes in advance) to each tendering holder of New Senior Notes an amount equal to the purchase price of the New Senior Note tendered by such holder and accepted by the Company for purchase, and the Company will promptly issue a new New Senior Note, and the New Indenture Trustee will authenticate and mail or deliver such new New Senior Note to such holder equal in principal amount to any unpurchased portion of the New Senior Note surrendered. Any New Senior Note not so accepted shall be promptly mailed or delivered by the Company to the holder thereof. The Company will publicly announce the results of the Asset Sale Offer on the Purchase Date. In the event that the aggregate amount of Asset Sale Proceeds or net cash proceeds of 110 Indebtedness incurred pursuant to the New Senior Note Indenture exceeds the aggregate principal amount of New Senior Notes surrendered by holders thereof pursuant to such Asset Sale Offer, the Company may use the remaining Asset Sale Proceeds or net cash proceeds of such Indebtedness in accordance with the terms of the New Senior Note Indenture. If the aggregate principal amount of New Senior Notes surrendered by holders thereof exceeds the amount of Asset Sale Proceeds or net cash proceeds of Indebtedness incurred pursuant to the New Senior Note Indenture, the New Indenture Trustee will select the New Senior Notes to be purchased on a pro rata basis. Upon completion of any Asset Sale Offer, the amount of Asset Sale Proceeds or net cash proceeds of such Indebtedness will be deemed to be reset at zero. Other than as specifically provided in this provision, any purchase pursuant to this provision will be made pursuant to the provisions of the New Senior Note Indenture relating to redemptions in general. Whenever any Asset Sale Proceeds or net cash proceeds of Indebtedness incurred pursuant to the New Senior Note Indenture are received by the Company, such Asset Sale Proceeds or net cash proceeds of Indebtedness will be set aside in the Asset Sale Account pending allocation of such Asset Sale Proceeds or net cash proceeds of Indebtedness incurred pursuant to the provisions of the New Senior Note Indenture. All cash Asset Sale Proceeds shall be deposited in the Asset Sales Account immediately upon receipt by the Company or any Subsidiary or their agent. All non-cash Asset Sale Proceeds shall be delivered immediately to the New Collateral Agent upon receipt by the Company or any Subsidiary or their agent and shall be pledged to the New Collateral Agent for the ratable benefit of the holders of New Senior Notes to secure the obligations of the Company under the New Senior Note Indenture and the New Senior Notes pursuant to a pledge agreement in form and substance satisfactory to the New Indenture Trustee. When the aggregate amount of Asset Sale Proceeds and net cash proceeds from Indebtedness incurred pursuant to the New Senior Note Indenture exceeds $10 million, the Company will be required to apply all such Asset Sale Proceeds and net cash proceeds to an Asset Sale Offer in accordance with the procedures set forth above in this section "Asset Sale Proceeds." The cash Asset Sale Proceeds shall be distributed to the holders of New Senior Notes also in accordance with the procedures set forth above. Any cash Asset Sale Proceeds not so distributed to holders of New Senior Notes will be returned to the Company. CHANGE OF CONTROL Unless waived by the Required Holders, upon the occurrence of a Change of Control, the Company will make an offer (the "Change of Control Offer") to each holder of New Senior Notes to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's New Senior Notes at a purchase price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (the "Change of Control Payment"). Within 45 days following any Change of Control, the Company will mail a notice to the New Indenture Trustee and each holder of New Senior Notes stating: (1) that the Change of Control Offer is being made pursuant to this provision and that all New Senior Notes tendered will be accepted for payment; (2) the purchase price and the purchase date, which shall be no earlier than 30 days nor later than 45 days from the date such notice is mailed (the "Change of Control Payment Date"); (3) that any New Senior Note not tendered shall continue to accrue interest in accordance with its terms; (4) that, unless the Company defaults in the payment of the Change of Control Payment, all New Senior Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (5) that holders of New Senior Notes electing to have any New Senior Notes purchased pursuant to a Change of Control Offer will be required to surrender the New Senior Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the New Senior Notes completed, to the paying agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (6) that holders of New Senior Notes will be entitled to withdraw their election if the paying agent receives, not later than the close of business on the second Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the holder of New Senior Notes, the principal amount of New 111 Senior Notes delivered for purchase, and a statement that such holder is withdrawing his election to have such New Senior Notes purchased; and (7) that holders of New Senior Notes whose New Senior Notes are being purchased only in part will be issued new New Senior Notes equal in principal amount to the unpurchased portion of the New Senior Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. The Company will comply with the requirements of Rule 14e-1 under the Securities Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable to the repurchase of the New Senior Notes in connection with a Change of Control. On the Change of Control Payment Date, the Company will, to the extent lawful, (1) accept for payment New Senior Notes or portions thereof tendered pursuant to the Change of Control Offer, (2) deposit with the paying agent an amount equal to the Change of Control Payment in respect of all New Senior Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the New Indenture Trustee the New Senior Notes so accepted together, with an Officers' Certificate stating the New Senior Notes or portions thereof tendered to the Company. The paying agent shall promptly mail to each holder of New Senior Notes such accepted payment in an amount equal to the purchase price for such New Senior Notes, and the New Indenture Trustee shall promptly authenticate and mail to each holder a new New Senior Note equal in principal amount to any unpurchased portion of the New Senior Notes surrendered, if any; provided, however, that each such new New Senior Note shall be in a principal amount of $1,000 or an integral multiple thereof. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The New Indenture Trustee shall be under no obligation to ascertain the occurrence of a Change in Control or to give notice with respect thereto other than upon receipt of the written notice of Change in Control from the Company. The New Indenture Trustee may conclusively assume, in the absence of a written notice to the contrary from the Company or any holder of New Senior Notes, that no Change in Control has occurred. Except as described above with respect to a Change of Control, the Company will not be required to repurchase or redeem the New Senior Notes from the holders of the New Senior Notes in the event of a takeover, recapitalization or similar transaction. CERTAIN COVENANTS OF THE COMPANY The following is a summary of certain of the covenants contained in the New Senior Note Indenture: Limitation on Investments. The Company will not be permitted to, nor will it be permitted to allow any Subsidiary to, directly or indirectly, make any Investment from and after the Effective Date except (1) Investments which constitute leasing commissions and tenant improvements, related to the ownership and maintenance of a parcel or parcels of Real Estate in an amount not to exceed by more than 10% the amount of such commissions or improvements set forth in a budget approved by the Board of Trustees of the Company (as the same may be amended from time to time with the consent of the Board of Trustees of the Company), (2) with any Asset Sale Proceeds that are not applied to the then outstanding New Senior Notes in accordance with the "Asset Sale Proceeds" provision above, new loans to non-Affiliates or new equity Investments, in each case approved by the Board of Trustees of the Company, (3) Investments approved by the Board of Trustees of the Company of Available Cash in Cash Equivalents, (4) Investments approved by the Board of Trustees of the Company created by the Company or any Subsidiary as a result of any sale, refinancing or disposition of assets when the Company or such Subsidiary accepts, in partial payment of an outstanding obligation, a new mortgage or equity interest in the same property, and (5) Investments approved by the Board of Trustees of the Company in Subsidiaries formed or maintained pursuant to the New Senior Note Indenture; provided, however, that the stock of any such new Subsidiary is pledged to the New Collateral Agent for the ratable benefit of the holders of New Senior Notes in accordance with the New Senior Note Indenture. Indebtedness. The Company will not be permitted to, directly or indirectly, and will not directly or indirectly, permit any Subsidiary to incur, create, assume or suffer to exist any Indebtedness except 112 (1) Indebtedness represented by the New Senior Notes, (2) Contingent Obligations constituting endorsements for collection or deposit in the ordinary course of business, (3) current liabilities in respect of taxes, assessments and governmental charges or levies incurred, or claims for labor, materials, inventory, services, supplies and rentals incurred, or for goods or services purchased, in the ordinary course of business consistent with the past practice of the Company or such Subsidiary, (4) Indebtedness arising under any performance bond reimbursement obligation entered into in the ordinary course of business of the Company or such Subsidiary consistent with the past practice of the Company or such Subsidiary, (5) unimpaired indemnification claims under the Amended and Restated Declaration of Trust of the Company, (6) Indebtedness arising in connection with Subsidiaries formed or maintained pursuant to the New Senior Note Indenture, (7) the First Lien Debt, (8) Indebtedness incurred to finance the purchase price of property; provided, however, that such Indebtedness shall be non-recourse to the Company or such Subsidiary, and (9) additional secured Indebtedness of the Company; provided, however, that (i) 100% of the net cash proceeds of such Indebtedness, after deducting all expenses related thereto, shall be applied to the repayment of the New Senior Notes in accordance with the "Asset Sale Proceeds" provision above, and (ii) the interest rate payable in respect of such Indebtedness shall be lower than the interest rate then payable in respect of the New Senior Notes; and, provided, further, that if such interest rate is not a fixed rate of interest, the Company shall have entered into an interest rate agreement or other contractual arrangement concurrently with the incurrence of such Indebtedness the economic effect of which shall be that such floating interest rate over the life of such Indebtedness shall be lower than the interest rate then payable in respect of the Notes. Restricted Payments. The Company will not be permitted to (1) declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of or in respect of any of its Common Shares or any Preferred Stock which may be issued by the Company, other than such declaration and making of dividend payments that the Company deems necessary to preserve its status as a REIT, unless the Consolidated Net Worth of the Company at the time of such payment and after giving effect thereto is at least $50 million; provided, however, that the Company shall in no event declare or make any such dividend payment or other distribution if a Default or Event of Default has occurred and is continuing under the New Senior Note Indenture, or (2) purchase, redeem or otherwise acquire for value its Common Shares or any Preferred Stock which may be issued by the Company, whether outstanding on the Effective Date or thereafter issued and outstanding, unless the Consolidated Net Worth of the Company at the time of such purchase, redemption or other acquisition and after giving effect thereto is at least $50 million; provided, however, that the Company shall in no event make any such purchase, redemption or other acquisition if a Default or Event of Default has occurred and is continuing. Transactions with Affiliate. The Company will not be permitted to, nor will it be permitted to allow any Subsidiary to (1) make any Investment in an Affiliate, (2) transfer, sell, lease, assign or otherwise dispose of any assets to any such Affiliate, (3) merge into or consolidate with or purchase or acquire assets from any Affiliate, (4) repay any Indebtedness to any Affiliate (except under existing retirement or deferred compensation plans), or (5) enter into any other transaction directly or indirectly with or for the benefit of any such Affiliate (including, without limitation, guaranties and assumptions of obligations of any such Affiliate) except for (i) transactions in the ordinary course of business on a basis no less favorable to the Company or such Subsidiary as would be obtained in a comparable arm's length transaction with a person which is not an Affiliate, (ii) compensation to trustees commensurate with current compensation levels, (iii) salaries and other employee compensation and benefits to officers of the Company or such Subsidiary commensurate with the compensation levels in effect as of the date of the New Senior Note Indenture as may reasonably be adjusted over time but in no event to exceed 10% annually in the aggregate, (iv) any transaction required or otherwise permitted by the Prepackaged Plan or the New Senior Note Indenture, and (v) transactions with respect to Subsidiaries pursuant to the New Senior Note Indenture. COLLATERAL AND SECURITY The New Senior Notes will be secured by a first priority Lien in and on all of the Collateral, in favor of the New Collateral Agent for the benefit of the New Indenture Trustee, the New Collateral Agent and the 113 holders of New Senior Notes, (i) superior to and prior to the rights of all third persons other than those holding the First Lien Debt, and (ii) subject to no Liens other than the Liens permitted under the New Senior Note Indenture. The Collateral will consist of all of the Company's assets, including, without limitation, all personal property and real property, tangible or intangible, and all rents, issues, profits and proceeds thereof held by the Company or any Subsidiary. The security interests will be granted by the Company and the Subsidiaries pursuant to the New Collateral Documents. Release of Collateral. Subject to the certain conditions set forth in the Senior Note Indenture, Collateral which is sold, conveyed or disposed of in compliance with the provisions of the New Senior Note Indenture may be released (from the Lien and security interest created by the New Collateral Documents) from time to time in accordance with the provisions of the New Collateral Documents. No Collateral will be released from the Lien and security interest created by the New Collateral Documents unless the Company has made an Asset Sale Offer in accordance with the New Senior Note Indenture. Notwithstanding any of the terms of the New Senior Note Indenture or of any of the New Collateral Documents, at any time when an Event of Default will have occurred and be continuing and the maturity of the New Senior Notes shall have been accelerated (whether by declaration or otherwise), the New Collateral Agent will not, without the consent of the Required Holders, release any Collateral pursuant to the provisions of the New Senior Note Indenture or any of the New Collateral Documents. AMENDMENT, SUPPLEMENT AND WAIVER The Company and the Trustee, as applicable, may amend or supplement the New Senior Note Indenture, the New Senior Notes or any amended or supplemental New Senior Note Indenture with the written consent of the Required Holders (including consents obtained in connection with a tender offer or exchange offer for the New Senior Notes) and any existing Default or Event of Default and its consequences or compliance with any provision of the New Senior Note Indenture or the New Senior Notes may be waived with the consent of the Required Holders (including consents obtained in connection with a tender offer or exchange offer for the New Senior Notes); provided that, without the consent of each holder of a New Senior Note affected, an amendment or waiver may not (with respect to any New Senior Notes held by a nonconsenting holder of New Senior Notes) reduce the principal amount of New Senior Notes whose holders must consent to an amendment, supplement or waiver, reduce the principal of or change the fixed maturity of any New Senior Note or reduce the redemption price of the New Senior Notes, reduce the rate of or change the time for payment of interest on any New Senior Note, waive a Default or Event of Default in the payment of principal of or interest on the New Senior Notes (except a rescission of acceleration of the New Senior Notes by the Required Holders and a waiver of the payment default that resulted from such acceleration), make any New Senior Note payable in money other than that stated in the New Senior Notes, make any change in the provisions of the New Senior Note Indenture relating to waivers of past Defaults or the rights of holders of New Senior Notes to receive payments of principal of or interest on the New Senior Notes, directly or indirectly release Liens on all or substantially all of the Collateral except in connection with a merger, consolidation or disposition of assets permitted under the New Senior Note Indenture, make any change in the foregoing amendment and waiver provision, or waive a redemption payment with respect to any New Senior Note. Without the consent of any holder of New Senior Notes, the Company and the New Indenture Trustee, as applicable, may amend or supplement the New Senior Note Indenture and the New Senior Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated New Senior Notes in addition to or in place of certificated New Senior Notes, to provide for (i) the assumption of the Company's obligations to the holders of the New Senior Notes in the case of a merger or consolidation pursuant to the New Senior Note Indenture and (ii) certain amendments to the New Collateral Documents expressly called for therein pursuant to the New Senior Note Indenture, to execute and deliver any documents necessary or appropriate to release Liens on any Collateral as permitted by the New Senior Note Indenture, to make any change that would provide any additional rights or benefits to the holders of the New Senior Notes or that does not materially adversely affect the legal rights under the New Senior Note Indenture of any holder of the New 114 Senior Notes, or to comply with requirements of the Commission in order to effect or maintain the qualification of the New Senior Note Indenture under the TIA. EVENTS OF DEFAULT The following events will constitute "Events of Default" under the New Senior Note Indenture: (a) the Company fails to make any payment in respect of principal of the New Senior Notes or under the "Asset Sale Proceeds" or "Change in Control" provisions of the New Senior Note Indenture described in the appropriately captioned paragraphs above when the same becomes due and payable and such failure continues for a period of 5 business days after the due date of such payment, or the Company fails to make any payment when due of interest on the New Senior Notes and such failure continues for a period of 10 days after the due date of such payment; (b) any representation or warranty made or deemed made by the Company or any Subsidiary (or any of their officers) under this Disclosure Statement or the New Collateral Documents which proves to have been untrue or incorrect in any material respect when made or deemed made; (c) the Company (or the Company or any Subsidiary in the case of New Collateral Documents) fails to perform any term, covenant or agreement of the Company (subject in certain cases to a 30-day cure period); (d) the Company or any Subsidiary fails, after any applicable grace period, to pay any principal of or premium, if any, or interest on any of its Indebtedness in an amount exceeding $1,000,000 (excluding the New Senior Notes), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), or any other event occurs or condition exists under any agreement or instrument relating to any such Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (e) bankruptcy, insolvency, reorganization or other similar events with respect to the Company or any Material Subsidiary; (f) any judgment or order for the payment of money in excess of $1,000,000 is rendered against the Company or any Subsidiary, and either enforcement proceedings has been commenced by any creditor upon such judgment or order, or there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order by reason of a pending appeal or otherwise, is not in effect; and (g) except for releases of Collateral pursuant to Asset Sales effected in accordance with the New Senior Note Indenture, the New Senior Note Indenture or the New Collateral Documents, for any reason, cease to create a valid Lien on Collateral having a value of $1,000,000 or more purported to be covered thereby, or such Lien ceases to have the priority Lien status initially granted and be a perfected Lien as to collateral having a value of $1,000,000 or more. If an Event of Default occurs and is continuing, the New Indenture Trustee by notice to the Company may, or upon written notice from the Required Holders will, or the Required Holders by written notice to the Company and the New Indenture Trustee may, declare all the New Senior Notes to be due and payable immediately. Upon such declaration, the principal of, premium, if any, and interest on the New Senior Notes shall be due and payable immediately. If an Event of Default arising from bankruptcy, insolvency, reorganization or similar events occurs with respect to the Company or any Material Subsidiary, such an amount will ipso facto become and be immediately due and payable without any declaration or other act on the part of the New Indenture Trustee or any holder of New Senior Notes. The Required Holders by written notice to the New Indenture Trustee may on behalf of all of the holders of New Senior Notes rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal, interest or premium that has become due solely because of the acceleration) have been cured or waived. If an Event of Default occurs and is continuing, the New Indenture Trustee and/or the New Collateral Agent, as applicable, may pursue any available remedy (under the New Senior Note Indenture, the New Collateral Documents or otherwise) to collect the payment of principal and interest on the New Senior Notes or to enforce the performance of any provision of the New Senior Notes, the New Senior Note Indenture or the New Collateral Documents. A holder of a New Senior Note may pursue a remedy with respect to the New Senior Note Indenture or such New Senior Note only if (i) the holder of a New Senior Note gives to the New Indenture Trustee and 115 the New Collateral Agent written notice of a continuing Event of Default, (ii) the Required Holders make a written request to the New Indenture Trustee and the New Collateral Agent to pursue the remedy, (iii) such holder of a New Senior Note or holders of New Senior Notes offer and, if requested, provide to the New Indenture Trustee and the New Collateral Agent indemnity satisfactory to the New Indenture Trustee and the New Collateral Agent against any loss, liability or expense, (iv) the New Indenture Trustee and the New Collateral Agent do not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity, and (v) during such 60-day period the Required Holders do not give the New Indenture Trustee and the New Collateral Agent a direction inconsistent with the request. Notwithstanding any other provision of the Senior Note Indenture, the right of any holder of a New Senior Note to receive payment of principal and interest on such New Senior Note, on or after the respective due dates expressed in such New Senior Note, or to bring suit for the enforcement of any such payment on or after such respective dates, will not be impaired or affected without the consent of the holder of New Senior Notes, except that no holder of New Senior Notes will have the right to institute any such suit if and to the extent that the institution or prosecution thereof or the entry of judgment therein would under applicable law result in the surrender, impairment, waiver or loss of the Liens pursuant to the New Collateral Documents upon any property subject to such Liens. The Required Holders may direct the time, method and place of conducting any proceeding for any exercising remedy available to the New Indenture Trustee and/or the New Collateral Agent or exercising any trust or power conferred on it or them. However, the New Indenture Trustee and/or the New Collateral Agent may refuse to follow any such direction that conflicts with the law, the New Senior Note Indenture or the New Collateral Documents, that the New Indenture Trustee and/or the New Collateral Agent determines may be unduly prejudicial to the rights of other holders of New Senior Notes or that may involve the New Indenture Trustee and/or the New Collateral Agent in personal liability. Before proceeding to exercise any rights or powers under the New Senior Indenture or the New Collateral Documents at the request or direction of any of the holders of New Senior Notes, the New Indenture Trustee and the New Collateral Agent will be entitled to receive from the holders of New Senior Notes reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with any such direction. SUCCESSOR COMPANY The Company may not consolidate or merge with or into (whether or not the Company is the surviving entity), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions to, another person unless (i) the Company is the surviving entity, or the person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia, (ii) the person formed by or surviving any such consolidation or merger (if other than the Company), or the person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made, assumes, pursuant to a supplemental indenture and appropriate collateral documents in forms reasonably satisfactory to the New Indenture Trustee, all of the obligations of the Company under the New Senior Notes and the New Senior Note Indenture and all the obligations of the Company under the New Collateral Documents, (iii) immediately before and immediately after giving effect to such transaction no Default or Event of Default exists, and (iv) the Company or the person formed by or surviving any such consolidation or merger, or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made after giving pro forma effect thereto as of the end of the most recently completed fiscal quarter, shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction. DEFEASANCE The Company may, at the option of its Board of Trustees evidenced by a resolution set forth in an Officers' Certificate, at any time, with respect to the New Senior Notes, elect to have the defeasance section 116 of the New Senior Note Indenture be applied to all outstanding New Senior Notes upon compliance with the conditions set forth in the defeasance article of the New Senior Note Indenture. Upon the Company's exercise of this option the Company will be deemed to have been discharged from its obligations with respect to all outstanding New Senior Notes on the date the conditions set forth in the New Senior Note Indenture are satisfied (hereinafter "Defeasance"). For this purpose, such Defeasance means that the Company will be deemed to have paid and discharged the entire Indebtedness represented by the outstanding New Senior Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of the sections of the New Senior Note Indenture so specified to in the defeasance article of the New Senior Note Indenture, and to have satisfied all its other obligations under such New Senior Notes and the New Senior Note Indenture (and the trustee, on demand of and at the expense of the Company, will execute proper instruments acknowledging the same), except for the following which will survive until otherwise terminated or discharged hereunder: (a) the rights of holders of outstanding New Senior Notes to receive solely from the trust fund described in the New Senior Note Indenture, as more fully set forth in such defeasance article, payments in respect of the principal of and interest on such New Senior Notes when such payments are due, (b) the Company's obligations with respect to such New Senior Notes under certain sections of the New Senior Note Indenture, (c) the rights, powers, trusts, duties and immunities of the trustee described in the New Senior Note Indenture and the Company's obligations in connection therewith, and (d) the defeasance article of the New Senior Note Indenture. The following will be the conditions to the application of Defeasance: (a) the Company will irrevocably have deposited or caused to be deposited with the New Indenture Trustee (or another New Indenture Trustee satisfying the requirements of the New Senior Note Indenture who will agree to comply with the provisions of the defeasance article of the New Senior Note Indenture applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the holders of such New Senior Notes, (i) cash in an amount or (ii) non-callable Governmental Securities which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment under the New Senior Notes, cash in an amount, or (iii) a combination thereof, in such amounts, as will be sufficient to pay and discharge and which will be applied by the New Indenture Trustee (or other qualifying New Indenture Trustee) to pay and discharge (A) the principal of and interest on the outstanding New Senior Notes on the stated maturity or on the applicable redemption date, as the case may be, of such principal or interest to maturity and (B) any mandatory sinking fund payments or analogous payments applicable to the outstanding New Senior Notes on the day on which such payments are due and payable in accordance with the terms of the New Senior Note Indenture and of such New Senior Notes; provided that the New Indenture Trustee will have been irrevocably instructed to apply such money or the proceeds of such non-callable Governmental Securities to said payments with respect to the New Senior Notes; (b) no Default or Event of Default with respect to the New Senior Notes will have occurred and be continuing on the date of such deposit; (c) such Defeasance will not result in a breach or violation of, or constitute a default under, the New Senior Note Indenture or any other agreement or instrument to which the Company is a party or by which the Company is bound; (d) the Company will have delivered to the New Indenture Trustee an Officers' Certificate stating that the deposit made by the Company pursuant to its election under the New Senior Note Indenture was not made by the Company with the intent of preferring the holders over other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; (e) the Company will have delivered to the New Indenture Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Defeasance under the New Senior Note Indenture have been complied with; (f) the Company will have delivered to the New Indenture Trustee an opinion of counsel reasonably acceptable to the New Indenture Trustee confirming that (i) the Company has received from or there has been published by, the Internal Revenue Service a ruling or (ii) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel will confirm that, the holders of the outstanding New Senior Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as 117 would have been the case if such Defeasance had not occurred; and (g) the Company will have delivered to the New Indenture Trustee an opinion of counsel to the effect that such deposit would not constitute a preference as defined in Section 547 of the Bankruptcy Code, and the trust funds would not constitute property included within the estate of the debtor. THE NEW INDENTURE TRUSTEE AND NEW COLLATERAL AGENT The New Indenture Trustee will also be the corporate collateral agent under the Security Agreement. The New Indenture Trustee may be removed as trustee under the New Senior Note Indenture by the Required Holders and may be removed as collateral agent under the Security Agreement by the Required Holders. CERTAIN DEFINITIONS Set forth below are certain terms to be contained in the New Senior Note Indenture, modified where appropriate to use terms as defined elsewhere in this Disclosure Statement. "Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person and includes each officer, director, trustee or general partner of such person, and each owner of 5% or more of any class of voting stock or interests of such person. For purposes of this definition, "control" when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Sale" means any sale or other disposition, or series of sales or other dispositions, made on or after the Effective Date by the Company or any Subsidiary to any person of any Collateral. For the purposes hereof, any prepayment or payment at maturity of an Underlying Promissory Note shall be deemed to be an "Asset Sale." "Asset Sale Account" means that trust account (account no. 28666) maintained at Wilmington Trust Company in the name of the New Collateral Agent, under the sole dominion and control of the New Collateral Agent, and administered pursuant to the New Collateral Documents. "Asset Sale Proceeds" means payments in cash or other property (including securities) received by the Company or any Subsidiary (including, without limitation, any cash payments received by way of deferred payment of principal pursuant to a note or receivable or otherwise, but only as and when received) from any Asset Sale (after repayment of any indebtedness required to be paid by reason of such Asset Sale), in each case net of the amount of (a) reasonable brokers' and advisors' fees and commissions actually paid other than to an Affiliate of the Company, (b) all foreign, federal, state and local taxes actually payable by the Company as a direct consequence of such Asset Sale, (c) the reasonable fees and expenses attributable to such Asset Sale, to the extent not included in clause (a) above, except to the extent paid to any Affiliate of the Company, and (d) any proportionate share of the proceeds required to be paid to any person owing a beneficial interest in the property or assets sold pursuant to such Asset Sale. "Assignments of Leases" means each Assignment of Lease, made by the Company or a Subsidiary, executed prior to the execution of the New Senior Notes Indenture, concurrently with the execution of the New Senior Notes Indenture or thereafter in favor of the New Collateral Agent on behalf of the New Indenture Trustee, the New Collateral Agent and the holders of New Senior Notes, assigning a Lease, as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced in accordance with the terms thereof. 118 "Available Cash" means, as at any date of determination, all cash and Cash Equivalents held by the Company, any Subsidiary or the New Indenture Trustee, including, without limitation, cash and Cash Equivalents held in the Asset Sale Account. "Business Day" means any day other than a Legal Holiday. "Capital Expenditures" means, for any person for any period, the aggregate of all expenditures by such person and its consolidated Subsidiaries, except interest capitalized during construction, during such period for property, plant or equipment, including, without limitation, renewals, improvements, replacements and capitalized repairs, that would be reflected as additions to property, plant or equipment on a consolidated balance sheet of such person and its Subsidiaries prepared in accordance with GAAP and includes, without limitation, payments, other than those attributable to interest, on capitalized leases and other indebtedness incurred to finance such property, plant and equipment. For the purpose of this definition, the purchase price of equipment which is acquired simultaneously with the trade-in of existing equipment owned by such person or any of its Subsidiaries or with insurance proceeds, shall be included in Capital Expenditures only to the extent of the gross amount of such purchase price less the credit granted by the seller of such equipment being traded in at such time or the amount of such proceeds, as the case may be. "Cash Equivalents" means, collectively, (i) securities with maturities of 90 days or less from the date of acquisition issued or fully guaranteed or insured by the United States government or any agency thereof, (ii) certificates of deposit, overnight bank deposits and banker acceptances of any commercial bank (including Wilmington Trust Company) having combined capital and surplus of at least $200,000,000, a short term deposit rating of A1/P1 or better and organized under the laws of the United States of America having maturities of 90 days or less from the date of acquisition and (iii) commercial paper with maturities of 90 days or less having a rating of A1/P1 or better. "Change of Control" means (i) the sale of all or substantially all of the Company's and the Subsidiaries' assets (taken as a whole), in one or in a series of transactions, to any "person" or "group" (as such terms are used in or defined in Section 13(d)(3) of the Exchange Act), (ii) an event or series of events (whether a stock purchase, merger, consolidation or other business combination or otherwise) by which any person or group (other than the holders of New Senior Notes existing on the date hereof, including any person becoming a holder of New Senior Notes prior to the Effective Date and who is a holder of New Senior Notes on the Effective Date) is or becomes the "Beneficial Owner" (as defined under Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing after the happening of a contingency) having the right to vote in the election of trustees or (iii) after the date of first issuance of New Senior Notes, the replacement of a majority of the Board of Trustees of the Company over a two- year period from the trustees who constituted the Board of Trustees at the beginning of such period other than by (a) trustees whose nomination for election by the equityholders of the Company was approved by such Board of Trustees, (b) trustees elected by such Board of Trustees or (c) trustees nominated or elected by trustees approved as set forth in (a) or (b) above. "Collateral" means all the assets of the Company defined as "Collateral" in the New Collateral Documents. "Collateral Assignment of Leases" means each Collateral Assignment of Lease made by the Company or a Subsidiary, executed prior to the execution of the New Senior Note Indenture, concurrently with the execution of the New Senior Note Indenture or thereafter in favor of the New Collateral Agent on behalf of the New Indenture Trustee, the New Collateral Agent and the holders of New Senior Notes, assigning the related underlying assignment of lease, as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced in accordance with the terms thereof. 119 "Collateral Assignments of Mortgages" means each Collateral Assignment of Mortgage or Collateral Assignment of Deed of Trust made by the Company or a Subsidiary, executed prior to the execution of the New Senior Note Indenture, concurrently with the execution of the New Senior Note Indenture or thereafter in favor of the New Collateral Agent on behalf of the New Indenture Trustee, the New Collateral Agent and the holders of New Senior Notes, assigning the Underlying Mortgages, as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced in accordance with the terms thereof. "Consolidated Net Worth" means, with respect to any person, the sum of (i) the consolidated equity of the common equityholders of such person and its consolidated Subsidiaries plus (ii) the respective amounts reported on such person's most recent balance sheet with respect to any series of preferred equity that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such person upon issuance of such preferred equity, after eliminating inter-company items, including appropriate deductions for any minority interest in such person's Subsidiaries, less (x) all write-ups (other than write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the Issue Date in the book value of any assets owned by such person or a consolidated Subsidiary of such person and (y) all unamortized debt discount and expense and unamortized deferred charges, all of the foregoing determined in accordance with GAAP. "Contingent Obligation" means with reference to any person, any direct or indirect liability, contingent or otherwise, of such person with respect to any Indebtedness or contractual obligation of another person, if the purpose or intent of such person in incurring the Contingent Obligation is to provide assurance to the obligee of such Indebtedness or contractual obligation that such Indebtedness or contractual obligation will be paid or discharged, or that any agreement relating thereto will be complied with, or that any holder of such Indebtedness or contractual obligation will be protected (in whole or in part) against loss in respect thereof. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "First Lien Debt" means indebtedness of Paseo Padre Associates, a California partnership, 100% owned by the Company and its subsidiaries under the Imperial Bank Loan Agreement in an aggregate principal amount at any time outstanding not to exceed $18.1 million (plus interest, fees, costs and expenses). "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other person as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination. "Guarantor" means each of the Subsidiaries of the Company listed as guarantors in the New Senior Note Indenture or any other guarantor of the obligations under the New Senior Note Indenture. "Governmental Securities" means direct obligations of, or obligations guaranteed by, the United States of America, to the payment of which the full faith and credit of the United States is pledged. "Indebtedness" means with reference to any person (a) all indebtedness of such person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letter of credit and bankers' acceptances, whether or not matured) or for the deferred purchase price of property or services (other than normal trade accounts payable incurred in the ordinary course of business), (b) all obligations of such person evidenced by notes, bonds, debentures or similar instruments, (c) all indebtedness of such person created or arising under any conditional sale or other title retention agreement 120 with respect to property acquired by such person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (d) all capitalized lease obligations of such person, (e) all Contingent Obligations of such person, (f) all obligations of such person under interest rate contracts, (g) all indebtedness of the type referred to in clause (a), (b), (c), (d), (e) or (f) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien against property or an interest in property owned by such person, even though such person has not assumed or become liable for the payment of such indebtedness, and (h) in the case of the Company, the New Senior Notes. "Investment" means any advance, loan, extension of credit or capital contribution to, or purchase of any stocks, bonds, notes, debentures or other securities of, or interests in, any person, any purchase of any interest in Real Estate (other than by foreclosure, deed in lieu of foreclosure or other method of realizing on security) or any commitment or other obligation, whether contingent or absolute, to do any of the foregoing, which commitment or other obligation does not constitute a Contingent Obligation and any Capital Expenditures. "Lease" means each underlying lease of Real Estate. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York, Los Angeles, California, Philadelphia, Pennsylvania, Wilmington, Delaware or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangements, encumbrance, lien (statutory or other), security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a capitalized lease obligation, any financing lease having substantially the same economic effect as any of the foregoing, the filing, under the Uniform Commercial Code or comparable law of any jurisdiction, of any financing statement naming the owner of the assets to which such Lien relates as debtor, and any agreement to grant a Lien. "Material Subsidiary" means each Subsidiary of the Company that, as at any time, has at such time capital equal to more than 10% of the Consolidated Net Worth of the Company. "Mortgages" means each Mortgage, Security Agreement and Financing Statement or Deed of Trust, Security Agreement and Financing Statement and each Amendment to Mortgage, Security Agreement and Financing Statement or Amendment to Deed of Trust, Security Agreement and Financing Statement, in each case made by the Company or a Subsidiary, executed concurrently with the execution of the New Senior Note Indenture or thereafter in favor of the New Collateral Agent on behalf of the New Indenture Trustee, the New Collateral Agent and the holders of New Senior Notes, encumbering the Real Estate, as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced in accordance with the terms thereof. "New Collateral Documents" mean the Security Agreement, the Pledge Agreement, the Mortgages, the Assignments of Leases, the Collateral Assignments of Mortgages and the Collateral Assignment of Leases, and, with respect to any of the foregoing that may have been granted prior to the date hereof, amendments or restatements of such documents, together with all related filings, assignments, instruments, mortgages and other papers entered into or delivered in connection with any of the foregoing, as such agreements, filings, assignments, instruments, mortgages or papers or documents may from time to time be amended, supplemented or otherwise modified in accordance with the terms hereof and thereof. "Officers' Certificate" means a certificate signed on behalf of the Issuer by two Officers of the Issuer, one of whom must be the President or the Executive Vice President, and the other must be the Treasurer, an 121 Assistant Treasurer, the Controller, the Secretary, an Assistant Secretary, a Senior Vice President or a Vice President of the Issuer. "Pledge Agreement" means that certain Pledge Agreement, dated as of the date of the New Senior Note Indenture, made by the Company, executed concurrently with the execution of the New Senior Note Indenture, in favor of the Collateral Agent on behalf of the New Indenture Trustee, the New Collateral Agent and the holders of New Senior Notes, as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced in accordance with the terms thereof. "Preferred Stock", as applied to the stock of any person, means stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such person, over shares of stock of any other class of such person. "Real Estate" means any interest in all plots, pieces or parcels of land owned in any capacity, whether as a joint venturer, participant, partner or otherwise, or in which the Issuer may have a security interest, or leased as at the date hereof or acquired or leased hereafter by the Issuer or any Subsidiary, including, without limitation, those listed on Schedule 1 to the New Senior Notes Indenture and described in the Mortgages, together with all of the buildings and other improvements now or hereafter erected on the Real Estate, and any fixtures appurtenant thereto. "Required Holders" means the holders of a majority in principal amount of the New Senior Notes outstanding on the date of determination. "Security Agreement" means that certain Collateral and Security Agreement, dated as of the date of the New Senior Note Indenture made by the Company and the Subsidiaries, executed concurrently with the New Senior Note Indenture or thereafter, in favor of the New Collateral Agent on behalf of the New Indenture Trustee, the New Collateral Agent and the holders of New Senior Notes, as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced in accordance with the terms thereof. "Subsidiary" means with respect to any person, any corporation, partnership or other business entity of which an aggregate of 50% or more of the outstanding Stock having ordinary voting power to elect a majority of the board of directors, managers, trustees or other controlling persons is, at the time, directly or indirectly, owned by such person and/or one or more Subsidiaries of such person (irrespective of whether, at the time, shares of capital stock of any other class or classes of such entity shall have or might have voting power by reason of the happening of any contingency). Unless the context otherwise requires, as used herein "Subsidiary" shall mean a Subsidiary of the Company. "Underlying Loan Documents" means collectively, the Underlying Promissory Notes, the Underlying Mortgages, underlying assignments of leases and rents and any guarantees, instruments, agreements or other documents existing on the effective date of the Prepackaged Plan and executed by any person to or for the benefit of the Company or any Subsidiary in connection with any loan made by the Company or any Subsidiary to or for the benefit of such person, as the same may have been amended, modified or supplemented. "Underlying Mortgages" means collectively, the mortgages or deeds of trust granted by any person to or for the benefit of the Company or any Subsidiary securing an Underlying Promissory Note or other obligation of such person, as the same may have been or hereafter may be amended, modified or supplemented. "Underlying Promissory Notes" means the promissory notes or other instruments evidencing the Indebtedness of any person to the Company or any Subsidiary other than (a) promissory notes or other instruments constituting Cash Equivalents and (b) promissory notes or other instruments evidencing indebtedness of any person to the Company or any Subsidiary in connection with residential loans made by the Company or any Subsidiary to such person for the purpose of purchasing a condominium unit. 122 DESCRIPTION OF CAPITAL STOCK The Company's Declaration of Trust provides that the Company may issue up to 3,500,000 Preferred Shares and 20,000,000 Common Shares, of which 11,226,215 were outstanding as of March 31, 1995. No Preferred Shares have been issued and the voting, dividend, liquidation and other rights or preferences of Preferred Shares have not been fixed and are subject to the adoption by the Board of Trustees of a resolution or resolutions fixing any such rights or preferences. The Declaration of Trust also provides that the Company may not issue non- voting equity securities. Under the Prepackaged Plan, pursuant to the Amended and Restated Declaration of Trust the authorized capital stock of the Company will consist of 20,000,000 Common Shares and 3,500,000 Preferred Shares. Giving effect to the Reverse Stock Split, the issuance of New Common Shares, and other transactions contemplated by the Prepackaged Plan, the Company estimates that approximately 11,226,000 Common Shares will be outstanding as of the Effective Date. All Common Shares participate equally in distributions declared by the Board of Trustees and in net assets on liquidation after payments on the Preferred Shares, if any, have equal voting rights and will be fully paid and non- assessable by the Company upon issuance and sale as provided herein. The Common Shares have no preference, conversion, exchange, preemptive or cumulative voting rights. The Common Shares to be issued under the Prepackaged Plan will have the same rights and characteristics of the Outstanding Common Shares, subject to the Amended and Restated Declaration of Trust and the Reverse Stock Split. The Common Shares are (and, upon consummation of the Prepackaged Plan, will continue to be) transferable in the same manner as the shares of a corporation except that the Company may refuse to recognize transfer of shares and may redeem shares as hereinafter set forth. For the Company to qualify as a REIT under the Internal Revenue Code, it must meet certain requirements concerning the ownership of its outstanding shares of capital stock. Specifically, not more than 50% in value of its outstanding shares may be owned, either directly or under special attribution rules for this purpose under Section 544 of the Internal Revenue Code (the "Beneficial Attribution Rules"), by five or fewer individuals (as defined in the Internal Revenue Code to include certain non-natural persons) during the last half of a taxable year, and the Company must be beneficially owned (without regard to any attribution or constructive ownership rules) by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. See "Certain Federal Income Tax Consequences--REIT Status and Taxation of Company Under the Prepackaged Plan--REIT Organizational Requirements." In addition, the Company must meet certain requirements regarding the nature of its gross income in order to qualify as a REIT. One such requirement is that at least 95% of the Company's gross income for each year must consist of rents from real property and income from certain other investments. See "Certain Federal Income Tax Consequences--REIT Status and Taxation of Company Under the Prepackaged Plan--Income Tests." Any rents received by the Company from a tenant would not qualify as good income for purposes of this 95% gross income test if the Company were to own, directly or under special constructive ownership rules for this purpose under Section 318 of the Internal Revenue Code, as modified (the "Constructive Ownership Rules"), 10% or more of the ownership interests in the tenant. Any tenant ownership interests owned, directly or under the Constructive Ownership Rules, by a person who owns, directly or under the Constructive Ownership Rules, 10% or more by value of the Company's outstanding shares would be treated as owned by the Company for purposes of this 10% tenant limitation. Because the Board of Trustees believe it is in the best interests of the Company to continue to qualify as a REIT, upon the Effective Date, the Amended and Restated Declaration of Trust will include provisions restricting the acquisition of capital stock of the Company (the "Stock Ownership Limit Provisions"). In particular, the Stock Ownership Limit Provisions provide that no person (other than an Existing Holder (as hereinafter defined)) may own, directly or under the Beneficial Attribution Rules, more than 9.9% of the value of the outstanding capital stock of the Company (the "Ownership Limit"). The Stock Ownership Limit 123 Provisions also prohibit any transfer or other event that would (i) result in the outstanding capital stock of the Company being beneficially owned by fewer than 100 persons (determined without reference to any rules of attribution or constructive ownership), (ii) cause any person (other than an Existing Holder) to own, directly or under the Constructive Ownership Rules, more than 9.99% of the value of the outstanding stock of the Company (the "Constructive Ownership Limit") or (iii) result in the Company being "closely held" within the meaning of Section 856(h) of the Internal Revenue Code. The Stock Ownership Limit Provisions exclude from the Ownership Limit and the Constructive Ownership Limit any holder who holds Common Shares in excess of such limits on the Effective Date, including, at present, Heine Securities Corporation and its agents and affiliates, Fidelity Management & Research Company and its agents and affiliates, Angelo Gordon & Co., L.P. and its agents and affiliates and Intermarket Corporation and its agents and affiliates (collectively, the "Existing Holders"), but provide that no Existing Holder may own, directly or under the Beneficial Attribution Rules, more than a specified percentage determined separately for each such holder (the holder's "Existing Holder Limit"). Except as otherwise provided below, any acquisition or transfer of the Company's capital stock (including any acquisition or transfer under the Beneficial Attribution Rules or Constructive Ownership Rules) in violation of the above limits shall be null and void and the intended transferee or owner will acquire no rights to, or economic interest in, the shares. Subject to certain exceptions described below, any purported transfer of or other event that would cause a violation of the Stock Ownership Limit Provisions will be deemed void ab initio; nonetheless any such purported transfer or other event will cause any Common Shares or other capital stock held in excess of such provision to be automatically transferred, by operation of law, to a trust for the exclusive benefit of a beneficiary or beneficiaries named by the Company (a "Share Trust") and will be designated as "Shares-in- Trust." Any transfer of capital stock to a Share Trust, and subsequent designation of such capital stock as Shares-in-Trust ("Shares-in-Trust"), will be effective as of the close of business on the business day prior to the date of the event that results in the transfer of such capital stock to a Share Trust. Shares-in-Trust will remain issued and outstanding capital stock of the Company and will be entitled to the same rights and privileges on identical terms and conditions as the capital stock so transferred. The trustee of a Share Trust, as record holder of Shares-in-Trust, will be entitled to receive all dividends and distributions declared by the Board of Trustees of the Company and will hold such dividends and distributions in trust for the benefit of the beneficiary or beneficiaries of such Share Trust. The trustee of a Share Trust will also be entitled to vote all Shares-in-Trust and will have the exclusive right to designate a transferee or transferees of any and all Shares- in-Trust (without violating the Stock Ownership Limit Provisions) who will purchase the Shares-in-Trust for valuable consideration. The Company would have the right, for a period of 90 days after the later of (i) the date the shares are designated as Shares-in-Trust, and (ii) the date the Company determines in good faith that a transfer resulting in Shares-in-Trust has occurred, to purchase any or all of the Shares-in-Trust from the trustee at the lesser of the price paid in the transaction that created Shares-in-Trust (or, in the case of a devise, gift or other non-transfer event, the market price on the date of such event) or the market price for the Shares-in-Trust on the date the Company exercises its purchase right. All certificates representing Common Shares will bear a legend referring to the restrictions described above. Any person who acquires or attempts to acquire capital stock of the Company in violation of the foregoing restrictions, or any person who owned shares that were transferred to a Share Trust, will be required to (i) give immediate written notice to the Company of such event, and (ii) provide to the Company such other information as the Company may request in order to determine the effect, if any, of such transfer on the Company's status as a REIT. All persons who own, directly or by virtue of the attribution provisions of the Internal Revenue Code, more than 5% (or such lower percentage as is required pursuant to regulations under the Internal Revenue Code) of the Outstanding Common Shares shall, upon demand, file a written notice with the Company containing the information specified in the Amended and Restated Declaration of Trust within 30 days after January 1 of each year. In addition, each shareholder shall, upon demand, be required to disclose to the Company in writing such information with respect to the direct, indirect and constructive ownership of 124 Common Shares as the Board of Trustees deems necessary to comply with the provisions of the Internal Revenue Code or regulations of the Treasury Department applicable to a REIT or to comply with the requirements of any taxing authority or governmental agency. Such requirements are in addition to such shareholder's obligations to make any other filings required by law, including filings required under the federal securities laws. The Stock Ownership Limit Provisions generally will not apply to the acquisition of capital stock by an underwriter that acquires securities of the Company for resale. In addition, the Board of Trustees, upon receipt of a ruling from the Internal Revenue Service or an opinion of counsel and upon such other conditions as the Board of Trustees may direct, may, but is not required to, exempt a person from the Ownership Limit or Existing Holder Limit under certain circumstances if such person is not an individual or trust described in Section 856(h)(3)(A) of the Internal Revenue Code. Even if the REIT provisions of the Internal Revenue Code are changed so as to no longer contain any ownership concentration limitation or if the ownership concentration limitation is increased, except as otherwise described above, any change in the Stock Ownership Limit Provisions would require an amendment to the Amended and Restated Declaration of Trust. Amendments to the Amended and Restated Declaration of Trust require the affirmative vote of holders owning two-thirds of the outstanding Common Shares (or may be made pursuant to an order of the Bankruptcy Court). In addition to facilitating the Company's qualification as a REIT, the Stock Ownership Limit Provisions may have the effect of precluding an acquisition of control of the Company without the approval of the Board of Trustees. Pursuant to the by-laws of the Company, annual meetings of shareholders are normally held on the third Wednesday in February in each year unless otherwise fixed by the Board of Trustees. Special meetings may be called by the Chairman, a majority of trustees, or one or more shareholders holding not less than 25% of the outstanding Common Shares entitled to vote at the meeting. At each meeting, a holder of Common Shares is entitled to one vote for each Common Share owned, which means that in voting for the election of trustees, the holders of more than 50% of the Common Shares may elect all the trustees (upon consummation of the Prepackaged Plan) and the remainder of the shareholders may not elect any trustees. See "The Prepackaged Plan--Summary of Other Provisions of the Prepackaged Plan--Officers and Trustees" concerning the appointment of the Board of Trustees of the reorganized Company in connection with the Prepackaged Plan. Shareholders may vote by proxy provided that proxies shall have been filed with the Secretary of the Company before the time at which the vote shall be taken. The Declaration of Trust provides (and, upon consummation of the Prepackaged Plan, the Amended and Restated Declaration of Trust will continue to provide) that shareholders shall not be subject to any personal liability for the obligations, acts or omissions of the Company and that as far as practicable every written undertaking made by the Company shall contain a provision that such undertaking is not binding on any of the shareholders personally. The Company believes that no personal liability will attach to the shareholders under any undertaking containing such provision, except possibly in the very few jurisdictions which decline to recognize a business trust as a valid organization of any kind. With respect to all types of claims in the latter jurisdictions and with respect to tort claims, contract claims where such provision is omitted, claims for taxes and certain statutory liabilities in other jurisdictions, a shareholder may be held personally liable to the extent that claims are not satisfied by the Company. However, upon payment of any such liability the shareholder would, in the absence of willful misconduct on the shareholder's part, be entitled to reimbursement from the assets of the Company. The Company intends to carry insurance which the Board of Trustees considers adequate to cover any foreseeable tort claims. The Board of Trustees intends to conduct the operations of the Company with the advice of counsel in such a way as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the Company. The Declaration of Trust provides (and, upon consummation of the Prepackaged Plan, the Amended and Restated Declaration of Trust will continue to provide) that no trustee or officer of the Company shall 125 be liable to the Company or any trustee for any act or omission of any other trustee, shareholder, officer or agent of the Company or be held to any personal liability whatsoever in connection with the affairs of the Company except only that arising from his own willful misfeasance, bad faith, gross negligence or reckless disregard of duty and that to the maximum extent that the laws of the State of Maryland in effect from time to time permit limitation of the liability of trustees or officers, no trustee or officer of the Company shall be liable to the Company or its shareholders for money damages. In addition, the Declaration of Trust provides (and, upon consummation of the Prepackaged Plan, the Amended and Restated Declaration of Trust will continue to provide) that the Company will indemnify the trustees and officers of the Company to the full extent permitted by the general laws of the State of Maryland now or hereafter in force. The First National Bank of Boston, Boston, Massachusetts, is the transfer agent and registrar for the Company's Common Shares. 126 DESCRIPTION OF OUTSTANDING NOTES GENERAL The Outstanding Notes are secured obligations governed by the Outstanding Note Indenture between the Company and the Outstanding Note Trustee, dated as of July 15, 1992. The Company's obligations under the Outstanding Note Indenture are secured by the Outstanding Collateral Agreement, dated as of February 21, 1991, and amended on July 15, 1992. The following summary of certain provisions of the Outstanding Notes and the Outstanding Note Indenture does not purport to be complete and is subject to and is qualified in its entirety by reference to all of the provisions of the Outstanding Note Indenture and the Outstanding Collateral Agreement including the definitions therein of certain terms. This summary is further subject to and qualified by reference to all of the terms and provisions of the Outstanding Collateral Agreement described further under the caption "Security" below. Capitalized terms used in the following summary and not otherwise defined herein shall have the meanings ascribed to them in the Outstanding Note Indenture or the Outstanding Collateral Amendment as applicable. DENOMINATION AND MODIFICATION The Outstanding Notes were issued as uncertificated secured notes. The Outstanding Notes were distributed pursuant to the 1992 Restructuring to each holder of an obligation (including, without limitation, interest accrued from and after January 31, 1991) payable by the Company to or for the benefit of any holders of unsecured claims that are allowed claims pursuant to the Prior Plan or the Outstanding Collateral Agreement (a "Creditor Obligation") in an amount equal to the principal amount of such Creditor Obligations held by such holder on July 15, 1992 after giving effect to any payments on such date. Regularly scheduled payments of principal, premium, if any, and interest are payable to holders of Outstanding Notes at the principal office of the Company in Philadelphia, Pennsylvania, or at any paying agency maintained at the time by the Company for such purpose. Payments to holders of Outstanding Notes are made by wire transfer or interbank transfer of immediately available funds to such holders. An instruction for transfer of Outstanding Notes may be presented for registration of transfer or exchange at the Company's office in Los Angeles, California, or at the principal trust office of the Outstanding Note Trustee in Wilmington, Delaware or at such other location or locations as may be established pursuant to the Outstanding Note Indenture, without any service charge but subject to the limitations provided in the Outstanding Note Indenture. PAYMENTS Required Payments. The Outstanding Note Indenture provides for required payments on the dates set forth below (each, a "Required Payment Date") necessary to reduce the aggregate outstanding principal amount of the Outstanding Notes to the respective amounts set forth below:
MAXIMUM AGGREGATE REQUIRED OUTSTANDING PAYMENT DATE SECURITIES ------------ ----------------- July 15, 1992 $275,000,000 December 31, 1992 $200,000,000 June 30, 1993 $150,000,000 December 31, 1993 $105,000,000 June 30, 1994 $ 65,000,000 December 31, 1994 $ 40,000,000 June 30, 1995 $ -0-
127 Permitted Deferrals. The Company may, by notice to the Outstanding Note Trustee and the holders of Outstanding Notes given at least ten days prior to any Required Payment Date, elect to defer payment of a portion of the Required Payment due and payable on such Required Payment Date not greater than the amounts set forth below opposite the Required Payment Dates set forth below (and as adjusted by certain carry-forward provisions discussed below):
REQUIRED PAYMENT DATE AMOUNT ------------ ----------- July 15, 1992 $50,000,000 December 31, 1992 $40,000,000 June 30, 1993 $30,000,000 December 31, 1993 $11,250,000 June 30, 1994 $10,000,000 December 31, 1994 $ 6,250,000 June 30, 1995 $10,000,000
For each Required Payment Date from July 15, 1992 to and including June 30, 1994, an amount equal to the excess, if any, of (i) the amount of any payment permitted to be deferred (the "Permitted Deferred Payment") for such Required Payment Date (as adjusted) over (ii) the amount actually deferred (the "Deferred Payment") for such Required Payment Date will be added to the amount of the Permitted Deferred Payment for the next Required Payment Date and thereafter carried forward to each succeeding Required Payment Date until actually deferred. Any Permitted Deferred Payment not deferred by the Company on any such Required Payment Date that is carried forward to the December 31, 1994 Required Payment Date shall expire if not deferred on December 31, 1994. Any Deferred Payment is due and payable on the date that is 30 months following the Required Payment Date on which such Deferred Payment was deferred by the Company; provided, however, that all Deferred Payments will be due and payable on December 31, 1995. Additional Payments. Pursuant to the terms of the Outstanding Note Indenture, the Company was or is required to pay to each holder of Outstanding Notes on (a) July 15, 1992, (b) quarterly on the last business day of each fiscal quarter after July 15, 1992 and (c) on the Termination Date (each, an "Additional Payment Date") an amount equal to such holder's ratable portion of the Available Cash at each such Additional Payment Date. Interest. The Company is obligated to pay interest on the outstanding principal amount of Outstanding Notes from and after July 15, 1992 to and including the Termination Date at an annual rate equal to the Adjusted Prime Rate in effect from time to time, which was payable on July 15, 1992 and thereafter in arrears on the last day of each Fiscal Quarter and on the Termination Date. All Deferred Payments bear interest at the Deferred Payment Interest Rate which is two percentage points above the Adjusted Prime Rate. In addition, upon the occurrence and during the continuance of an Event of Default, the outstanding principal amount of Outstanding Notes (including, without limitation, all Deferred Payments and all Defaulted Interest) bears interest, payable on demand, at an annual rate equal at all times to 1% above the rate otherwise in effect from time to time. Notwithstanding the foregoing, if at any time from July 15, 1992 to and including June 30, 1994, the Adjusted Prime Rate or the Deferred Payment Interest Rate exceeds nine percent per annum, then and for as long as either such rate exceeds nine percent per annum, the Company is, at its option, permitted to accrue (and not currently pay in cash) interest on account of such sums for which the interest rate exceeds nine percent per annum, and any amounts of interest in excess of nine percent that accrue and are not currently paid in cash continue to accrue and are payable on December 31, 1995. Interest does not accrue on any such interest accrued in excess of nine percent. Application of Payments. In general, payments made by the Company under the Outstanding Note Indenture are applied as follows: first, to unpaid interest accrued on the Outstanding Notes (including any interest which is payable, but is not punctually paid or duly provided for ("Defaulted Interest") and excepting 128 Deferred Interest); second, to the outstanding balance of any Deferred Payments, if due and payable, and, at the election of the Company, to any remaining outstanding balance of any Deferred Payments, whether or not due and payable; third, to the outstanding principal balance of the Outstanding Notes, in the order of maturity of each of the Required Payments; fourth, to Deferred Interest, if any, and; fifth, to any remaining outstanding balance of any Deferred Payments, whether or not due and payable. Payments applied to the outstanding balance of any Deferred Payments are applied first to the Deferred Payments that have been outstanding for the longest period of time. CERTAIN COVENANTS OF THE COMPANY The Outstanding Note Indenture contains covenants which, among other things, (i) restrict investment, capital expenditures and other material outlays and commitments relating thereto, (ii) restrict the incurrence of debt, (iii) restrict dividends or and repurchases of capital stock, (iv) restrict mergers and acquisitions and changes of business or conduct of business, (v) restrict transactions with affiliates, (vi) restrict certain sales of assets or the conduct of sales of assets, (vii) require maintenance of certain financial ratios and levels, including capital ratios and total debt ratios, (viii) limit the Company's ability to incur liens on its assets and (ix) limit the Company's ability to incur lease obligations. The following is a summary of certain of the covenants contained in the Outstanding Note Indenture: Ratio of Outstanding Securities to Capital Base. The Company is required to maintain at the end of each Fiscal Quarter a ratio (expressed as a percentage) of (a) the aggregate principal amount of Outstanding Securities to (b) the Capital Base, for the periods set forth below, equal to or less than the respective percentages set forth below:
PERIOD REQUIRED PERCENTAGE ------ ------------------- July 15, 1992 - December 30, 1992........................ 632% December 31, 1992 - June 29, 1993........................ 515% June 30, 1993 - December 30, 1993........................ 438% December 31, 1993 - June 29, 1994........................ 358% June 30, 1994 - December 30, 1994........................ 313% December 31, 1994 - June 29, 1995........................ 209% June 30, 1995 and thereafter............................. 102%
Ratio of Earning Assets to Outstanding Securities. The Company is required to maintain at the end of each Fiscal Quarter a ratio (expressed as a percentage) of (a) Earning Assets to (b) the aggregate principal amount of Outstanding Securities, for the periods set forth below, equal to or greater than the respective percentages set forth below:
PERIOD REQUIRED PERCENTAGE ------ ------------------- July 15, 1992 - December 30, 1992........................ 96% December 31, 1992 - June 29, 1993........................ 105% June 30, 1993 - December 30, 1993........................ 113% December 31, 1993 - June 29, 1994........................ 116% June 30, 1994 - December 30, 1994........................ 117% December 31, 1994 - June 29, 1995........................ 120% June 30, 1995 and thereafter............................. 131%
Expenses. The Company will not permit or suffer to exist the sum of actual "Operating expenses of rental properties" and "Other operating expenses (excluding professional expenses)" as described in a Form 10-Q for the Company to exceed the sum of budgeted "Operating expenses of rental properties" and "Other 129 operating expenses (excluding professional expenses)" as set forth on an annual budget approved by the Board of Trustees of the Company by more than 10% for each Fiscal Quarter and by more than 10% for each Fiscal Year. Non-Earning Assets. At the respective dates set forth below, the amount of Non-Earning Assets maintained by the Company is not permitted to exceed the respective amounts set forth below:
PERIOD AGGREGATE AMOUNT ------ ---------------- December 31, 1992........................................... $90,000,000 June 30, 1993............................................... $75,000,000 December 31, 1993........................................... $60,000,000
In the event that at any specified date the amount of Non-Earning Assets maintained by the Company exceeds the Permitted Non-Earning Assets for such date, then within 45 days after such date, the Company is required to pay to each holder of Outstanding Notes its proportionate share (as determined by the outstanding principal amounts of Outstanding Notes held by each holder) of the product of (i) the excess of (A) the Non-Earning Assets on such date set forth above, over (B) the Permitted Non-Earning Assets for such date and (ii) 0.015. Limitation on Existing Advances and Investments; Prohibition Against New Investments. The Company is not permitted to fund any Investment under any Contractual Obligation existing on the effective date of the Outstanding Note Indenture, except in accordance with and subject to certain existing maximum amounts set forth in the Outstanding Note Indenture. The Company is not permitted to, directly or indirectly, become party or subject to any new Contractual Obligation to fund an Investment in or to any Person from and after the effective date of the Outstanding Note Indenture. Notwithstanding the foregoing, the Company may fund (i) Investments under Qualified Contractual Obligations that constitute increases in maximum amounts of such Qualified Contractual Obligations; provided, however, that with respect to Underlying Mortgages, such Investments, which constitute actual cash outlays in excess of existing commitments pursuant to the Underlying Mortgages, may not exceed in the aggregate (x) $5,000,000 from and after July 15, 1992, to and including December 31, 1992, (y) $3,500,000 from and after January 1, 1993, to and including December 31, 1993, and (z) $2,000,000 annually thereafter, and (ii) Investments which constitute capital expenditures, leasing commissions and tenant improvements, related to the ownership and maintenance of a parcel or parcels of Real Estate in an amount not to exceed, by more than 10%, the amount of such expenses set forth on a budget approved by the trustees of the Company and subsequently submitted to and not objected to by the Required Holders. The Company is not permitted to, directly or indirectly, fund or otherwise make any Investment, except (i) Investments expressly permitted or required under the Outstanding Note Indenture, (ii) Investments of Available Cash in Cash Equivalents, (iii) Investments created by the Company as a result of sale, refinancing or disposition of assets when the Company accepts in partial payment of an outstanding obligation a new mortgage or equity interest in the same property, and (iv) Investments in Subsidiaries formed or maintained pursuant to the Outstanding Note Indenture. Indebtedness. The Company is not permitted to, directly or indirectly, incur, create, assume or suffer to exist any Indebtedness, except (a) the Outstanding Notes and the Additional Cash Consideration, (b) Contingent Obligations constituting endorsements for collection or deposit in the ordinary course of business, (c) current liabilities in respect of taxes, assessments and governmental charges or levies incurred, or claims for labor, materials, inventory, services, supplies and rentals incurred, or for goods or services purchased, in the ordinary course of business consistent with the past practice of the Company, (d) Indebtedness arising under any performance bond reimbursement obligation entered into in the ordinary 130 course of business of the Company consistent with the past practice of the Company, (e) unimpaired indemnification claims under the Declaration of Trust of the Company, and (f) Indebtedness arising in connection with Subsidiaries formed or maintained pursuant to the Outstanding Note Indenture. Restricted Payments. The Company is not permitted to (a) declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of or in respect of any of its Common Shares, except so long as there is no Default or Event of Default (i) such minimum declaration and making of dividend payments required for the Company to preserve its status as a REIT or (ii) the inadvertent making of Dividend Overpayments or (b) purchase, redeem, prepay, defease or otherwise acquire for value or make any payment on account or in respect of its Common Shares, whether outstanding on the effective date of the Outstanding Note Indenture or thereafter issued and outstanding. REDEMPTION The Company is required to redeem the Outstanding Notes pursuant to the schedule of Required Payments and Permitted Deferrals described above under the caption "--Payments." In addition, the Company may, upon at least five business days' prior notice to the Outstanding Note Trustee (unless a shorter notice shall be satisfactory to the Outstanding Note Trustee) and the holders of Outstanding Notes stating the proposed date and aggregate principal amount of the redemption, and if such notice is given, the Company shall, prepay the outstanding principal balance of the Outstanding Notes, in whole or in part, together with accrued interest to the date of such redemption on the outstanding balance prepaid without penalty in amounts not less than $1,000,000 or integral multiples in excess thereof. SECURITY Pursuant to the 1992 Restructuring, on the effective date of the 1992 Restructuring (July 15, 1992) the liens then existing against the collateral securing the Creditor Obligations pursuant to the Collateral Agreement dated as of February 21, 1991 were continued pursuant to the Outstanding Note Indenture and the Outstanding Collateral Agreement. Such documents provided that, without further action, upon the effective date of the 1992 Restructuring such liens continued to secure the Outstanding Notes as modified under the Outstanding Note Indenture as it may be amended, modified, supplemented or replaced from time to time. The Company executed, delivered and caused to be recorded, as necessary, all agreements, instruments and other documents necessary to effect the continuation of liens contemplated by the Outstanding Collateral Agreement and the Outstanding Note Indenture and agreed to fully cooperate and take such action as the Outstanding Note Trustee may request from time to time to maintain the continued perfection of such liens. Pursuant to the 1992 Restructuring, the terms of the Outstanding Notes were modified. Under applicable law relating to the priority of liens, modification of debt may adversely affect the priority of liens securing the original debt. New mortgages were not recorded and new policies of title insurance, or the like, were not obtained with respect to the existing liens as part of the 1992 Restructuring. Although as part of the 1992 Restructuring the Company represented and warranted to the holders of Outstanding Notes that there were no intervening liens and that the Prior Plan prohibited such liens, there can be no assurance that there were no intervening liens or that if such intervening liens existed, the liens securing the Outstanding Notes retained their priority after the 1992 Restructuring. Certain Amendments to the 1991 Collateral Agreement. As part of the 1992 Restructuring, the Company and the holders of the Outstanding Notes provided for the collateral securing the Creditor Obligations (and, as a result of the 1992 Restructuring, the Outstanding Notes) to be subject to the terms and provisions of the Outstanding Note Indenture as well as the Outstanding Collateral Agreement and the Amended Plan, and the Company confirmed, reaffirmed and ratified that the rights, including the liens and security interests against the collateral, that the holders of the Outstanding Notes were granted under the Prior Plan continued 131 to secure the Company's obligations in respect of the Outstanding Notes as modified by the 1992 Restructuring. The 1992 Restructuring amendments to the Outstanding Collateral Agreement and the Security Agreement, dated as of February 21, 1991, provided, among other things, for (a) a mechanism for the Outstanding Note Trustee to obtain the consent of the holders of Outstanding Notes to allow the Company to take certain actions with respect to the collateral securing the Outstanding Notes if such actions are not otherwise provided for in the Outstanding Collateral Agreement or the Prior Plan, and (b) the Company to have certain rights to service and otherwise deal with the collateral securing the Outstanding Notes without the approval of the holders of Outstanding Notes, so long as no Event of Default has occurred and is continuing, including the right to take title to (i) a mortgage or equivalent security then held by the Company or acquired in connection with property held by the Company in a wholly-owned Subsidiary organized solely for the purpose of foreclosing upon such mortgage or equivalent security, or (ii) Real Estate which is the subject of a lien of a mortgage or equivalent security then held by the Company or acquired in connection with property held by the Company for the purpose of holding and operating such Real Estate in a wholly owned Subsidiary organized solely for the purpose of holding and operating such Real Estate, provided that the Company or such Subsidiary delivers to the Outstanding Collateral Agent, at the time of taking title in such Subsidiary, (w) a mortgage lien upon the Real Estate, (x) a pledge of 100% of the issued and outstanding stock of such Subsidiary, (y) a legal opinion of the Company's counsel as to the Company's compliance with the foregoing or other evidence reasonably satisfactory to the holders of Outstanding Notes, and (z) all necessary documents and instruments necessary to grant to the Outstanding Collateral Agent a valid, perfected and enforceable security interest in the assets and stock of such Subsidiary. AMENDMENT, SUPPLEMENT AND WAIVER The Outstanding Note Indenture may be amended or supplemented with the consent of the Required Holders and any past default and its consequences may be waived with the consent of the Required Holders; provided that, without the consent of each holder, no such amendment, supplement or waiver may change the maturity of, the principal of, or any installment of principal of or interest on, any Outstanding Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or reduce, waive or change the time for making any payment required on account of Non- Earning Assets in excess of certain agreed amounts or reduce the aforesaid percentage of principal amount of Outstanding Notes whose holders must consent to an amendment, supplement or waiver. Without the consent of any holder of Outstanding Notes, the Company and the Outstanding Note Trustee may amend or supplement the Outstanding Note Indenture to, among other things, evidence succession of another corporation to the Company to the extent otherwise permitted under the Outstanding Note Indenture or to cure any ambiguity, correct or supplement any provision of the Outstanding Note Indenture inconsistent with other provisions thereof or make any other provision which does not adversely affect the interests of the holders of Outstanding Notes. EVENTS OF DEFAULT The Outstanding Note Indenture defines an Event of Default as being any one of the following events: (a) a default in any payment on the Outstanding Notes or any payment to holders of Creditor Obligations under the Prior Plan when the same becomes due and payable; (b) any representation or warranty of the Company under the Outstanding Note Indenture or the Outstanding Collateral Agreement that is incorrect in any material respect; (c) a default in the performance of any term, covenant or agreement of the Company (subject in certain cases to a 30-day cure period); (d) the Company fails to pay any principal of or premium or interest on any of its Indebtedness in an amount exceeding $1,000,000 (excluding the Outstanding Notes), when the same becomes due and payable, or any other event occurs or condition exists under any agreement or instrument relating to any such Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness is declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (e) bankruptcy, insolvency, reorganization or other similar events; (f) any 132 judgment or order for the payment of money in excess of $1,000,000 rendered against the Company and either enforcement proceedings have been commenced by any creditor upon such judgment or order, or there is any period of 10 consecutive days during which a stay of enforcement of such judgment or order by reason of a pending appeal or otherwise, is not in effect; and (g) except for releases of collateral pursuant to Permitted Financings or Asset Sales, the Outstanding Note Indenture or the Outstanding Collateral Agreement, for any reason, ceases to create a valid Lien on collateral having a value of $10,000,000 or more purported to be covered thereby, or such Lien ceases to have the priority Lien status initially granted and be a perfected Lien as to collateral having a value of $10,000,000 or more. If an Event of Default occurs and is continuing, then (i) if such Event of Default is the result of bankruptcy, insolvency, reorganization or similar events, the principal amount of all Outstanding Notes and all obligations of the Company under the Outstanding Note Indenture and the plan of reorganization then in effect shall be automatically accelerated and (ii) in every other case, the Outstanding Note Trustee may, and upon the direction from the Required Holders shall, declare the principal amount of the Outstanding Notes and all obligations of the Company under the Outstanding Note Indenture and the plan of reorganization then in effect to be due and payable immediately, but under certain conditions such acceleration may be rescinded by the Required Holders. No holder of any Outstanding Note has any right to institute any proceeding with respect to the Outstanding Note Indenture or for any remedy thereunder, unless (i) the Required Holders previously shall have given to the Outstanding Note Trustee written notice of an Event of Default, (ii) the Required Holders shall have made written request upon the Outstanding Note Trustee, (iii) such holder shall have offered indemnity satisfactory to the Outstanding Note Trustee to institute such proceeding as Outstanding Indenture Trustee, (iv) the Outstanding Note Trustee for ten Business Days shall have failed to institute such proceeding, and (v) during such ten day period the Required Holders shall not have issued a direction inconsistent with such prior request. However, the right of any holder of any Outstanding Note to institute suit for enforcement of any payment of principal of, and premium and interest on, such Outstanding Note on or after the due date expressed in such Outstanding Note, may not be impaired or affected without such holder's consent. The Required Holders may direct the time, method and place of conducting any proceeding for any remedy available to the Outstanding Note Trustee or exercising any trust or power conferred on the Outstanding Note Trustee with respect to Outstanding Notes. However, the Outstanding Note Trustee may refuse to follow any such direction that conflicts with any rule of law or the Outstanding Note Indenture. Before proceeding to exercise any right or power under the Outstanding Note Indenture at the direction of the Required Holders, the Outstanding Note Trustee shall be entitled to receive from the holders reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in its compliance with any such direction. If an Event of Default shall occur, the Outstanding Note Trustee shall give notice thereof to the Outstanding Collateral Agent and may direct the Outstanding Collateral Agent to enforce any right under the Outstanding Collateral Agreement. The Company will be required under the Outstanding Note Indenture to notify the Outstanding Note Trustee and the holders within five business days of the existence of any default under the Outstanding Note Indenture of which any officer of the Company is aware. In addition, the Company will be required to furnish to the Outstanding Note Trustee within 45 days after the end of each fiscal year, a statement as to whether any default under the Outstanding Note Indenture occurred during the fiscal year. MERGER; SALE OF ASSETS; PERMITTED FINANCINGS Merger. Under the Outstanding Note Indenture, the Company may not (i) merge with any Person, (ii) consolidate with any Person, (iii) acquire all or substantially all of the stock or stock equivalents of any Person, (iv) acquire all or substantially all of the assets of any Person, or (v) enter into any joint venture or partnership with any Person. 133 Sale of Assets. The Company is permitted to dispose of assets subject to compliance with certain procedures in the Outstanding Collateral Agreement; provided, however, that all cash Asset Sale Proceeds are required to be deposited in a trust account held by the Outstanding Collateral Agent immediately upon receipt by the Company or its agent, and all non-cash Asset Sale Proceeds are required to be delivered immediately to the Outstanding Note collateral agent upon receipt by the Company or its agent. Subject to required Additional Payments of Available Cash, the Company may have the use of the Asset Sale Proceeds (together with any interest thereon) up to an aggregate of $10,000,000 in any one Fiscal Quarter, provided that the chief financial officer of the Company furnishes to the Outstanding Note Trustee, the Outstanding Note collateral agent and the holders of Outstanding Notes a certificate stating that there is no existing Default or Event of Default and that such Asset Sale Proceeds are to be used in accordance with the terms and provisions of the Outstanding Note Indenture. Permitted Financings. With the prior written consent of the Required Holders (which consent may be given or withheld for any reason), the Company may sell, otherwise dispose of, refinance or otherwise transfer any of its property as part of a financing transaction that satisfies certain provisions limiting application of proceeds (a "Permitted Financing"). In order for any proposed financing transaction to be considered a Permitted Financing, the terms of such financing transaction must provide that (i) the Company shall apply substantially all of the net cash proceeds generated from such financing transaction in the same manner provided for regularly scheduled principal and interest payments and (ii) 100% of any non-cash proceeds shall be pledged as collateral to the Outstanding Collateral Agent pursuant to the Outstanding Collateral Agreement for the benefit of the holders of Outstanding Notes. RESTRICTIONS ON TRANSFER The Company is not required to register the transfer or exchange of Outstanding Notes if the aggregate amount of Outstanding Notes being transferred or exchanged pursuant to such transfer or exchange is less than $5,000,000 or is not an integral multiple of $1,000,000 in excess thereof (unless the transfer or exchange shall be of a holder's entire interest in the Outstanding Notes), or unless the transferee or recipient of such exchange is at such time a holder or is a Qualified Institutional Buyer as defined under Rule 144A promulgated under the Securities Act. No Outstanding Notes may be sold, transferred, negotiated or assigned to bearer. SATISFACTION AND DISCHARGE The Outstanding Note Indenture will cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Outstanding Notes therein expressly provided for), and the Outstanding Note Trustee, upon written request by the Company, at the expense of the Company, will execute proper instruments acknowledging satisfaction and discharge of the Outstanding Note Indenture, when (1) either (A) all Outstanding Notes theretofore issued (other than Outstanding Notes for whose payment money has theretofore been deposited in trust with the Trustee for the benefit of the holders of Outstanding Notes) have been cancelled and marked as such in the security register in accordance with the terms of the Outstanding Note Indenture; or (B) all such Outstanding Notes not theretofore cancelled and marked as such in the security register (i) have become due and payable, or (ii) will become due and payable at their stated maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Outstanding Note Trustee for the giving of notice of redemption by the Outstanding Note Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with the Outstanding Note Trustee as trust funds in trust for the benefit of the holders of Outstanding Notes for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Outstanding Notes not theretofore cancelled, for principal (and premium, if any) and interest, if any, to the date of such deposit (in the case of Outstanding 134 Notes which have become due and payable) or to the stated maturity or redemption date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder or under the Prior Plan by the Company; (3) no default or event of default shall have occurred and be continuing on the date of such deposit; and (4) the Company has delivered to the Outstanding Note Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of the Outstanding Note Indenture have been complied with. THE OUTSTANDING NOTE TRUSTEE AND COLLATERAL AGENT The Outstanding Note Trustee is also presently the Outstanding Collateral Agent under the Outstanding Collateral Agreement. The Outstanding Note Trustee may be removed as trustee under the Outstanding Note Indenture by the Required Holders and may be removed as Outstanding Collateral Agent under the Outstanding Collateral Agreement by the Required Holders. CERTAIN DEFINITIONS Set forth below are certain terms contained in the Outstanding Note Indenture, modified where appropriate to use terms as defined elsewhere in this Disclosure Statement. "Adjusted Prime Rate" means, for the periods set forth below, a floating annual rate of interest equal to the rates set forth below:
PERIOD RATE ------ ---- July 15, 1992 - December 31, 1992................. Reference Rate, plus 1.75% January 1, 1993 - June 30, 1993................... Reference Rate, plus 2.00% July 1, 1993 - December 31, 1993.................. Reference Rate, plus 2.25% January 1, 1994 - June 30, 1994................... Reference Rate, plus 2.50% July 1, 1994 - December 31, 1994.................. Reference Rate, plus 2.75% January 1, 1995 - June 30, 1995................... Reference Rate, plus 3.00% From and after July 1, 1995....................... Reference Rate, plus 3.25%
"Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person and includes each officer, director, trustee or general partner of such person, and each owner of 5% or more of any class of voting stock or interests of such person. For the purposes of this definition, "control", when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Available Cash" means, as at any date of determination, all cash and Cash Equivalents held by the Company, any Subsidiary or the collateral agent under the Outstanding Collateral Agreement, including, without limitation, cash and Cash Equivalents held in the Asset Sale Account or in any Deposit Account (as defined in the Outstanding Collateral Agreement) in excess of $10,000,000 less the amount of Dividend Overpayments, if any, during the period following the Effective Date. "Asset Sale" means any sale or other disposition, or series of sales or other dispositions, made on or after the Effective Date by the Company or any Subsidiary to any person of any Collateral. For the purposes hereof, any prepayment or payment at maturity of a Promissory Note shall be deemed to be an "Asset Sale." "Asset Sale Proceeds" means payments in cash or other property (including securities) received by the Company or any Subsidiary (including, without limitation, any cash payments received by way of deferred payment of principal pursuant to a note or receivable or otherwise, but only as and when received) from any Asset Sale (after repayment of any Indebtedness required to be paid by reason of such Asset Sale) or any 135 Permitted Financing which has been approved by the Required Holders pursuant to Outstanding Note Indenture (after application of such Permitted Financing proceeds in accordance with Outstanding Note Indenture) or otherwise, in each case net of the amount of (a) reasonable brokers' and advisors' fees and commissions actually paid other than to an Affiliate of the Company, (b) all foreign, federal, state and local taxes actually payable by the Company as a direct consequence of such Asset Sale, (c) the reasonable fees and expenses attributable to such Asset Sale, to the extent not included in clause (a), except to the extent paid to any Affiliate of the Company and (d) any proportionate share of the proceeds required to be paid to any person owning a beneficial interest in the property or assets sold pursuant to such Asset Sale. "Capital Base" means, as at any date of determination, an amount equal to the difference of (a) the sum of (i) the aggregate par value of the capital stock of the Company (and any Subsidiary) as at such date of determination, plus (ii) the paid in capital and earned surplus of the Company (and any Subsidiary) as at such date of determination, minus (b) 50% of the Non-Earning Assets as at such date of determination. "Cash Equivalents" means, collectively, (a) securities with maturities of 90 days or less from the date of acquisition issued or fully guaranteed or insured by the United States government or any agency thereof, (b) certificates of deposit, overnight bank deposits and bankers' acceptances of any commercial bank having combined capital and surplus of at least $200,000,000, a short term deposit rating of A1/P1 or better and organized under the laws of the United States of America having maturities of 90 days or less from the date of acquisition and (c) commercial paper with maturities of 90 days or less having a rating of A1/P1 or better. "Collateral" means all property and interests in property, real or personal and tangible or intangible, and all rents, issues, profits and proceeds thereof held by the Company or any Subsidiary as at the effective date of the Plan or acquired thereafter. "Contingent Obligation" means with reference to any person, any direct or indirect liability, contingent or otherwise, of such person with respect to any Indebtedness or Contractual Obligation of another person, if the purpose or intent of such person in incurring the Contingent Obligation is to provide assurance to the obligee of such Indebtedness or Contractual Obligation that such Indebtedness or Contractual Obligation will be paid or discharged, or that any agreement relating thereto will be complied with, or that any holder of such Indebtedness or Contractual Obligation will be protected (in whole or in part) against loss in respect thereof. "Contractual Obligation" means with reference to any person, any obligation, agreement, undertaking or similar provision of any security issued by such person or of any agreement, undertaking, contract, lease, indenture, mortgage, deed of trust or other instrument to which such person is a party or by which it or any of its property is bound or to which any of its properties is subject. "Dividend Overpayments" means, as at any date of determination, an amount equal to the aggregate amount of dividends paid by the Company in excess of the minimum amount which was required to preserve its status as a real estate investment trust under the Internal Revenue Code. "Earning Assets" means, as at any date of determination, an amount equal to the difference of (a) Invested Assets as at such date of determination and (b) the aggregate amount of Non-Earning Loans and Non-Earning Properties as at such date of determination. "Indebtedness" means with reference to any person (a) all indebtedness of such person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured) or for the deferred purchase price of property or services (other than normal trade accounts payable incurred in the ordinary course of business), (b) all obligations of such person evidenced by notes, bonds, debentures or similar instruments, (c) all indebtedness of such person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such person (even though the rights and remedies of the seller or lender 136 under such agreement in the event of default are limited to repossession or sale of such property), (d) all capitalized lease obligations of such person, (e) all Contingent Obligations of such person, (f) all obligations of such person under interest rate contracts, (g) all indebtedness referred to in clause (a), (b), (c), (d), (e) or (f) above of such person secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien against property or an interest in property owned by such person, even though such person has not assumed or become liable for the payment of such indebtedness, and (h) in the case of the Company, the Outstanding Notes. "Investment" means any advance, loan, extension of credit or capital contribution to, or purchase of any stocks, bonds, notes, debentures or other securities of, or interest in, any person, any purchase of any interest in Real Estate (other than by foreclosure, deed in lieu of foreclosure or other method of realizing on security) or any commitment or other obligation, whether contingent or absolute, to do any of the foregoing, which commitment or other obligation does not constitute a Contingent Obligation. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a capitalized lease obligation, any financing lease having substantially the same economic effect as any of the foregoing, and the filing, under the Uniform Commercial Code or comparable law of any jurisdiction, of any financing statement naming the owner of the asset to which such Lien relates as debtor. "Net Cash Value" means, total cash investment in respect of a property, net of any write-offs of the cash investment in such property, before the allowance for accumulated depreciation. "Non-Earning Assets" means, at any date of determination, the aggregate of Non-Earning Loans and Non-Earning Properties. "Non-Earning Loans" means, all of the Company's (a) notes and receivables on which payment of interest or a contractual payment of principal is more than 60 days past due, (b) loans on which extensions (generally, where principal has been increased or cumulative extensions of maturity for more than 24 months has been granted or suffered) have been granted, (c) loans which the Company has classified as non-accrual, and (d) loans on which the Company has reduced the rate of interest so that the current cash payments yield an annualized return of 5% or less, subject to temporary exclusion of certain of such assets upon certification by the chief financial officer of the Company which would yield an annualized return of five percent (5%) or more, calculated as if foreclosure proceedings were otherwise completed and on the basis of Net Cash Value, for the first six months after such certification date. "Non-Earning Properties" means, as at any date of determination, any and all Real Estate held by the Company that has not, on an individual basis, generated for two consecutive Fiscal Quarters net Operating Income sufficient to yield an annualized return of 5% or more, calculated on the basis of Net Cash Value of the investment in such Real Estate. Notwithstanding the foregoing, at the date of determination with respect to any property held for less than six months, if the Company provides the Creditors' Committee with a certificate of the chief financial officer stating that the Company reasonably believes that such property will yield an annualized return of 5% or more, calculated as aforesaid, for the first six months after acquisition, then such property shall not be a Non-Earning Property. "Promissory Note" means the promissory notes or other instruments evidencing the Indebtedness of any person to the Company other than (a) promissory notes or other instruments constituting Cash Equivalents and (b) promissory notes or other instruments evidencing indebtedness of any person to the Company in connection with residential end loans made by the Company to such person for the purpose of purchasing a condominium unit. 137 "Real Estate" means any interest in all of those plots, pieces or parcels of land owned in any capacity, whether as a joint venturer, participant, partner or otherwise, or leased as at the date hereof or acquired thereafter by the Company, including, without limitation, those listed in the Outstanding Note Indenture and described in the mortgages or equivalent security instruments executed and delivered in connection with the Outstanding Note Indenture, together with all of the buildings and other improvements now or hereafter erected on the Real Estate, and any fixtures appurtenant thereto. "Reference Rate" means the rate of interest publicly announced from time to time by Bank of America in San Francisco, California, as its reference rate. The reference rate is a rate set by Bank of America based upon various factors, including, without limitation, Bank of America's costs and desired return, general economic conditions and other factors and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in the reference rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. "Required Holders" means the holders of at least 66 2/3% in principal amount of the Outstanding Notes on the date of determination. "Subsidiary" means any corporation of which the Company, directly and/or indirectly through one or more Subsidiaries owns 50% or more of the shares of voting stock. For the purposes of this definition, "voting stock" means stock of the class or classes having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Termination Date" means that date on which all of the Outstanding Notes are paid in full and all amounts owing under the Outstanding Note Indenture and the Prior Plan are paid in full. "Underlying Mortgages" means collectively, the mortgages or deeds of trust granted by any person to or for the benefit of the Company securing a Promissory Note of such person, as the same may have been amended, modified or supplemented. 138 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The material federal income tax consequences of the Prepackaged Plan under the Internal Revenue Code are described below. The state and local income tax consequences of the Prepackaged Plan are not discussed herein. Due to the unsettled nature of several of the tax issues presented by the Prepackaged Plan, the differences (even among holders of Outstanding Common Shares and among creditors within the same creditor class) in the nature of the claims of the various creditors or holders of Outstanding Common Shares, their taxpayer status, residence, and methods of accounting and prior actions taken by creditors with respect to their claims, as well as the possibility that events subsequent to the date hereof, including amendments to the Internal Revenue Code, regulations thereunder or court decisions, could change the federal tax consequences of the transactions, the tax consequences described below are general descriptions and subject to significant uncertainties. The Company has not sought, nor does it intend to seek, a ruling from the Internal Revenue Service. Consequently, there can be no assurance that the treatment set forth below will be accepted by the Internal Revenue Service. ACCORDINGLY, HOLDERS OF CLAIMS AND OUTSTANDING COMMON SHARES ARE URGED TO CONSULT THEIR TAX ADVISORS WITH SPECIFIC REFERENCE TO THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE PREPACKAGED PLAN WITH RESPECT TO THEIR CLAIM OR EQUITY INTEREST. TAX CONSEQUENCES TO CREDITORS The federal income tax consequences to creditors arising from the Prepackaged Plan will vary depending upon, among other things, whether or not a creditor's Claim is an obligation classified as a Tax Security. The term "security" is not defined in the Internal Revenue Code, but is generally regarded as stock or a debt instrument due more than 10 years from the date of issuance. However, the precise limits are unclear and an instrument with an original term of as little as 5 years (or even less) may also qualify. All creditors who receive New Common Shares pursuant to the Prepackaged Plan should consult their tax advisors to determine whether their Claims constitute securities for federal income tax purposes. Claims Not Constituting Tax Securities. The tax treatment of a creditor whose Claim is not classified as a Tax Security for federal income tax purposes (as described above) on the exchange of such a Claim (other than any Claim for interest) for cash or property will depend on several issues. A holder will recognize gain or loss equal to the difference between the holder's "amount realized" (i.e., the sum of the amount of cash received, the issue price of new debt instruments received, the fair market value of stock and other property received) and its adjusted tax basis in its Claim. The tax basis of property received by creditors with respect to Claims that do not constitute Tax Securities (other than with respect to Claims for interest) will be the amount of such property that is included in the holder's amount realized on the exchange. The holding period for property received in the exchange will begin on the day following the exchange. Claims Constituting Tax Securities. If the Prepackaged Plan as confirmed does not qualify as a "reorganization" under the Internal Revenue Code, creditors whose Claims constitute Tax Securities will be treated the same as creditors whose Claims do not constitute Tax Securities. The Company expects that the Prepackaged Plan will constitute a "tax-free recapitalization" under Internal Revenue Code section 368(a)(1)(E) as to the Company and that the New Senior Notes will constitute Tax Securities. In that event, holders of Tax Securities who receive New Common Shares, New Senior Notes, or both, will generally not recognize gain or loss, subject to certain exceptions. First, income or loss will be recognized to the extent that the value received for accrued interest is more or less than the amount of accrued interest previously included in income for federal income tax purposes. For a more detailed discussion of the tax consequences of the receipt of interest, see "Claims for Interest" below. Second, creditors with Claims constituting Tax Securities who receive stock (or other Tax Securities, such as New Senior Notes) as well as "other property" (including cash) in a reorganization generally do not recognize loss, and recognize gain to the extent of the lesser of (i) the fair market value of such other property, or (ii) the actual gain realized by such creditor 139 determined by comparing the value received with the adjusted tax basis of the Tax Security exchanged. The tax basis of "other property" received in a tax- free reorganization in exchange for a Tax Security will generally equal the fair market value of that "other property," and the holding period of the "other property" will begin on the day following the exchange. A Tax Security holder's aggregate basis in the stock (and, if applicable, other Tax Security) received in a tax-free reorganization (other than a Tax Security representing a Claim for interest) will equal the holder's basis in the surrendered Tax Security (other than with respect to a Claim for interest), reduced by the amount of cash and the fair market value of "other property" received for such Tax Security (other than a Tax Security representing a Claim for interest) and increased by the amount of gain (if any) recognized on the exchange. The holding period for the stock and other Tax Securities received in the exchange (other than in respect of a Claim for interest) will include the period the holder of the exchanged Tax Security held that Tax Security, provided the Tax Security was held as a capital asset on the date of the exchange. Under these rules, holders of Claims that receive New Common Shares or New Senior Notes, or both, for their Claims may recognize gain, if any, only to the extent of the cash they receive. They will hold the New Common Shares or New Senior Notes, or both, with a basis computed as described above. A Tax Security Holder who receives (i) no property other than cash, or (ii) nothing in exchange for its Claim, will recognize gain or loss based on the amount of cash received, if any, compared with the adjusted tax basis of its Claim. Claims for Interest. The Prepackaged Plan provides that consideration received in satisfaction of a Claim will first be allocated to repayment of principal of Claims, and any payment in excess of such principal amount will be allocated to unpaid interest on Claims. No assurance can be given that the Internal Revenue Service will respect this allocation. Creditors will recognize ordinary income to the extent they receive any cash or property (including New Common Stock or New Senior Notes) that is allocable to interest income they have not previously included in federal taxable income. The proper allocation of amounts received in exchange for the discharge of a Claim at a discount between principal and interest is unclear and may be affected by, among other things, the rules in the Internal Revenue Code relating to imputed interest, original issue discount and accrued market discount. Creditors should consult their own tax advisors to determine the amount of consideration received under the Prepackaged Plan allocable to interest. In the event that the amount of cash, New Common Shares, New Senior Notes, and other property allocable to interest on a creditor's Claim is less than the amount previously included as interest on the Claim in the creditor's federal taxable income, the unpaid interest may be deducted generally as a loss or as an adjustment to a reserve for bad debts. Character of Gain or Loss. The character of gain or loss recognized by a holder of a Claim as capital or ordinary, and, in the case of capital gain or loss, as short-term or long-term, will depend on a number of factors, including the following: (i) the nature and origin of the Claim; (ii) the tax status of the holder of the Claim; (iii) whether the holder is a financial institution; (iv) whether the Claim is a capital asset in the hands of the holder; (v) whether the Claim has been held for more than one year; (vi) the extent to which the holder previously claimed a loss, bad debt deduction or charge to a reserve for bad debts with respect to the Claim; and (vii) in the case of a Claim arising from certain indebtedness issued after July 18, 1984 with a term of more than one year for which no election was made to currently include market discount in income, whether the difference between the holder's basis in the indebtedness immediately after it was acquired and the amount of the indebtedness exceeded any then-unaccrued original issue discount (by more than the de minimis amount). In the case of a creditor whose existing Claims constitute capital assets in the creditor's hands, the gain required to be recognized will be classified as a capital gain, except to the extent of interest (including accrued market discount). Any gain recognized will be treated as ordinary income to the extent of accrued (and previously unrecognized) market discount on the Outstanding Notes. See "Market Discount" below. It should also be noted that Internal Revenue Code section 582(c) provides that the sale or exchange of a bond, debenture, note or certificate, or other evidence of indebtedness by a bank or certain other financial institutions will not be considered the sale or exchange of a capital asset. Accordingly, any gain recognized by such creditors as a result of the implementation of the Prepackaged Plan will be ordinary income, 140 notwithstanding the nature of their Claims. Any capital gain recognized by a creditor will be long-term capital gain with respect to those Claims for which the creditor's holding period is more than one year, and short-term capital gain with respect to those Claims for which the creditor's holding period is one year or less. There may be a favorable differential tax rate applied to capital gain for certain holders. Proposed legislation would index such capital gain for the effects of inflation after December 31, 1994. Market Discount. The Tax Reform Act of 1984 provided extensive new rules regarding the creation, recognition and reporting of interest (including original issue and market discount) on debt obligations. In general, the new rules expanded the instances of discount and unstated interest, both on original issue and subsequent disposition or acquisition of the obligation. To the extent that a creditor has a lower tax basis in Outstanding Notes than their face amount, the difference should constitute market discount under section 1276 of the Internal Revenue Code. Under a de minimis exception, there is no market discount if the difference mentioned in the previous sentence is less than 0.25% of the face amount of the debt instrument multiplied by the number of complete years after the acquisition date to the obligation's date of maturity. Unless the holder elects otherwise, the accrued market discount generally would be the amount calculated by multiplying the market discount by a fraction, the numerator of which is the number of days the obligation has been held by the holder and the denominator of which is the number of days after the holder's acquisition of the obligation up to and including its maturity date. Holders in whose hands Claims are "market discount bonds" will be required to treat as ordinary income any gain recognized upon the exchange of their Outstanding Notes to the extent of the market discount accrued during the holder's period of ownership, unless the holder has elected to include such market discount in income as it accrued. Any additional gain recognized by the holder would be characterized in accordance with the rules described above. Any accrued market discount not treated as ordinary income upon an exchange of Outstanding Notes for New Senior Notes and New Common Shares in which gain or loss is not recognized in whole or in part should carry over into the New Common Shares and New Senior Notes received in the exchange. The allocation of such market discount between the New Senior Notes and New Common Shares is unclear. On disposition of such New Senior Notes and New Common Shares, any gain recognized generally would be treated as ordinary income to the extent of the amount of accrued market discount carried over. Withholding. The Company will withhold any amounts required by law from payments made to creditors. In particular, under the "backup withholding" rules, the Company may be required to withhold cash equal to 31% of the amount to be distributed to United States Claim holders in exchange for interest, unless the Claim holders are eligible for certain exemptions or provide their taxpayer identification numbers and certify that they are not subject to backup withholding by filing a Form W-9. This may require payments by certain creditors of the required withholding tax on the non-cash consideration issuable under the Prepackaged Plan. Analogous withholding requirements may apply to interest payments to foreign Claim holders. Many foreign Claim holders holding debt instruments (as opposed, e.g., to Claims for goods or services) may establish exemption from withholding by filing Forms W-8. In addition, creditors may be required to provide general tax information to the Company. RECAPTURE OF GAIN ON SUBSEQUENT SALE OF NEW COMMON SHARES Any gain realized on a subsequent sale of New Common Shares received in exchange for a Claim under the Prepackaged Plan will be treated as ordinary income to the extent of the sum of any bad debt deductions, any charges to bad debt reserves, any ordinary loss taken on the exchange of such Claim for such New Common Shares, or any income not recognized due to the use of the cash method of tax accounting with respect to the Claim exchanged. The amount of ordinary income will be reduced by the amount of income, if any, included in the creditor's taxable income as a result of the exchange of New Common Shares for a Claim. 141 TAX TREATMENT OF HOLDERS OF OUTSTANDING COMMON SHARES Holders of Outstanding Common Shares will generally not recognize gain or loss as a result of the Reverse Stock Split. If holders of Outstanding Common Shares fail to accept the Prepackaged Plan and, as a consequence, the Outstanding Common Shares are canceled and such holders receive nothing under the Prepackaged Plan, such holders would recognize a loss equal to the holder's aggregate tax basis in the Outstanding Common Shares. Any loss recognized generally would be a capital loss and would be a long-term capital loss if the Outstanding Common Shares were held for more than one year. TAX CONSEQUENCES OF HOLDING NEW SENIOR NOTES It is not anticipated that the New Senior Notes will be publicly traded. It is also anticipated that the New Senior Notes will bear "adequate stated interest." In that case, the issue price of the New Senior Notes should equal the face amount of the New Senior Notes. Payments on the New Senior Notes that do not constitute interest will constitute principal payments that will reduce a holder's tax basis in the New Senior Notes. Upon a sale, exchange or other taxable disposition of New Senior Notes, a holder will recognize gain or loss in an amount equal to the difference between the holder's amount realized and the holder's adjusted tax basis in the New Senior Notes. Except as discussed above under "--Tax Consequences to Creditors--Market Discount," any gain or loss recognized will be a capital gain or loss if the New Senior Notes were held as a capital asset, and will be long-term if, at the time of disposition, the holder's holding period was, or was deemed to be, in excess of one year. If the New Senior Notes are determined to be publicly traded for tax purposes and the initial trading price of the New Senior Notes is less than their stated redemption price, the New Senior Notes will bear original issue discount. Holders of the New Senior Notes would be required to include any original issue discount in income on a constant interest basis. TAX CONSEQUENCES OF HOLDING NEW COMMON SHARES Distributions, if any, made on the New Common Shares will be treated as dividends to the extent of the current or accumulated earnings and profits of the Company. See "--REIT Status and Taxation of Company Under the Prepackaged Plan--Taxation to United States Shareholders of Distributions" for a discussion of the treatment of such distributions. Distributions that are not treated as dividends will first reduce a holder's tax basis in the New Common Shares and the remainder, if any, will generally be treated as gain on a sale of the New Common Shares. Upon a sale, exchange or other taxable disposition of New Common Shares, a holder will recognize gain or loss in an amount equal to the difference between the holder's amount realized and the holder's adjusted tax basis in the New Common Shares. Except as discussed above under "--Tax Consequences to Creditors--Market Discount" and "--Recapture of Gain on Subsequent Sale of New Common Shares," any gain or loss recognized will be a capital gain or loss if the New Common Shares were held as a capital asset. Except as discussed below under "--REIT Status and Taxation of Company Under the Prepackaged Plan--Taxation to United States Shareholders of Distributions," such capital gain or loss will be long-term if, at the time of disposition, the holder's holding period was, or was deemed to be, in excess of one year. REIT STATUS AND TAXATION OF COMPANY UNDER THE PREPACKAGED PLAN General Tax Consequences. The Company will continue to elect to be taxed as a REIT under Internal Revenue Code sections 856 through 860 and the applicable Treasury Regulations (the "REIT Requirements" or the "REIT Provisions"), which are the requirements for qualifying as a REIT after the Prepackaged Plan is consummated. As long as the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income taxes on that portion of its ordinary income or capital gain that is currently distributed to shareholders. Such treatment substantially eliminates the federal "double taxation" on earnings (at the corporate and the shareholder levels) that generally results from investment in a corporation. The Company intends to continue to operate in such a manner as to continue to qualify for taxation as a REIT under the Internal Revenue Code, but no assurance can be given that it will operate in a manner so as to 142 qualify or remain qualified. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within the Company's control may affect its ability to qualify as a REIT. In addition, no assurance can be given that legislation, new regulations, administrative interpretations, or court decisions will not significantly change the tax laws with respect to the qualification as a REIT or the federal income tax consequences of such qualification; however, the Company is not aware of any proposal in Congress to amend the tax laws that would materially and adversely affect the Company's ability to operate as a REIT. The REIT Requirements are highly technical and complex. The following discussion sets forth only the material aspects of those requirements. This summary is qualified in its entirety by the applicable Internal Revenue Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof. Despite the REIT election, the Company may be subject to federal income and excise tax as follows: First, the Company will be taxed at regular corporate income tax rates on any undistributed REIT taxable income, including undistributed net capital gains. Second, under certain circumstances, the Company may be subject to the "alternative minimum tax" on certain of its items of tax preferences, if any. Third, if the Company has (i) net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business, or (ii) other nonqualifying net income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if the Company has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than sales of foreclosure property), such income will be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), but has nonetheless maintained its qualifications as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which the Company fails the 75% or 95% test, multiplied by a fraction intended to reflect the Company's profitability. Sixth, if the Company should fail to distribute, or fail to be treated as having distributed, with respect to each calendar year, at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. The Company does not now intend to acquire any appreciated assets from a corporation generally subject to full corporate-level tax in a transaction in which its basis in assets would carry over from the transferor. However, in the event of such an acquisition, the Company could, under certain circumstances, be subject to tax upon disposition of such assets. REIT Organizational Requirements. The Internal Revenue Code defines a REIT as a corporation, trust, or association (a) that is managed by one or more trustees or directors, (b) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest, (c) that would be taxable as a domestic corporation but for the REIT Requirements, (d) that is neither a financial institution nor an insurance company subject to certain provisions of the Internal Revenue Code, (e) the beneficial ownership of which is held by 100 or more persons, (f) not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year, and (g) that meets 143 certain other tests, described below, regarding the nature of its income and assets. The Internal Revenue Code provides that conditions (a) through (d), inclusive, must be met during the entire taxable year and that condition (e) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. For purposes of condition (f), pension funds and certain other tax-exempt entities are generally treated as individuals. Effective for taxable years beginning after December 31, 1993, a pension trust that qualifies under section 401(a) of the Internal Revenue Code generally will not be treated as an individual for these purposes; instead, the beneficiaries of the pension trust will be treated as holding shares of the REIT in proportion to their actuarial interests in the pension trust. The Company believes that it will issue sufficient New Common Shares pursuant to the Prepackaged Plan to allow it to continue to satisfy conditions (e) and (f) above. Income Tests. In order to maintain qualification as a REIT, the Company must satisfy annually three gross income requirements. First, at least 75% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived, directly or indirectly, from investments relating to real property or mortgages on real property (as interest on obligations secured by mortgages, "rents from real property" or as gain on the sale or exchange of such property), from certain types of temporary investments or from certain other types of gross income. Second, at least 95% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property investments as aforesaid and from dividends, interest, and gain from the sale or other disposition of stock or securities and certain other types of gross income (or from any combination of the foregoing). Third, short-term gain from the sale or other disposition of stock or securities, gain from prohibited transactions, and gain on the sale or other disposition of real property held for less than four years (apart from involuntary conversions and sales of foreclosure property) generally must represent less than 30% of the Company's gross income (including gross income from prohibited transactions) for each taxable year. Rents received or deemed to be received by the Company will qualify as "rents from real property" in satisfying the gross income requirements for a REIT described above only if certain conditions are met. First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales. Second, the Internal Revenue Code provides that rents received from a tenant will not qualify as "rents from real property" in satisfying the gross income tests if the Company, or an owner of 10% or more of the Company, directly or constructively, owns 10% or more of such tenant (a "Related Party Tenant"). Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." The Company does not anticipate deriving rent attributable to personal property leased in connection with real property in excess of the 15% limitation described above. Finally, for rents received to qualify as "rents from real property," the Company generally must not operate or manage the property or furnish or render services to tenants, other than through an "independent contractor" from whom the Company derives no revenue. The "independent contractor" requirement, however, does not apply to property that is not subject to the special regime for "foreclosure property" to the extent the services provided by the Company are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant primarily for his convenience." While the Company believes that the services rendered to its tenants are usually or customarily rendered in connection with the rental of space, if challenged by the Internal Revenue Service, it may not be able to demonstrate that the extent to which such services are rendered by other property owners is common enough to cause them to be "customarily rendered." In the case of any property that is subject to the special regime for "foreclosure property" or services that are not "usual and customary" under the foregoing rules, the Company intends to employ independent contractors to perform such services. Relief Provisions. If the Company fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain 144 provisions of the Internal Revenue Code. These relief provisions will be generally available if the Company's failure to meet such tests was due to reasonable cause and not due to willful neglect, if the Company attaches a schedule of the sources of its income to its return and if any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances the Company would be entitled to the benefit of these relief provisions. As discussed above, even if these relief provisions apply, a tax would be imposed with respect to the Company's excess net income. Asset Tests. At the close of each quarter of its taxable year, the Company must satisfy three tests relating to the nature of its assets. First, at least 75% of the value of the Company's total assets must be represented by real estate assets, cash, cash items, and government securities. Second, not more than 25% of the Company's total assets may be represented by securities other than those in the 75% asset class. Third, of the investments included in the 25% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets, and the Company may not own more than 10% of any one issuer's outstanding voting securities. After initially meeting the asset tests at the close of any quarter, the Company will not lose its status as a REIT if it fails to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If the failure to satisfy the asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter. The Company intends to maintain adequate records of the value of its assets to ensure compliance with the asset tests, and to take such action within 30 days after the close of any quarter as may be required to cure any noncompliance. Annual REIT Distribution Requirements. In order to be treated as a REIT, the Company is required to distribute dividends (other than capital gain dividends) to its shareholders in an amount at least equal to (a) the sum of (i) 95% of the Company's "REIT taxable income" (computed without regard to the dividends paid deduction and the Company's net capital gain) plus (ii) 95% of the net income (after tax), if any, from foreclosure property in excess of the special tax on income from foreclosure property, minus (b) the sum of certain items of noncash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100% of its "REIT taxable income," as adjusted, it will be subject to tax thereon at regular ordinary and capital gains corporate tax rates. Furthermore, if the Company should fail to distribute during each calendar year at least the sum of (a) 85% of its REIT ordinary income for such year, (b) 95% of its REIT capital gain net income for such year, and (c) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. The Company intends to make timely distributions sufficient to satisfy the annual distribution requirement. The Company anticipates that it will generally have sufficient cash or liquid assets to enable it to satisfy the 95% distribution requirement. REIT taxable income is taxable income computed under general principles, subject to the following modifications: (i) the corporate dividends received deductions are not allowed; (ii) the deduction for dividends paid under Internal Revenue Code section 561 is computed without regard to that portion of the deduction that is attributable to the amount excluded from REIT taxable income as net income from foreclosure property; (iii) taxable income is computed without regard to the rules under Internal Revenue Code section 443(b) relating to computation of tax on change of annual accounting period; (iv) an amount equal to the net income from foreclosure property is excluded; (v) an amount equal to the tax imposed under Internal Revenue Code section 857(b)(5) if certain REIT requirements is deducted; and (vi) an amount equal to any net income derived from prohibited transactions is excluded ("REIT Taxable Income"). It is possible that, from time to time, the Company may not have sufficient cash or other liquid assets to meet the 95% distribution requirement due to timing differences between (a) the actual receipt of income and actual payment of deductible expenses, and (b) the inclusion of such income and deduction of such 145 expenses in arriving at the taxable income of the Company. In the event that such an insufficiency or such timing differences occur, the Company may find it necessary to arrange for borrowings, or to pay dividends in the form of taxable stock dividends, if it is practicable to do so, to meet the 95% distribution requirement. Under certain circumstances, the Company may be able to rectify a failure to meet the distribution requirement for a year by paying "deficiency dividends" to shareholders in a later year, which may be included in the Company's deduction for dividends paid for the earlier year. Thus, the Company may be able to avoid being taxed on amounts distributed as deficiency dividends; however, the Company will be required to pay interest based upon the amount of any deduction taken for deficiency dividends. Failure to Qualify As a REIT. If the Company fails to qualify for taxation as a REIT in any taxable year, and the relief provisions described above do not apply, the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to shareholders in any year in which the Company fails to qualify will not be deductible by the Company and they will not be required to be made. In such event, to the extent of current and accumulated earnings and profits, all distributions to shareholders will be taxable as ordinary income, and subject to certain limitations of the Internal Revenue Code, corporate distributees may be eligible for the dividends-received deduction. Unless entitled to relief under specific statutory provisions, the Company will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost, and will not be permitted to requalify unless it distributes any earnings and profits attributable to the period when it failed to qualify. In addition, it would be subject to tax on any built-in gains on property held during the period during which it did not qualify if it sold such property within 10 years of requalification. It is not possible to state whether in all circumstances the Company would be entitled to such statutory relief. Taxation to United States Shareholders of Distributions. As long as the Company qualifies as a REIT, distributions up to the amount of the Company's current or accumulated earnings and profits (and not designated as capital gain dividends) to a United States shareholder (i.e., a holder of New Common Shares that is for United States federal income tax purposes (a) a citizen or resident of the United States, (b) a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, or (c) an estate or trust the income of which is subject to United States federal income taxation regardless of its source), will be taken into account by them as ordinary income and will not be eligible for the dividends-received deduction for corporations. Distributions that are designated by the Company as capital gain dividends will be treated as long- term capital gain (to the extent they do not exceed the Company's actual net capital gain) for the taxable year without regard to the period for which the shareholder has held its stock. However, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income, pursuant to Internal Revenue Code section 291(d). A distribution in excess of current and accumulated earnings and profits will first be treated as a tax- free return of capital, reducing the tax basis in the United States shareholder's New Common Shares, and a distribution in excess of the United States shareholder's tax basis in such respective New Common Shares will be taxable gain realized from the sale of such shares. Dividends declared by the Company in October, November or December of any year payable to a shareholder of record on a specified date in any such month will be treated as both paid by the Company and received by the shareholder on December 31 of such year, provided that the dividend is actually paid by the Company during January of the following calendar year. Shareholders may not claim the benefit of any tax losses of the Company on their own income tax returns. The Company will be treated as having sufficient earnings and profits to treat as a dividend any distribution by the Company up to the amount required to be distributed in order to avoid imposition of the 4% excise tax discussed above. As a result, shareholders may be required to treat as taxable dividends, certain distributions that would otherwise result in a tax-free return of capital. Moreover, any "deficiency dividend" will be treated as a "dividend" (an ordinary dividend or a capital gain dividend, as the case may be), regardless of the Company's earnings and profits. 146 A loss incurred on the sale or exchange of New Common Shares held for less than six months will be deemed a long-term capital loss to the extent of any capital gain dividends received by the selling shareholder with respect to such stock. Treatment of Tax-Exempt Shareholders. Distributions from the Company to a tax-exempt employee pension trust or other domestic tax-exempt shareholder will not constitute "unrelated business taxable income" unless the shareholder has borrowed to acquire or carry its shares of the Company. A tax-exempt employee's pension trust that holds more than 10% of the New Common Shares may under certain circumstances be required to treat a certain percentage of dividends as unrelated business taxable income if the Company is "predominantly held" by qualified trusts. For these purposes, a qualified trust is any trust defined under Internal Revenue Code section 401(a) and exempt from tax under Internal Revenue Code section 501(a). Taxation of Foreign Shareholders. The rules governing United States income taxation of non-resident alien individuals, foreign corporations, foreign partnerships, and foreign trusts and estates holding New Common Shares (collectively, "Foreign Shareholders") are complex, and no attempt will be made herein to discuss such rules. A Foreign Shareholder should consult with his or her own tax advisor to determine the effects of federal, state, and local and country of tax residence income tax laws on an investment in the Company, including any reporting requirements. ADDITIONAL TAX CONSEQUENCES TO THE COMPANY FROM THE PREPACKAGED PLAN Availability of Tax Attributes. The Company's federal income tax returns reflect significant NOLs. As discussed below, a portion of those NOLs may be available to offset future income of the Company. The Company's tax returns for years in which the NOLs were incurred have not been examined by the Internal Revenue Service. Accordingly, the amount and availability of these NOLs (including the applicability of Internal Revenue Code section 382) may be subject to review upon audit by the Internal Revenue Service. Internal Revenue Code Section 382 Limits on Use of Tax Attributes. Internal Revenue Code section 382 (in conjunction with Internal Revenue Code section 383) provides rules governing the use of a corporation's NOLs and other tax attributes following significant changes in the ownership of a corporation's stock. Subject to the Title 11 Exception discussed below, Internal Revenue Code section 382 provides that, following an "ownership change" of a corporation with NOLs or a net unrealized built-in loss (a "Loss Corporation"), the amount of the Loss Corporation's taxable income that can be offset by its NOLs and, under certain circumstances, recognized built-in losses cannot exceed an amount equal to the sum of (x) the product of the value of the Loss Corporation immediately before the ownership change (increased as discussed below, in some circumstances, by any increase in value resulting from any surrender or cancellation of creditors' claims) multiplied by the long-term tax-exempt rate, which is 6.83% for March 1995 (the "Section 382 Limitation") plus (y) recognized built-in gains (if any). Any portion of the Section 382 Limitation not used in any taxable year can be carried forward to increase the corporation's Section 382 Limitation in future years. Recognized built-in gains include gains resulting from the disposition (within 5 years after the ownership change) of assets, the fair market value of which immediately before the ownership change is greater than the tax adjusted basis of such assets at that time (to the extent of that excess) and income attributable to periods before the ownership change but includible during the 5- year period after the ownership change. Recognized built-in gains increase the Section 382 Limitation only to the extent of a corporation's net unrealized built-in gain, i.e., generally, to the extent its potential built-in gains exceed its potential built-in losses immediately before an ownership change. Recognized built-in losses result from the disposition (within 5 years after the ownership change) of assets, the fair market value of which immediately before the ownership change is less than the adjusted tax basis of such assets at that time (to the extent of that difference) and deductions attributable to periods before the ownership change but claimed during the 5-year period after the ownership change. Recognized built-in 147 losses are subject to the Section 382 Limitation only to the extent of a corporation's net unrealized built-in loss, i.e., generally, to the extent the corporation's potential built-in losses exceed its potential built-in gains immediately before an ownership change. A corporation's net unrealized built-in loss is treated as zero unless the corporation's net unrealized built-in loss exceeds a threshold amount and a corporation's net unrealized built-in gain is treated as zero unless the corporation's net unrealized built-in gain exceeds a threshold amount. After the Prepackaged Plan is effected, the Company anticipates that it will have a net unrealized built-in loss. An "ownership change" occurs if there is an "owner shift involving a 5- percent shareholder" or an "equity structure shift" and because of such event, the percentage of stock of the new Loss Corporation owned by any one or more of "5-percent shareholders" (described below) is increased by more than 50 percentage points relative to the lowest percentage of stock of the old Loss Corporation owned by those 5-percent shareholders at any time during the testing period (generally a 3-year period). The determination of whether an ownership change has occurred is made by aggregating the increases in percentage ownership for each 5-percent shareholder whose percentage ownership is increased during the testing period. For this purpose, all stock owned by persons who own less than 5% of a corporation's stock generally is treated as stock owned by a single 5-percent shareholder. An "owner shift involving a 5-percent shareholder" is defined as any change in the respective ownership of stock of a corporation that affects the percentage of stock held by any 5-percent shareholder. For purposes of this rule, all shareholders owning less than 5% of the stock are generally aggregated and treated as one 5-percent shareholder. The period for measuring whether an ownership change has occurred is referred to as the "testing period." The testing period is a 3-year period ending on the day of an owner shift involving a 5-percent shareholder. Thus, a series of unrelated sales in a 3-year period may cause an ownership change. Internal Revenue Code section 382 shortens the testing period in two circumstances. First, when an ownership change occurs, a new testing period cannot begin before the day after that change. Thus, if a second ownership change occurs in the future, changes that counted for the first ownership change do not count again. Second, the testing period cannot begin prior to the first year from which there is a loss carryforward, or in certain circumstances, a net unrealized built-in loss. To the Company's knowledge, its NOLs are not currently subject to a Section 382 Limitation. The exchanges anticipated to occur pursuant to the Prepackaged Plan will cause an ownership change with respect to the NOL carryforwards of the Company. Unless the Title 11 exception (discussed below) to the Section 382 Limitation applies, this ownership change will result in an annual Section 382 Limitation applying to the amount of taxable income of the Company that can be offset with pre-change losses in the year of the ownership change and in all years thereafter. Taxable income in excess of the Section 382 Limitation and, possibly, recognized built-in gain would be subject to current federal income tax. Internal Revenue Code section 382 contains a special provision (the "Title 11 Exception") which provides that in a case under the jurisdiction of a Bankruptcy Court brought under Title 11 of the United States Code (relating to bankruptcy) (a "Title 11 Case"), the limitations of Internal Revenue Code section 382 will not apply to any ownership change resulting from such a proceeding if qualifying creditors and shareholders immediately before such ownership change own, after such ownership change and as a result of being shareholders or creditors immediately before such change, 50% of the stock of the Loss Corporation (measured by vote and value). (As discussed below, the Loss Corporation may elect not to have this exception apply.) A corporation's shareholders are probably determined under attribution rules, including the rule that stock owned by a corporation is deemed owned not by the corporation but by the corporation's stockholders. Qualifying ("old and cold") creditors generally are creditors that have held their debt for at least 18 months before the filing of the bankruptcy case or who acquired their debt in the ordinary course of the debtor's business and have held their beneficial interest in the debt at all times. Treasury regulations provide specific rules under which persons that own less than 5% of publicly traded debt (that has been outstanding for more than 18 months) are presumed to have held their debt for the required 18 months. 148 The regulations permit Loss Corporations to treat all debt held by less-than- 5-percent shareholders or 5-percent entities (i.e., entities through which a 5- percent shareholder owns an interest in the Loss Corporation) on the change date as always having been held by the same beneficial owners. This general rule does not apply if (i) the creditor's participation in formulating the plan of reorganization makes evident to the Loss Corporation that it is not an "old and cold" creditor, (ii) the Loss Corporation has actual knowledge that the exercise of an option by a less-than-5-percent shareholder would turn it into a 5-percent shareholder or entity, or (iii) the creditor is a 5-percent entity that had an ownership change in the 18-month period, and the indebtedness represents more than 25 percent of its gross assets (excluding cash or cash equivalents). In addition, the regulations provide tacking rules under which a transferee creditor is treated as having held the debt during the period it was held by the transferor, thus adding to the category of creditors that can qualify as "old and cold." The tacking rules apply to (i) debt transferred to related parties, (ii) debt transferred under a syndication agreement within 90 days of origination, (iii) debt transferred by an underwriter, (iv) debt transferred with its basis determined by Internal Revenue Code sections 1014 or 1015, or to satisfy a pecuniary bequest or divorce settlement, (v) debt transferred pursuant to a security arrangement, (vi) debt transferred in a debt to debt exchange with the Loss Corporation, and (vii) debt transferred in a customary commercial factoring transaction within 30 days after the account arose by a transferee that regularly engages in those transactions. These tacking rules are not available where an abusive principal purpose exists. If the Title 11 Exception applies, the Company's NOL carryover and specified credits must be computed to eliminate deductions for interest paid or accrued by the Company on that portion of the debt that is exchanged for stock, and for which the Company previously had claimed deductions for federal income tax purposes during (i) the three taxable years prior to the taxable year in which the ownership change occurs, and (ii) the portion of the taxable year of the ownership change up to, but not including, the "change date." In addition, if the debtor undergoes a second ownership change within two years, its Section 382 Limitation after that second change would be zero. The Company is currently considering, based on projections of future income, whether it would be more advantageous to have the Title 11 Exception apply or to elect to have the Title 11 Exception not apply, and whether, if it determines that it would be advantageous to have the Title 11 Exception apply, it is eligible for that exception. The Company has tentatively concluded that it would be advantageous for it to elect not to have the Title 11 Exception apply. A REIT generally may elect to use its NOLs to reduce its REIT Taxable Income (subject to the Internal Revenue Code section 382 restrictions discussed above) in a manner similar to that of Subchapter C corporations, subject to the special rules discussed below. A REIT may not carryback its NOLs for use in any taxable year preceding the taxable year in which the NOL arises. A REIT may carryforward its NOLs up to 15 years. In computing the amount of NOL carryover available for a REIT taxable year, available NOLs may be used to shelter REIT Taxable Income. A REIT that distributes all of its REIT Taxable Income before taking its NOLs into account will receive a deduction equal to the distributed income. Unlike a regular corporation, which must use its NOLs to reduce all of its taxable income, a REIT may elect to use only a portion of its NOLs to reduce (but not eliminate) its REIT Taxable Income and carryforward its unused NOLs. A REIT could use its NOLs, however, to reduce its REIT Taxable Income and so reduce the amount of income it would be required to distribute to its shareholders in that taxable year. REITS are also subject to a special rule regarding the computation of NOL carryovers and capital gain dividends. A REIT is taxed on any net capital gain that is not distributed as capital gain dividends. A shareholder or beneficial holder treats a capital gain dividend received from a REIT as long-term capital gain rather than ordinary income. For purposes of the net operating loss rules, the amount of a REIT's net capital gain for the taxable year that is paid out as capital gain dividends is excluded in determining the amount of the REIT's NOLs that may be carried through the taxable year to succeeding taxable years. Thus, a REIT offsets only its undistributed capital gains by the amount of any current or carryover NOLs. Elimination of Tax Deductions Under Internal Revenue Code Section 269. In addition to the limitations on the utilization of NOLs discussed above, Internal Revenue Code section 269 grants the Internal Revenue 149 Service authority to disallow all of a corporation's NOLs if control of a corporation is acquired with the principal purpose to evade or avoid federal income tax by securing the benefit of a tax deduction which the acquiring person would not otherwise enjoy. The regulations make clear that Internal Revenue Code section 269 can apply whether or not the NOLs are limited under Internal Revenue Code section 382. In addition, there is a presumption that Internal Revenue Code section 269 applies if the Title 11 Exception applies, unless the Loss Corporation carries on more than an insignificant amount of an active trade or business during and subsequent to its bankruptcy case. The Company will continue its historic business. As a result, Internal Revenue Code section 269 should not apply to the transactions contemplated by the Prepackaged Plan. Cancellation of Indebtedness Income. As a result of the implementation of the Prepackaged Plan, the amount of the Company's aggregate outstanding indebtedness will be reduced. In general, for federal income tax purposes, a debtor will realize COD income when a creditor accepts less than full payment in satisfaction of its debt. Absent an exception, the amount of COD realized must be included in taxable income. An exception to this rule under Internal Revenue Code section 108 provides that COD will not be included in the debtor's taxable income where the debtor is in bankruptcy and the discharge occurs pursuant to a plan approved by the Bankruptcy Court. Pursuant to the Internal Revenue Code section 108 exception, unless another rule under Internal Revenue Code section 108 applies to prevent the Company from realizing COD (e.g., where the payment of the discharged liability would have given rise to a deduction), the Company's tax attributes (including net operating loss carryforwards and tax basis of its assets) will be reduced or, if the Company so elects, the basis of the Company's depreciable property and certain property held for resale will first be reduced to zero, and then the Company's tax attributes will be reduced. COD is not taken into account in determining continued qualification as a REIT. Under the Prepackaged Plan, the Company will realize COD and thus, will be required to reduce its tax attributes as a result of discharging creditor Claims with cash, New Senior Notes or New Common Shares. The amount of COD will equal the excess of the adjusted issue price of the debt cancelled, if any, over the sum of the cash, the issue price of the New Senior Notes, and the fair market value of the New Common Shares received in exchange therefor. If debt was not issued with original issue discount, the adjusted issue price of the debt is its face amount. For debt issued with original issue discount, the adjusted issue price generally will equal the initial issue price of the debt plus the amount of any original issue discount accrued to the time of the exchange, less any payments on the debt other than payments of stated interest. Alternative Minimum Tax. The Tax Reform Act of 1986 imposed a comprehensive alternative minimum tax ("AMT") on corporations. AMT liability generally equals 20% of the corporation's alternative minimum taxable income ("AMTI") and is payable to the extent it exceeds the regular tax for the taxable year. AMTI is determined by making certain adjustments to regular taxable income and adding the amount of "tax preferences" described in Internal Revenue Code section 57. Up to 90% of AMTI can be offset with NOLs (as computed for AMT purposes). Thus, at a minimum, a 2% tax is imposed on AMTI (i.e., AMT at a 20% rate on the 10% of AMTI that cannot be offset with NOLs). Future income of the Company that is offset by NOLs for regular tax purposes may not be wholly offset by NOLs for AMT purposes. These general rules are applied to REITs by adjusting REIT Taxable Income for tax preferences; a REIT claiming no tax preferences would have no AMTI, and thus, no AMT liability. The limits on NOL use to shelter AMTI would therefore affect the Company only if the Company claims tax preferences. One of the significant adjustments made in determining a corporation's AMTI is an increase based on adjusted current earnings. For any taxable year beginning after 1989, a corporation's AMTI is increased by 75% of the amount, if any, that the adjusted current earnings of the corporation exceeds AMTI without taking into account the adjusted current earnings adjustment, and without regard to the alternative tax NOL deduction. Internal Revenue Code section 56(g)(4)(G) provides adjusted current earnings generally equal AMTI determined with a number of specific adjustments. Internal Revenue Code section 56(g)(4)(B)(i) provides that in determining a corporation's adjusted current earnings, amounts excluded from income under Internal Revenue Code section 108 are also excluded for purposes of the AMT. Accordingly, the Company's AMT should not be affected by COD income realized by the Company pursuant to the Prepackaged Plan, but not recognized under Internal Revenue Code section 108. 150 FINANCIAL ADVISOR The Company retained Houlihan Lokey, an investment banking firm, to advise it with respect to the Restructuring, including the appropriate terms, from the Company's perspective, of any modifications of the Outstanding Notes pursuant to the Restructuring. As compensation for its services as financial advisor to the Company in connection with the Restructuring, the Company initially agreed to pay Houlihan a fee of $75,000 per month (the "Monthly Fee"), plus reimbursement for reasonable and actual out-of-pocket expenses incurred by Houlihan Lokey in connection with the Restructuring. In addition, if the Restructuring is consummated, Houlihan Lokey will receive a fee equal to 0.5% of the face amount of debt restructured, modified, converted or forgiven payable upon closing of the Restructuring (the "Completion Fee"). The Company also agreed to indemnify Houlihan Lokey for certain liabilities arising from its participation as the Company's advisor. Pursuant to a letter agreement that memorialized certain prior verbal modifications to the terms of Houlihan Lokey's engagement dated March 16, 1995, effective January 1, 1994, Houlihan Lokey had reduced its Monthly Fee to $50,000 and effective June 1, 1994, Houlihan Lokey had reduced its Monthly Fee to $10,000. Effective November 1, 1994, the Company had agreed to resume paying Houlihan Lokey a monthly fee of $75,000 (the "New Monthly Fee"), provided that the New Monthly Fees (beginning November 1, 1994, and continuing through the closing of the Restructuring) would be fully credited against the Completion Fee. Furthermore, Houlihan Lokey's aggregate Completion Fee was set at $1,450,000 less the New Monthly Fees paid to, and received by, Houlihan Lokey (the "Completion Fee Balance") and pursuant to a letter agreement dated April 7, 1995, the Completion Fee Balance was further reduced by $112,500. The Completion Fee Balance is payable in cash only. As of the date of this Disclosure Statement, Houlihan Lokey has been paid $600,000 in New Monthly Fees, reducing the Completion Fee Balance to $737,500 to be paid 2 days prior to the filing of a Chapter 11 petition by the Company. FEES AND EXPENSES Acceptance of the Prepackaged Plan is being solicited on behalf of the Company. The expense of soliciting acceptances of the Prepackaged Plan will be borne by the Company. The Company has not retained any dealer-manager or similar agent in connection with the Solicitation and will not make any payments to brokers, dealers or others soliciting acceptances of the Restructuring. Thus, the Company does not anticipate any solicitation agent fees in connection with the Solicitation. The Company will not pay the Information Agent any separate consideration for its services. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of the Company and its affiliates, who will not receive additional compensation. Arrangements may also be made with brokerage houses and other custodians, nominees and fiduciaries to forward the material regarding the Prepackaged Plan to the beneficial owners of Outstanding Notes and Outstanding Common Shares. The Company will reimburse such forwarding agents for reasonable out-of-pocket expenses incurred by them, but no compensation will be paid for their services. Pursuant to the Prepackaged Plan, the Company is required to make a cash payment of at least $50 million (less the $25 million paid on April 11, 1995 pursuant to the Agreement of Understanding and any additional amounts paid to the holders of the Outstanding Notes between March 1, 1995 and the Petition Date) to the holders of the Outstanding Notes. Cash generated from operations and approximately $60 million (less the $25 million paid on April 11, 1995 pursuant to the Agreement of Understanding and any additional amounts paid to the holders of the Outstanding Notes between March 1, 1995 and the Petition Date) from cash on hand will be used to pay expenses and fees relating to the Restructuring. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The expenses to be incurred in connection with the Restructuring, including the fees and expenses of Houlihan Lokey as financial advisor, and printing, filing, accounting and legal fees, will be paid by the Company and are estimated to be approximately $1.9 million (a portion of which may have been paid prior to the closing of the Restructuring). The Company intends to use a portion of the cash on hand and funds generated from operations, to pay such amounts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 151 ADDITIONAL INFORMATION CONCERNING THE COMPANY This Disclosure Statement is accompanied by and incorporates by reference the following documents of the Company: (i) pages 28-47 (the audited financial statements) of the Annual Report on Form 10-K for the year ended September 30, 1994; and (ii) pages 2-16 (the unaudited financial statements) of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 152 ANNEX A IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN FILED AS OF THE DATE OF THE DISCLOSURE STATEMENT Paul S. Aronzon (State Bar No. 88781) Anne E. Wells (State Bar No. 155975) MILBANK, TWEED, HADLEY & McCLOY 601 South Figueroa Street, 30th Floor Los Angeles, California 90017 (213) 892-4000 Attorneys for Mortgage and Realty Trust, a Maryland real estate investment trust UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA In re ) CASE NO. LA 95- ) MORTGAGE AND REALTY TRUST, a ) Maryland real estate investment ) trust, ) Chapter 11 ) ) PLAN OF REORGANIZATION PROPOSED BY ) MORTGAGE AND REALTY TRUST ) Debtor. ) (Dated July 12, 1995) ) ) [No Hearing Scheduled] ) ) ) Tax I.D. No. 23-1862664 ) TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION 1.1 Administrative Claim................................................ 1 1.2 Allowed Claim or Allowed Interest................................... 1 1.3 Amended and Restated Declaration of Trust........................... 1 1.4 Bankruptcy Code..................................................... 1 1.5 Bankruptcy Court.................................................... 1 1.6 Bankruptcy Rules.................................................... 1 1.7 Bar Date............................................................ 2 1.8 Business Day........................................................ 2 1.9 Cash................................................................ 2 1.10 Claim............................................................... 2 1.11 Class 2 Expense Claims.............................................. 2 1.12 Confirmation........................................................ 2 1.13 Confirmation Date................................................... 2 1.14 Confirmation Order.................................................. 2 1.15 Creditor............................................................ 2 1.16 Debtor.............................................................. 2 1.17 Debtor in Possession................................................ 2 1.18 Disbursing Agent.................................................... 2 1.19 Disclosure Statement................................................ 2 1.20 Disputed Claim or Disputed Interest................................. 2 1.21 Effective Date...................................................... 3 1.22 Entity.............................................................. 3 1.23 Estate.............................................................. 3 1.24 Excluded Claims..................................................... 3 1.25 File or Filed....................................................... 3 1.26 Final Order......................................................... 3 1.27 Initial Cash Distribution Fund...................................... 3 1.28 Initial Cash Reserve Fund........................................... 3 1.29 Instrument.......................................................... 3 1.30 Interest............................................................ 3 1.31 Lien................................................................ 3 1.32 New................................................................. 4 1.34 New Collateral Documents............................................ 4 1.35 New Common Shares................................................... 4 1.36 New Indenture Trustee............................................... 4 1.37 New Note Indenture.................................................. 4 1.38 New Notes........................................................... 4 1.39 New Plan Securities................................................. 4 1.40 Other Secured Claims................................................ 4 1.41 Outstanding Collateral Agreement.................................... 4 1.42 Outstanding Common Shares........................................... 4 1.43 Outstanding Equity Securities....................................... 4 1.44 Outstanding Indenture Trustee....................................... 4 1.45 Outstanding Notes................................................... 4 1.46 Outstanding Note Indenture.......................................... 4 1.47 Outstanding Pledge Agreement........................................ 4 1.48 Outstanding Securities.............................................. 5
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PAGE ---- 1.49 Outstanding Stock Rights............................................ 5 1.50 Petition Date....................................................... 5 1.51 Plan................................................................ 5 1.52 Postpetition Tax Claims............................................. 5 1.53 Prior Plan.......................................................... 5 1.54 Priority Claim...................................................... 5 1.55 Pro Rata............................................................ 5 1.56 Registration Rights Agreement....................................... 5 1.57 Released Claims..................................................... 5 1.58 Reorganization Case................................................. 5 1.59 Reorganized Debtor.................................................. 5 1.60 Scheduled........................................................... 5 1.61 Schedules........................................................... 5 1.62 Senior Noteholders.................................................. 5 1.63 Shares.............................................................. 6 1.64 Unsecured Claim..................................................... 6 ARTICLE II CLASSIFICATION OF CLAIMS AND INTERESTS 2.1 General............................................................. 6 2.2 Classification...................................................... 7 ARTICLE III TREATMENT OF CLAIMS AND INTERESTS 3.1 Unclassified Claims (Administrative Claims)......................... 7 3.2 Class 1 (Priority Claims)........................................... 8 3.3 Class 2 (Outstanding Notes)......................................... 8 3.4 Class 3 (Other Secured Claims)...................................... 10 3.5 Class 4 (Unsecured Claims).......................................... 10 3.6 Class 5 (Outstanding Common Shares)................................. 10 3.7 Class 6 (Outstanding Stock Rights).................................. 10 ARTICLE IV TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES 4.1 Assumption.......................................................... 10 4.2 Cure Payments....................................................... 11 4.3 Rejection........................................................... 11 ARTICLE V MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN 5.1 Cancellation of Outstanding Securities and Related Agreements....... 11 5.2 New Plan Securities and New Indenture............................... 11 5.3 Distribution of Property Under the Plan............................. 12 5.4 Revesting of Assets................................................. 15 5.5 Amended and Restated Declaration of Trust; Indemnification.......... 16 5.6 Management of the Reorganized Debtor................................ 16 5.7 Objections to Claims or Interests................................... 16
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PAGE ---- 5.8 Discharge of Debtor and Injunction.................................. 16 5.9 No Liability for Solicitation or Participation...................... 17 5.10 Limitation of Liability............................................. 17 5.11 Other Documents and Actions......................................... 17 5.12 Authorized Actions.................................................. 17 5.13 Releases............................................................ 18 5.14 Retiree Benefits.................................................... 18 ARTICLE VI CONFIRMATION 6.1 Confirmation........................................................ 18 ARTICLE VII CONFIRMATION AND EFFECTIVE DATE CONDITIONS 7.1 Conditions to Effective Date........................................ 19 7.2 Waiver of Conditions to the Effective Date.......................... 19 ARTICLE VIII RETENTION OF JURISDICTION 8.1 Retention of Jurisdiction........................................... 19 ARTICLE IX MISCELLANEOUS PROVISIONS 9.1 Exemption from Transfer Taxes....................................... 20 9.2 Application of Distributions........................................ 20 9.3 Dissolution of Committees........................................... 21 9.4 Modification of the Plan............................................ 21 9.5 Revocation of the Plan.............................................. 21 9.6 Successors and Assigns.............................................. 21 9.7 Saturday, Sunday or Legal Holiday................................... 21 9.8 Post-Effective Date Effect of Evidences of Claims or Interests...... 21 9.9 Governing Law....................................................... 21 9.10 Severability of Plan Provisions..................................... 22 9.11 No Admissions....................................................... 22
EXHIBITS AND SCHEDULES Exhibit A - Form of New Note Indenture Exhibit B - Form of New Collateral Documents Exhibit C - Form of Registration Rights Agreement Exhibit D - Summary of Terms of Securities Exhibit E - Schedule of Assumed Contracts and Unexpired Leases Exhibit F - Schedule of Rejected Contracts and Leases Exhibit G - Amended and Restated Declaration of Trust iii INTRODUCTION Mortgage and Realty Trust, a Maryland real estate investment trust (the "Debtor"), hereby proposes the following plan of reorganization (the "Plan") for the resolution of all claims against and equity interests in the Debtor. Reference is made to the "Disclosure Statement and Proxy Statement -Prospectus for the Solicitation of Votes for the Prepackaged Plan of Reorganization of Mortgage and Realty Trust" (the "Disclosure Statement") for a discussion of the Debtor's history, business, properties and results of operations, and for a summary of the Plan and certain related matters. All holders of claims against and equity interests in the Debtor are encouraged to read the Plan and the Disclosure Statement in their entirety before voting to accept or reject the Plan. No materials, other than the Disclosure Statement and any exhibits and schedules attached thereto or referenced therein, have been approved by the Debtor for use in soliciting acceptances or rejections of the Plan. ARTICLE I DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION In addition to such other terms as are defined in other sections of the Plan, the following terms (which appear in the Plan as capitalized terms) have the following meanings as used in the Plan: 1.1 Administrative Claim: A Claim for costs and expenses of administration allowed under section 503(b) of the Bankruptcy Code and referred to in section 507(a)(1) of the Bankruptcy Code, including, without limitation: (a) the actual and necessary costs and expenses incurred after the Petition Date of preserving the Estate and operating the business of the Debtor (such as wages, salaries or commissions for services and payments for goods) (b) compensation for legal, financial advisory, accounting and other services and reimbursement of expenses allowed under section 330 of the Bankruptcy Code; and (c) all fees and charges assessed against the Estate under 28 U.S.C. (S) 1930. 1.2 Allowed Claim or Allowed Interest: A Claim against or Interest in the Debtor to the extent that: (a) (i) a proof of the Claim or Interest was or is timely Filed or deemed timely Filed under applicable law or by reason of an order of the Bankruptcy Court or (ii) if no proof of Claim or Interest is filed, the Claim or Interest is Scheduled as liquidated, undisputed, and noncontingent; and (b) (i) the Claim or Interest is not a Disputed Claim or Disputed Interest (but only to the extent that such Claim is not a Disputed Claim or Disputed Interest); (ii) the Claim or Interest is allowed by a Final Order (but only to the extent allowed); or (iii) the Claim or Interest is allowed under the Plan, but only to the extent allowed. 1.3 Amended and Restated Declaration of Trust: The Amended and Restated Declaration of Trust of the Reorganized Debtor, substantially in the form of Exhibit G. 1.4 Bankruptcy Code: Title 11 of the United States Code, as in effect on the Petition Date or as amended, as applicable to the Reorganization Case. 1.5 Bankruptcy Court: The United States District Court having jurisdiction over the Reorganization Case and, to the extent of any reference made pursuant to section 157, title 28, United States Code, the unit of such District Court constituted pursuant to section 151, title 28, United States Code. 1.6 Bankruptcy Rules: The Federal Rules of Bankruptcy Procedure, the Local Rules of the Bankruptcy Court and the guidelines and requirements of the Office of the United States Trustee, as applicable from time to time in the Reorganization Case. A-1 1.7 Bar Date: The date, if any, fixed by the Bankruptcy Court pursuant to Bankruptcy Rule 3003(c)(3) as the last day for filing proofs of claim in the Reorganization Case. 1.8 Business Day: Any day other than a Saturday, Sunday or "legal holiday" (as defined in Bankruptcy Rule 9006(a)). 1.9 Cash: Legal tender accepted in the United States of America for the payment of public and private debts, currently United States Dollars. 1.10 Claim: A claim against the Debtor, whether or not asserted or allowed, as defined in section 101(5) of the Bankruptcy Code. 1.11 Class 2 Expense Claims: Any unpaid fees and reasonable unpaid out-of- pocket costs or expenses earned or incurred through the Effective Date by the Outstanding Indenture Trustee or the attorneys for the Senior Noteholders and Mutual Series Fund, Inc., including, without limitation, reasonable out-of- pocket costs and expenses and reasonable fees of legal counsel to the Outstanding Indenture Trustee. 1.12 Confirmation: The confirmation of the Plan effected by the Confirmation Order. 1.13 Confirmation Date: The date on which the Bankruptcy Court enters the Confirmation Order on its docket. 1.14 Confirmation Order: The order of the Bankruptcy Court confirming the Plan pursuant to section 1129 of the Bankruptcy Code. 1.15 Creditor: Any Entity that holds on the Effective Date a Claim against the Debtor that arose or is deemed to have arisen before the Petition Date, including a Claim against the Debtor of a kind specified in sections 502(g), 502(h) or 502(i) of the Bankruptcy Code. 1.16 Debtor: Mortgage and Realty Trust, a Maryland real estate investment trust. 1.17 Debtor in Possession: The Debtor, as debtor in possession in the Reorganization Case. 1.18 Disbursing Agent: The Reorganized Debtor or any other Entities designated by the Reorganized Debtor pursuant to section 5.3.5 to distribute property under the Plan. 1.19 Disclosure Statement: The Disclosure Statement and Proxy Statement For the Solicitation of Votes For the Prepackaged Plan of Reorganization of Mortgage and Realty Trust, dated July 12, 1995 (and all exhibits and schedules annexed thereto or referred to therein) that relates to the Plan, as it may have been amended or supplemented from time to time. 1.20 Disputed Claim or Disputed Interest: A Claim or Interest as to which a proof of claim or interest, as applicable, (a) has been Filed or deemed Filed under applicable law, or by reason of an order of the Bankruptcy Court, but as to which an objection has been or may be timely Filed and which objection, if timely Filed, has not been withdrawn on or before any date fixed for Filing such objections by the Plan or order of the Bankruptcy Court and has not been overruled or denied by a Final Order or (b) has not been timely Filed, if such proof of Claim or Interest was required to be Filed. Prior to the time that an objection has been or may be deemed timely Filed, a Claim or Interest shall be considered a Disputed Claim or Disputed Interest, as applicable, in its entirety if: (i) the amount of the Claim or Interest specified in the proof of claim or interest exceeds the amount of any corresponding Claim or Interest Scheduled by the Debtor in its Schedules or its List of Equity Security Holders, as applicable; (ii) any corresponding Claim or Interest Scheduled by the Debtor in its Schedules or its List of Equity Security Holders, as applicable, has been Scheduled as disputed, contingent or unliquidated, irrespective of the amount Scheduled; or (iii) no corresponding Claim or Interest has been Scheduled by the Debtor in its Schedules or its List of Equity Security Holders, as applicable. A-2 1.21 Effective Date: A Business Day, selected by the Debtor, (a) that is at least eleven (11) calendar days after the Confirmation Date or, with the consent of the Senior Noteholders, at least one (1) Business Day after the Confirmation Date, if the Bankruptcy Court enters an order making Bankruptcy Rule 7062 inapplicable to the proceedings respecting the Confirmation Order or otherwise determining that the Effective Date may occur immediately following Confirmation; and (b) on which: (x) no stay of the Confirmation Order is in effect and (y) all conditions to the Effective Date set forth in section 7.1 hereof have been satisfied or waived pursuant to section 7.2 hereof. 1.22 Entity: An individual, corporation, limited liability company, partnership, association, joint stock company, joint venture, estate, trust, unincorporated organization, government or any political subdivision thereof, governmental unit, Creditors' Committee, unofficial committee of creditors or equity holders or other entity. 1.23 Estate: The estate created by the commencement of the Reorganization Case under section 541 of the Bankruptcy Code. 1.24 Excluded Claims: Any obligations that arise under the Plan or any document, instrument or agreement to be executed, delivered or assumed under the Plan, including, without limitation, the obligations of the Reorganized Debtor under the New Notes, the New Note Indenture, the New Collateral Documents, and all documents, instruments and agreements delivered or to be delivered in connection therewith. 1.25 File or Filed: File or filed with the clerk of the Bankruptcy Court in the Reorganization Case. 1.26 Final Order: An order or judgment of the Bankruptcy Court or other court of competent jurisdiction as to which the time to appeal, seek leave to appeal, petition for certiorari or move for reargument or rehearing has expired and as to which no appeal, petition for certiorari or other proceedings for reargument, rehearing or leave to appeal shall be pending or as to which any right to appeal, petition for certiorari, reargue, rehear or seek leave to appeal shall have been waived in writing in form and substance satisfactory to the Debtor or the Reorganized Debtor or, in the event that an appeal, writ of certiorari, or reargument or rehearing thereof or leave to appeal has been motioned for or sought, such order of the court shall have been affirmed by the highest court to which such order was appealed, or certiorari has been denied or from which reargument or rehearing or leave to appeal was motioned for or sought, and the time to take any further appeal, petition for certiorari, move for reargument or rehearing or seek leave to appeal shall have expired. 1.27 Initial Cash Distribution Fund: Cash in an amount not less than $50 million (less any amounts paid to the holders of the Outstanding Notes between March 1, 1995 and the Petition Date), held by the Reorganized Debtor on the Effective Date for distribution to holders of Allowed Class 2 Claims, in excess of monies held by the Reorganized Debtor in the Initial Cash Reserve Fund. 1.28 Initial Cash Reserve Fund: Cash in an amount not to exceed $10 million, held by the Reorganized Debtor on the Effective Date for use by the Reorganized Debtor in its business operations. 1.29 Instrument: Such term has the meaning set forth in Section 5.3.8(b). 1.30 Interest: The interest of any equity security holder, as defined in section 101(17) of the Bankruptcy Code, of the Debtor, whether or not asserted, including an interest arising out of any Outstanding Stock Rights. 1.31 Lien: Any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other, including a lien as defined in section 101(37) of the Bankruptcy Code), security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including any conditional sale or other title retention agreement, the interest of a lessor under a capitalized lease obligation, any financing lease having substantially the same economic effect as any of the foregoing, and the filing, under the Uniform Commercial Code or comparable law of any jurisdiction, of any financing statement naming the owner of the asset to which such Lien relates as debtor. A-3 1.32 New: New or amended and restated, as the case may be. 1.33 New Collateral Agent: Wilmington Trust Company and William J. Wade, as collateral agent under the New Collateral Documents. 1.34 New Collateral Documents: The Collateral and Security Agreement dated as of the Effective Date by and among the Reorganized Debtor and the New Collateral Agent, including any exhibits or schedules thereto in substantially in the form of Exhibit B, and the Mortgages, the Assignments of Leases, the Collateral Assignments of Mortgages, the Pledge Agreement and the Collateral Assignments of Leases (each as defined in the New Senior Note Indenture) and all other documents, instruments and agreements delivered or to be delivered in connection with the New Senior Note Indenture. 1.35 New Common Shares: The common shares of beneficial interest in the Reorganized Debtor to be distributed in accordance with the provisions of the Plan. 1.36 New Indenture Trustee: Wilmington Trust Company, as trustee under the New Note Indenture. 1.37 New Note Indenture: The Outstanding Note Indenture, as amended and restated, substantially in the form of Exhibit A. 1.38 New Notes: The Senior Secured Notes due 2002 of the Reorganized Debtor dated as of the Effective Date and issued pursuant to the New Note Indenture. 1.39 New Plan Securities: The New Common Shares and the New Notes to be distributed in accordance with the provisions of the Plan. 1.40 Other Secured Claims: Any Claim, other than a Claim of a holder of Outstanding Notes, or a Class 2 Expense Claim, of a Creditor secured by a Lien on property of the Estate, to the extent of the value, as determined by the Bankruptcy Court pursuant to section 506(a) of the Bankruptcy Code, of such Creditor's interest in such property of the Estate. 1.41 Outstanding Collateral Agreement: The Collateral and Security Agreement dated as of February 21, 1991 between, among others, the Debtor and Wilmington Trust Company and William J. Wade, as Collateral Agents, relating to the Outstanding Notes, as such agreement may have been amended or supplemented from time to time prior to the Effective Date. 1.42 Outstanding Common Shares: The common shares of beneficial interests in the Debtor, with a par value of $1.00 for each share, as authorized by the declaration of trust of the Debtor, issued and outstanding prior to the Effective Date. 1.43 Outstanding Equity Securities: The Outstanding Common Shares and the Outstanding Stock Rights. 1.44 Outstanding Indenture Trustee: Wilmington Trust Company, as trustee under the Outstanding Note Indenture, and any predecessor or successor trustee. 1.45 Outstanding Notes: The outstanding Senior Secured Uncertificated Notes due 1995 issued by the Debtor under the Outstanding Note Indenture and pursuant to the Prior Plan. 1.46 Outstanding Note Indenture: The Indenture dated as of July 15, 1992 between the Debtor and Wilmington Trust Company, as Trustee, relating to the Outstanding Notes, as such indenture may have been amended or supplemented from time to time prior to the Effective Date. 1.47 Outstanding Pledge Agreement: Those certain pledge agreements executed in connection with the Outstanding Note Indenture. A-4 1.48 Outstanding Securities: The Outstanding Notes and the Outstanding Equity Securities. 1.49 Outstanding Stock Rights: Any right to purchase or otherwise acquire common shares of beneficial interests in the Debtor, and any stock appreciation or similar rights relating to common shares of beneficial interests in the Debtor, existing prior to the Effective Date. "Outstanding Stock Rights" does not include any rights arising solely out of the ownership of the Outstanding Common Shares. 1.50 Petition Date: The date on which the Debtor Filed its voluntary petition for relief commencing the Reorganization Case. 1.51 Plan: This plan of reorganization, including the exhibits and schedules hereto, either in its present form or as it may be amended, supplemented or modified from time to time in accordance with the provisions of the Plan and the Bankruptcy Code. 1.52 Postpetition Tax Claims: Such term shall have the meaning set forth in section 3.1.3(d). 1.53 Prior Plan: The plan of reorganization of the Debtor confirmed by the United States Bankruptcy Court for the Central District of California, in Case No. LA 90-08976-SB, by order entered February 27, 1991, together with any and all amendments to such plan of reorganization. 1.54 Priority Claim: Any Claim, other than an Administrative Claim, of a Creditor to the extent such Claim is entitled to priority under section 507(a) of the Bankruptcy Code. 1.55 Pro Rata: With respect to distributions under the Plan, proportionately so that the ratio of (a) the amount of consideration distributed on account of a particular Allowed Claim or Allowed Interest to (b) the amount of the Allowed Claim or Allowed Interest is the same as the ratio of (w) the amount of consideration distributed on account of all Allowed Claims or Allowed Interests of the class in which a particular Allowed Claim or Allowed Interest is included to (x) the amount of all Allowed Claims or Allowed Interests of that class. 1.56 Registration Rights Agreement: The Registration Rights Agreement relating to the New Plan Securities, substantially in the form of Exhibit C. 1.57 Released Claims: Any and all actions, causes of action, claims, liabilities, demands, and obligations of any kind or nature whatsoever that are based upon or that arise out of any act or omission that is related to the Reorganization Case or that are made in connection with or relate to negotiating, formulating, implementing, confirming or consummating the Plan or the Disclosure Statement; provided, however, that the term "Released Claims" shall not include any Excluded Claim. 1.58 Reorganization Case: The case under chapter 11 of the Bankruptcy Code commenced by the Debtor on the Petition Date. 1.59 Reorganized Debtor: The Debtor, or any successor thereto by merger, consolidation or otherwise, from and after the Effective Date. 1.60 Scheduled: Set forth on the Schedules. 1.61 Schedules: The schedules of assets and liabilities filed by the Debtor with the Bankruptcy Court in accordance with section 521 of the Bankruptcy Code and Bankruptcy Rule 1007, as the same may be amended from time to time in accordance with Bankruptcy Rule 1009 prior to the Effective Date. 1.62 Senior Noteholders: Fidelity Management & Research Company, Angelo Gordon & Co., Mutual Series Fund Inc., Strome--Susskind & Co., and Emerald Partners, as holders of Outstanding Notes, acting by a vote of 66 2/3% of the aggregate principal amount of Outstanding Notes held by them. A-5 1.63 Shares: The Outstanding Common Shares and the New Common Shares outstanding immediately after consummation of the Plan. 1.64 Unsecured Claim: Any Claim, that is not an Administrative Claim, a Priority Claim, a Claim under or evidenced by the Outstanding Notes, the Outstanding Note Indenture, the Outstanding Collateral Agreement or the Prior Plan, an Other Secured Claim, or a Claim based upon the Outstanding Common Shares or Outstanding Stock Rights. Rules of Interpretation: For the purposes of the Plan: (a) whenever from the context it is appropriate, each term, whether stated in the singular or the plural, shall include both the singular and the plural; (b) any reference in the Plan to a contract, instrument, release or other agreement or document being in a particular form or on particular terms and conditions means that such document shall be substantially in such form or substantially on such terms and conditions; provided, however, that any change to such form, terms or conditions that are material to a party to such document shall not be modified without such party's consent; (c) any reference in the Plan to an existing document or Exhibit Filed or to be Filed means such document or Exhibit, as it may have been or may be amended, modified or supplemented; (d) unless otherwise specified in a particular reference, all references in the Plan to sections, Articles and Exhibits are references to sections, Articles and Exhibits of or to the Plan; (e) the words "herein," "hereof," "hereto," "hereunder" and others of similar import refer to the Plan in its entirety rather than to only a particular portion of the Plan; (f) captions and headings to Articles and sections are inserted for convenience of reference only and are not intended to be part of or to affect the interpretations of the Plan; and (g) any term used in the Plan that is not defined in the Plan, either in this Article I or elsewhere, but that is used in the Bankruptcy Code or the Bankruptcy Rules has the meaning ascribed to such term in the Bankruptcy Code or the Bankruptcy Rules, as applicable, and the rules of construction set forth in section 102 of the Bankruptcy Code shall apply. Time: In computing any period of time prescribed or allowed by the Plan, the provisions of Bankruptcy Rule 9006(a) shall apply. Exhibits and Schedules: All Exhibits and Schedules to the Plan not attached to the Plan and Disclosure Statement shall be contained in separate Exhibit Volumes which shall be Filed not less than twenty (20) days prior to the hearing on Confirmation. The Exhibit Volumes may be inspected in the office of the Clerk of the Bankruptcy Court during normal Bankruptcy Court hours. On or before the Effective Date, the Debtor shall File such agreements and other documents as may be necessary or appropriate to effectuate and further evidence the terms and conditions of the Plan. All Filed Exhibits are incorporated herein by this reference and made a part hereof. ARTICLE II CLASSIFICATION OF CLAIMS AND INTERESTS 2.1 General. The following is a designation of the classes of Claims and Interests under the Plan. In accordance with section 1123(a)(1) of the Bankruptcy Code, Administrative Claims described in section 3.1 have not been classified and are excluded from the following classes. A Claim or Interest is classified in a particular class only to the extent that the Claim or Interest qualifies within the description of that class, and is classified in another class or classes to the extent that any remainder of the Claim or Interest qualifies within the description of such other class or classes. A Claim or Interest is classified in a particular class only to the extent that the Claim or Interest is an Allowed Claim or Allowed Interest in that class and has not been paid, released or otherwise satisfied before the Effective Date; a Claim or Interest that is not an Allowed Claim or Allowed Interest is not in any class. Notwithstanding anything to the contrary contained in the Plan, no distribution shall be made on account of any Claim or Interest that is not an Allowed Claim or Allowed Interest. A-6 2.2 Classification. Claims and Interests are classified for all purposes, including voting, confirmation and distribution pursuant to the Plan, as follows: CLASS 1 Priority Claims. CLASS 2 All Claims under or evidenced by the Outstanding Notes, the Outstanding Note Indenture, the Outstanding Collateral Agreement, the Outstanding Pledge Agreement, or any other document, instrument or agreement delivered in connection therewith (Impaired). CLASS 3 All Other Secured Claims (Impaired). CLASS 4 Unsecured Claims against the Debtor that are not classified in any other class of Claims, including, without limitation, Claims arising from the purchase of goods and services (Impaired). CLASS 5 Interests of Holders of Outstanding Common Shares (Impaired). CLASS 6 Interests of Holders of Outstanding Stock Rights (Impaired).
ARTICLE III TREATMENT OF CLAIMS AND INTERESTS 3.1 Unclassified Claims (Administrative Claims). 3.1.1 GENERAL. Subject to the bar date provisions herein, the Reorganized Debtor shall pay to each holder of an Administrative Claim, on account of the Administrative Claim and in full satisfaction thereof, Cash equal to the amount of such Administrative Claim, unless the holder agrees or shall have agreed to other less favorable treatment of such Claim. Except as otherwise provided herein, payment of an Administrative Claim will be made on the later of (a) the Effective Date or (b) the date such payment would have become due under the terms of such Claim in the absence of the Reorganization Case. 3.1.2 PAYMENT OF STATUTORY FEES. On or before the Effective Date, all fees payable pursuant to 28 U.S.C. 1930, as determined by the Bankruptcy Court at the hearing on Confirmation, shall be paid in Cash equal to the amount of such Administrative Claim. 3.1.3 BAR DATE FOR ADMINISTRATIVE CLAIMS. (A) GENERAL PROVISIONS. Except as provided below in sections 3.1.3(c) and (d), requests for payment of Administrative Claims must be Filed no later than sixty (60) days after the Effective Date. Holders of Administrative Claims (including, without limitation, professionals requesting compensation or reimbursement of expenses and the holders of any Claims for federal, state or local taxes) that are required to File a request for payment of such Claims and that do not File such requests by the applicable bar date shall be forever barred from asserting such Claims against the Debtor, the Reorganized Debtor or any of their respective properties. (B) PROFESSIONALS. All professional or other Entities requesting compensation or reimbursement of expenses pursuant to sections 327, 328, 330, 503(b) and 1103 of the Bankruptcy Code for services rendered before the Effective Date (including, without limitation, any compensation requested by any professional or any other Entity for making a substantial contribution in the Reorganization Case) shall File and serve on the Reorganized Debtor an application for final allowance of compensation and reimbursement of expenses no later than sixty (60) days after the Effective Date. Objections to applications of professionals for compensation or reimbursement of expenses must be Filed and served on the Reorganized Debtor and the professionals to whose application the objections are addressed in accordance with an order of the Bankruptcy Court. A-7 (C) ORDINARY COURSE LIABILITIES. Holders of Administrative Claims based on liabilities incurred by the Debtor in Possession in the ordinary course of the Debtor's business (other than Claims of governmental units for taxes or Claims and/or penalties related to such taxes) and Claims arising under loans or advances to the Debtor in Possession, whether or not incurred in the ordinary course of business, shall not be required to File any request for payment of such Claims. Such Administrative Claims shall be assumed and paid by the Reorganized Debtor pursuant to the terms and conditions of the particular transaction giving rise to such Administrative Claim without any further action by the holders of such Claims. (D) POSTPETITION TAX CLAIMS. All requests for payment of Administrative Claims and other Claims by a governmental unit for taxes (and for interest and/or penalties related to such taxes) for any tax year or period, all or any portion of which occurs or falls within the period from and including the Petition Date through and including the Effective Date ("Postpetition Tax Claims") and for which no bar date has otherwise been established prior to the Effective Date, must be Filed on or before the later of (i) thirty (30) days following the Effective Date; and (ii) 120 days following the filing of the tax return for such taxes for such tax year or period with the applicable governmental unit. Any holder of any Postpetition Tax Claim that is required to File a request for payment of such taxes and does not File such a request by the applicable bar date shall be forever barred from asserting any such Postpetition Tax Claim against any of the Debtor, the Reorganized Debtor or their respective properties, whether any such Postpetition Tax Claim is deemed to arise prior to, on, or subsequent to the Effective Date. 3.2 Class 1 (Priority Claims): 3.2.1 SECTION 507(A)(8) PRIORITY CLAIMS. Unless the applicable taxing agency agrees to less favorable treatment, the Reorganized Debtor shall pay to each holder of an Allowed Priority Claim entitled to priority under section 507(a)(8) of the Bankruptcy Code deferred Cash payments, over a period not exceeding six years from the date of assessment of such Claim, in an aggregate amount equal to the amount of such Allowed Claim, plus interest from the Effective Date on the unpaid portion of such Allowed Claim (without penalty of any kind) at the rate prescribed below. The payment of the amount of each such Allowed Priority Claim shall be made in equal semiannual installments commencing on the latest of: (i) the Effective Date, (ii) 30 calendar days after the date on which an Order allowing such Claim becomes a Final Order and (iii) such other time or times as may be agreed to by the holder of such Claim and the Reorganized Debtor. Each installment shall include simple interest on the unpaid portion of such Allowed Claim, without penalty of any kind, at the applicable statutory rate of interest provided for such taxes under applicable nonbankruptcy law; provided, however, that the Reorganized Debtor shall have the right to pay any Claim entitled to priority under section 507(a)(8) of the Bankruptcy Code, or any remaining balance of such Claim, in full, at any time on or after the Effective Date, without premium or penalty of any kind. 3.2.2 OTHER PRIORITY CLAIMS. Except as otherwise provided in the Plan and subject to compliance with the terms of the Plan, to the extent not previously paid, each holder of an Allowed Priority Claim entitled to priority under sections 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of the Bankruptcy Code shall be paid the full amount of its Allowed Priority Claim in Cash on the Effective Date (or as soon as practicable after the date on which any such Claim is allowed if the date of allowance is later than the Effective Date). 3.3 Class 2 (Outstanding Notes). The Class 2 Claims are impaired under the Plan. The Class 2 Claims (other than Class 2 Expense Claims) shall be Allowed Claims (whether or not a proof of Claim is Filed) in an amount estimated not to exceed $355,000,000. A-8 On the Effective Date, each holder of an Allowed Class 2 Claim (other than the Class 2 Expense Claims, which shall be treated as described in section 3.3.1) shall receive its Pro Rata share of: (a) Cash in the Initial Cash Distribution Fund; plus (b) New Notes in the principal amount of $110 million; plus (c) 10,889,180 New Common Shares which shall represent 97% in the aggregate of the Shares, (or New Common Shares which shall represent 99.5% of the Shares if the holders of Class 5 Interests do not vote to accept the Plan in accordance with section 1126(d) of the Bankruptcy Code, with .5% of the New Common Shares to be distributed to charities designated by the Senior Noteholders). On the Effective Date or as soon thereafter as is practicable, the Reorganized Debtor and each holder of an Allowed Class 2 Claim receiving in excess of 5% of the New Common Shares or the New Notes shall be entitled to enter into the Registration Rights Agreement relating to the New Plan Securities. 3.3.1 CLASS 2 EXPENSE CLAIMS. The Reorganized Debtor shall pay to the applicable party entitled to payment an amount equal to the amount of the Class 2 Expense Claims. Payment of such Class 2 Expense Claims shall constitute distributions on account of the Allowed Claims in Class 2, in addition to the distributions provided for such class in section 3.3; and distributions otherwise provided under the Plan to holders of Allowed Class 2 Claims under section 3.3 shall not be reduced on account of such payment of Class 2 Expense Claims. Notwithstanding anything in this section 3.3.1 to the contrary, the Reorganized Debtor's obligation to pay the Class 2 Expense Claims shall be subject to the same bar date and procedural provisions set forth in section 3.1.3(a), and the procedures regarding resolution of contested Claims and Interests set forth in section 5.7, and, pursuant to Section 1129(a)(4) of the Bankruptcy Code, are subject to the approval of the Bankruptcy Court as reasonable. 3.3.2 GENERAL DESCRIPTION OF NEW PLAN SECURITIES DISTRIBUTABLE TO HOLDERS OF CLASS 2 ALLOWED CLAIMS. The securities to be issued and distributed to holders of Allowed Class 2 Claims under the Plan include the following: (A) NEW NOTES. The terms and conditions of the New Notes shall be as provided in the form of New Notes and the New Note Indenture. By way of summary, the New Notes (i) shall be issued by the Reorganized Debtor in denominations of $1,000 (or integral multiples thereof) in an aggregate principal amount not to exceed $110 million; (ii) shall be dated as of the Effective Date and mature on the seventh (7th) anniversary of the Effective Date; (iii) shall be guaranteed by each of the subsidiaries of the Debtor; and (iv) shall be secured under the New Note Indenture and the New Collateral Documents by Liens on substantially all of the assets of the Reorganized Debtor. Interest on the New Notes shall accrue from the Effective Date at a per annum rate of 11-1/8%. Interest on the New Notes shall be payable in Cash semiannually in arrears on June 30 and December 31, commencing after the Effective Date of the Plan. (B) NEW COMMON SHARES. Under the Plan, the Reorganized Debtor shall issue up to 10,889,180 million New Common Shares to holders of Allowed Class 2 Claims (subject to rounding to account for fractional shares, as described in section 5.3.3). The New Common Shares shall represent shares of beneficial interest in the Reorganized Debtor and the terms and conditions of the New Common Shares shall be as provided in the Amended and Restated Declaration of Trust, and as provided by applicable law. Each New Common Share shall have a par value of $1.00. Certain matters relating to voting rights of holders of New Common Shares are described in section 5.5. A-9 3.4 Class 3 (Other Secured Claims). The Class 3 Claims are impaired under the Plan. To the extent not previously paid, all Allowed Class 3 Claims will be (at the option of the Reorganized Debtor with the consent of the Senior Noteholders): (a) paid in full, in Cash on the Effective Date (or as soon as practicable after the date on which any such Claim is allowed if the date of allowance is later than the Effective Date); (b) paid upon such other less favorable terms as may be mutually agreed upon by the Reorganized Debtor and the holder of such Claim; or (c) reinstated and paid or performed by the Reorganized Debtor in accordance with section 1124 of the Bankruptcy Code, or the legal, equitable and contractual rights to which such Claim entitles the holder of such Claim shall be left unaltered. 3.5 Class 4 (Unsecured Claims). The Class 4 Claims are impaired under the Plan. Each holder of a Class 4 Claim shall receive on the Effective Date, or as soon thereafter as the Claim becomes an Allowed Claim, whichever is later, Cash equal to the amount of such Allowed Class 4 Claim unless the holder of such Claim agrees to a less favorable treatment. 3.6 Class 5 (Outstanding Common Shares). The Class 5 Interests are impaired under the Plan. If holders of Allowed Class 5 Interests vote to accept the Plan in accordance with section 1126(d) of the Bankruptcy Code, then each holder of an Allowed Class 5 Interest shall retain its existing Outstanding Common Shares, subject to a reverse stock split and the issuance of New Common Shares to holders of Allowed Class 2 Claims, after which holders of Allowed Class 5 Interests will hold shares representing 3% in the aggregate of the Shares. If holders of Class 5 Interests do not vote to accept the Plan in accordance with section 1126(d) of the Bankruptcy Code, no distributions shall be made under the Plan on account of Interests of holders of Outstanding Common Shares by the Debtor or from property of the Debtor, and all Interests in Class 5 and the Outstanding Common Shares shall be cancelled and extinguished. 3.7 Class 6 (Outstanding Stock Rights). The Class 6 Interests are impaired under the Plan. The Outstanding Stock Rights will be canceled and no distributions shall be made to holders of Outstanding Stock Rights under the Plan. Each of the holders of an Interest in Class 6 shall receive or retain no property under the Plan on account of such Interest. ARTICLE IV TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES 4.1 Assumption. Unless previously assumed or rejected by order of the Bankruptcy Court pursuant to section 365 of the Bankruptcy Code, as of the Effective Date, the Reorganized Debtor shall assume, pursuant to section 365 of the Bankruptcy Code, each of the executory contracts and leases of the Debtor that are not rejected under section 4.3 including the executory contracts and leases that are identified in Exhibit E. The Debtor reserves the right at any time prior to the hearing on Confirmation, with the consent of the Senior Noteholders, to amend Exhibit E either to: (a) delete any executory contract or lease listed therein and provide for its rejection pursuant to section 4.3 hereof or (b) add any executory contract or lease to Exhibit E, thus providing for its assumption (or assumption and assignment) pursuant to this section 4.1. The Debtor shall provide notice of any amendment to Exhibit E to the parties to the executory contract or lease affected thereby. The Confirmation Order shall constitute an order of the Bankruptcy Court approving all such assumptions described in this section 4.1, pursuant to section 365 of the Bankruptcy Code, as of the Effective Date. A-10 4.2 Cure Payments. Any monetary defaults under each executory contract and lease to be assumed under the Plan shall be satisfied, pursuant to section 365(b)(1) of the Bankruptcy Code in either of the following ways: (1) by payment of the default amount in Cash on the Effective Date; or (2) by payment of the default amount on such other terms as agreed to by the Reorganized Debtor and the non-Debtor parties to such executory contract or lease. In the event of a dispute regarding (i) the amount or timing of any cure payments, (ii) the ability of the Reorganized Debtor to provide adequate assurance of future performance under the contract or lease to be assumed or (iii) any other matter pertaining to assumption (or assumption and assignment) of the contract or lease to be assumed, the cure payments required by section 365(b)(1) of the Bankruptcy Code shall be made following the entry of a Final Order resolving the dispute and approving assumption. 4.3 Rejection. Unless previously assumed or rejected by order of the Bankruptcy Court pursuant to section 365 of the Bankruptcy Code, on the Effective Date, all documents, agreements, contracts and leases listed on Exhibit F shall be rejected, to the extent, if any, that any of the foregoing constitute executory contracts or unexpired leases, and without conceding or admitting that they constitute executory contracts or unexpired leases or that the Debtor has any liability thereunder. The Debtor reserves the right at any time prior to the hearing on Confirmation, with the consent of the Senior Noteholders, to amend Exhibit F either to: (a) delete any contract or lease listed therein and provide for its assumption pursuant to section 4.1 or (b) add any contract or lease to Exhibit F, thus providing for its rejection pursuant to this section 4.3. The Debtor shall provide notice of any amendment of Exhibit F to the parties to the contract or lease affected thereby. The Confirmation Order shall constitute an Order of the Bankruptcy Court approving all such rejections pursuant to section 365 of the Bankruptcy Code as of the Effective Date. Any Claim for damages arising from the rejection under the Plan of an executory contract or unexpired lease must be Filed within thirty (30) days after the mailing of notice of the entry of the Confirmation Order or be forever barred and unenforceable against the Debtor, its Estate, the Reorganized Debtor and its properties and barred from receiving any distribution under the Plan on account of such Claim. ARTICLE V MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN 5.1 Cancellation of Outstanding Securities and Related Agreements. Except as expressly provided in the Plan or in the Confirmation Order, on the Effective Date, the Outstanding Securities, the Outstanding Note Indenture, the Outstanding Collateral Agreement, the Outstanding Pledge Agreement, the Prior Plan, the Outstanding Stock Rights and all obligations of the Debtor under any of the foregoing, shall be terminated and canceled. 5.2 New Plan Securities and New Indenture. On or before the Effective Date, the Reorganized Debtor, the New Indenture Trustee, and the New Collateral Agent shall have executed the New Note Indenture and the New Collateral Documents, as applicable. On the Effective Date or as soon as practicable thereafter, the Reorganized Debtor and each holder of Allowed Class 2 Claims receiving 5% or more of the New Common Shares or the New Notes shall be entitled to execute and deliver the Registration Rights Agreement. All of the documents described in this paragraph shall become effective and binding on the Reorganized Debtor on and as of the Effective Date. On and after the Effective Date, the Reorganized Debtor shall issue the New Plan Securities in accordance with this Article V. A-11 5.3 Distribution of Property Under the Plan. 5.3.1 DISTRIBUTION DATE. Subject to the provisions of this section 5.3, and except as otherwise provided herein, property to be distributed to an impaired class (a) shall be distributed on or as soon as practicable after the Effective Date to each holder of an Allowed Claim or an Allowed Interest of that class that is an Allowed Claim or Allowed Interest as of the Effective Date, and (b) shall be distributed to each holder of an Allowed Claim or an Allowed Interest of that class that is allowed after the Effective Date, to the extent allowed, as soon as practicable after such Claim or Interest becomes an Allowed Claim or Allowed Interest. Property to be distributed under the Plan to a class that is not impaired or on account of a Claim of a kind described in Bankruptcy Code section 507(a)(1) or Class 2 Expense Claims shall be distributed on the latest of (i) the later of the two dates specified in the preceding sentence and (ii) the date on which the distribution to the holder of the Allowed Claim would have been due and payable under the terms of the Allowed Claim in the absence of the Reorganization Case. 5.3.2 HOLDERS OF OUTSTANDING SECURITIES ENTITLED TO RECEIVE DISTRIBUTIONS. Any distribution under the Plan on account of an Allowed Claim under or evidenced by Outstanding Notes shall be made to the holders of record of such Outstanding Notes as of the Effective Date. At the close of business on the Effective Date, the transfer ledgers for the Outstanding Notes shall be closed, and there shall be no further changes in the record holders of the Outstanding Notes. The Debtor, the Reorganized Debtor, the Outstanding Indenture Trustee shall have no obligation to recognize any transfer of the Outstanding Notes occurring on or after the Effective Date. The Debtor, the Reorganized Debtor, and the Outstanding Indenture Trustee shall be entitled instead to recognize and deal for all purposes hereunder with only those record holders stated on the transfer ledgers for the Outstanding Notes, as of the close of business on the Effective Date. 5.3.3 FRACTIONAL INTERESTS. The calculation of the percentage distribution of New Plan Securities to be made to holders of certain Allowed Claims as provided elsewhere in the Plan may mathematically entitle the holder of such an Allowed Claim to a fractional interest in one or more of such New Plan Securities. Notwithstanding such entitlement, New Notes to be issued under the Plan shall be issued and distributed only in denominations of $1,000 and integral multiples thereof, and only whole New Common Shares shall be issued and distributed. For purposes of applying the following two paragraphs, the holders of Allowed Claims under or evidenced by Outstanding Notes shall, in the case of Outstanding Notes held in street name, mean the beneficial holders thereof as of the Effective Date. (A) NEW NOTES. All New Notes that would have been distributed under the Plan in denominations of less than $1,000 but for the preceding paragraph, shall be aggregated into New Notes having denominations of $1,000 or integral multiples thereof. On the Effective Date or as soon thereafter as is practicable, the Disbursing Agent shall sell for Cash such aggregated New Notes in such manner and over such period of time as the Disbursing Agent considers appropriate to reasonably assure the maximization of the sale value of such New Notes. Upon the completion of such sales, the Disbursing Agent shall distribute the net proceeds thereof to the holders of the respective Allowed Claims ratably, in direct proportion to their respective interests in the New Notes to be sold. Notwithstanding the foregoing provisions of this section 5.3.3, if the aggregation (in accordance with this section 5.3.3) of New Notes results in a principal amount that is not $1,000 or an integral multiple thereof, such principal amount shall be rounded up to the next such integral multiple of $1,000 of New Notes and the principal amount of such New Notes so rounded up shall be sold by the Disbursing Agent as provided in this section 5.3.3. A-12 (B) NEW COMMON SHARES. The number of New Common Shares to be received by a holder of an Allowed Claim shall be rounded to the next greater or lower integer of shares as follows: (a) fractions of 1/2 or greater shall be rounded to the next greater whole number and (b) fractions of less than 1/2 shall be rounded to the next lower integer. The total number of New Common Shares to be distributed to a class of Claims shall be adjusted as necessary to account for the rounding provided for in this section 5.3.3(b). No consideration shall be paid in lieu of fractional shares that are rounded down. 5.3.4 PRO RATA DISTRIBUTION. Except as otherwise provided herein, the property to be distributed to Class 2 under the Plan shall be divided Pro Rata among the holders of Allowed Claims of such class. Solely for the purpose of applying the definition of "Pro Rata" to the distributions within such class, the amount of the Allowed Claims in Class 2 shall be determined as of the Effective Date, based on outstanding principal amounts of the Outstanding Notes, without including any accrued and unpaid interest and shall exclude the Class 2 Expense Claims. 5.3.5 DISBURSING AGENT. The Reorganized Debtor, or such other Entity or Entities as the Reorganized Debtor may employ, subject to the reasonable consent of the Senior Noteholders, shall act as Disbursing Agents under the Plan and make all distributions required under the Plan. Any Disbursing Agent may employ or contract with other Entities to assist in or perform the distribution of property under the Plan. Unless otherwise determined by the Reorganized Debtor, each Disbursing Agent shall serve without bond. Each third party Disbursing Agent shall receive, without further Bankruptcy Court approval, reasonable compensation for distribution services rendered pursuant to the Plan and reimbursement of reasonable out-of-pocket expenses incurred in connection with such services from the Reorganized Debtor on terms agreed to with the Reorganized Debtor. 5.3.6 DISPUTED CLAIMS OR INTEREST. Notwithstanding any other provisions of the Plan, no payments or distributions shall be made on account of any Disputed Claim or Interest until such Claim or Interest becomes an Allowed Claim or Interest, and then only to the extent that it becomes an Allowed Claim or Interest. 5.3.7 MANNER OF PAYMENT UNDER THE PLAN. Cash payments made pursuant to the Plan shall be in U.S. dollars by checks drawn on a domestic bank selected by the Reorganized Debtor, or by wire transfer from a domestic bank, at the Reorganized Debtor's option, except that payments made to foreign trade creditors holding Allowed Claims may be paid, at the option of the Reorganized Debtor in such funds and by such means as are necessary or customary in a particular foreign jurisdiction. Distributions of Cash pursuant to section 3.3.1.(a) shall be made by mail as set forth above or, upon request of a holder of an Allowed Class 2 Claim, by wire transfer in accordance with written instructions received therefrom. 5.3.8 SURRENDER OF INSTRUMENTS. (A) REQUIREMENTS TO SURRENDER OR DELIVER INSTRUMENTS OR DOCUMENTS. As a condition to the receipt of any distribution under the Plan: (i) a holder of an Outstanding Note shall deliver to the Outstanding Indenture Trustee or its designee such transaction instructions or other documents of transfer or exchange as the Outstanding Indenture Trustee shall request; and (ii) a holder of a document or instrument of the Debtor other than an Outstanding Note shall surrender the document or instrument to the Disbursing Agent or its designee. However, holders of the Outstanding A-13 Common Shares are not required to surrender such document or instrument. Prior to the Effective Date, each holder of a document or instrument will receive specific instructions regarding the time and manner in which the document or instrument is to be surrendered or delivered. Immediately upon the Effective Date and until such surrender or delivery, such document or instrument will be deemed canceled and represent only the right to receive the distributions to which the holder is entitled under the Plan. (B) LOST, STOLEN, MUTILATED OR DESTROYED INSTRUMENTS. Any bond, debenture, share of stock, other security or note, whether or not a security (collectively "Instruments"), or transaction instruction, that is lost, stolen, mutilated or destroyed shall be deemed surrendered when the holder of a Claim or Interest based thereon delivers to the Outstanding Indenture Trustee, or Disbursing Agent or their respective designee, (i) evidence satisfactory to the Outstanding Indenture Trustee, Disbursing Agent or designee of the loss, theft, mutilation or destruction of such Instrument or (ii) such security or indemnity as may be required by the Outstanding Indenture Trustee, Disbursing Agent or designee to save each of them harmless with respect thereto. (C) EFFECT OF FAILURE TO SURRENDER OR DELIVER INSTRUMENTS OR DOCUMENTS. Any holder of an Instrument of the Debtor that fails to surrender or deliver or be deemed to have surrendered or delivered the Instrument or relevant transaction instruction or other document within two years after the Effective Date shall be forever barred from receiving any distribution under the Plan. In such cases, any property held for distribution on account of a Claim or Interest based on such Instrument shall become property of the Reorganized Debtor in the manner provided in section 5.3.10(b)(2) for unclaimed distributions. To the extent that any such property is held by a Disbursing Agent other than the Reorganized Debtor, such Disbursing Agent shall return such property to the Reorganized Debtor. 5.3.9 DELIVERY OF DISTRIBUTIONS AND UNDELIVERABLE OR UNCLAIMED DISTRIBUTIONS. (A) DELIVERY OF DISTRIBUTIONS IN GENERAL. Except as provided below in this section 5.3.9 for undeliverable distributions, distributions to holders of Allowed Claims and Allowed Interests shall be distributed by mail as follows: (a) except in the case of the holder of an Instrument for which there is an indenture trustee or stock transfer agent, (1) to the addresses set forth on the respective proof of claim or interest filed by such holders; (2) to the addresses set forth in any written notices of address changes delivered to the Disbursing Agent(s) after the date of any related proof of claim or interest; or (3) to the address reflected on the Schedules if no proof of claim or interest is Filed and the Disbursing Agent(s) have not received a written notice of a change of address; and (b) in the case of the holder of an Instrument for which there is an indenture trustee or stock transfer agent, to the latest mailing address maintained of record by the pertinent indenture trustee, security registrar or stock transfer agent, or, if no mailing address is maintained of record, to the pertinent indenture trustee, security registrar or stock transfer agent. (B) UNDELIVERABLE DISTRIBUTIONS. (1) HOLDING AND INVESTMENT OF UNDELIVERABLE PROPERTY. If the distribution to the holder of a Claim or Interest is returned to a Disbursing Agent as undeliverable, no further distribution shall be made to such holder unless and until the Reorganized Debtor or the applicable Disbursing Agent is notified in writing of such holder's then current address. Subject to section 5.3.9(b)(2), undeliverable distributions shall remain in the possession of the applicable Disbursing Agent pursuant to this section 5.3.9 until such times as a distribution becomes deliverable. Unclaimed Cash (including interest, dividends and other consideration, if any, distributed on or received for undeliverable New Plan Securities) shall be held in trust in a segregated bank account in the name of the applicable Disbursing Agent for the benefit of the potential claimants of such funds, and A-14 shall be accounted for separately. Such funds shall be held in interest- bearing accounts to the extent practicable, and the parties entitled to such funds shall be entitled to any interest earned on such funds. Undeliverable New Plan Securities shall be held in trust for the benefit of the potential claimants of such securities by the applicable Disbursing Agent in principal amount of notes and in number of shares sufficient to fund the unclaimed amounts of such securities, and shall be accounted for separately. (2) DISTRIBUTION OF UNDELIVERABLE PROPERTY AFTER IT BECOMES DELIVERABLE AND FAILURE TO CLAIM UNDELIVERABLE PROPERTY. Within thirty (30) days after the end of each calendar quarter following the Effective Date, the applicable Disbursing Agents shall make distributions of property that has become deliverable during the preceding quarter. Each such distribution shall include any dividends, interest payments or other distributions made on account of the distributed property. Any holder of an Allowed Claim or Allowed Interest who does not assert a claim for an undeliverable distribution held by a Disbursing Agent within one (1) year after the Effective Date shall no longer have any claim to or interest in such undeliverable distribution, and shall be forever barred from receiving any distributions under the Plan. In such cases any property held for distribution on account of such Allowed Claims or Allowed Interests shall be returned to and/or retained by the Reorganized Debtor, as follows: (1) any Cash shall be the property of the Reorganized Debtor, free from any restrictions thereon; (2) any New Notes shall be canceled; and (3) any New Common Shares reserved for issuance shall be held by the Reorganized Debtor as unrestricted treasury shares. Nothing contained in the Plan shall require the Debtor, the Reorganized Debtor or any Disbursing Agent to attempt to locate any holder of an Allowed Claim or an Allowed Interest. 5.3.10 COMPLIANCE WITH TAX REQUIREMENTS. In connection with the Plan, to the extent applicable, each Disbursing Agent shall comply with all withholding and reporting requirements imposed on it by any governmental unit, and all distributions pursuant to the Plan shall be subject to such withholding and reporting requirements. 5.3.11 SETOFFS. The Reorganized Debtor may, but shall not be required to, setoff against any Allowed Claim and the distributions to be made pursuant to the Plan on account of such Allowed Claim, claims of any nature that the Debtor or the Reorganized Debtor may have against the holder of such Allowed Claim; provided, however, that neither the failure to effect such a setoff nor the allowance of any Claim against the Debtor or the Reorganized Debtor shall constitute a waiver or release by the Debtor or the Reorganized Debtor of any claim that the Debtor or the Reorganized Debtor may possess against such holder. 5.4 Revesting of Assets. Except as otherwise provided in any provision of the Plan, on the Effective Date, all property of the Estate of the Debtor shall revest in the Reorganized Debtor, free and clear of all Claims, liens, encumbrances and other interests of holders of Claims and Interests. From and after the Effective Date, the Reorganized Debtor may operate its business and use, acquire and dispose of property and settle and compromise Claims or Interests without supervision by the Bankruptcy Court and free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly imposed by the Plan, the Confirmation Order, the New Note Indenture and the New Collateral Documents, and any document, agreement or instrument delivered in connection therewith. A-15 5.5 Amended and Restated Declaration of Trust; Indemnification. On the Effective Date, the Reorganized Debtor shall adopt the Amended and Restated Declaration of Trust pursuant to section 8-501 of title 8 of the Corporations and Associations Law article of the Annotated Code of Maryland and section 1123(a)(5)(I) and (b)(5) of the Bankruptcy Code. The Amended and Restated Declaration of Trust will, inter alia: (i) authorize the issuance of the New Common Shares; (ii) continue to prohibit the issuance of nonvoting equity securities to the extent required by section 1123(a)(6) of the Bankruptcy Code. Pursuant to the Amended and Restated Declaration of Trust and other relevant agreements, and notwithstanding any other term or provision of the Plan to the contrary, the Reorganized Debtor shall indemnify and hold harmless its current and former officers, trustees and employees to the fullest extent permitted by applicable law with respect to any such officer's, trustee's or employee's acts, conduct and omissions whether arising before or after the Petition Date; and (iii) impose certain transfer restrictions. Upon (i) Confirmation of the Plan, (ii) the occurrence of the Effective Date and (iii) the filing with the Maryland Secretary of State of the Amended and Restated Declaration of Trust, the Amended and Restated Declaration of Trust will become effective. 5.6 Management of the Reorganized Debtor. 5.6.1 OFFICERS AND TRUSTEES. The initial Board of Trustees of the Reorganized Debtor shall consist of seven members, including (a) the Chief Executive Officer of the Reorganized Debtor, (b) one member designated by Mutual Series Fund, Inc., and (c) five members designated by the Senior Noteholders. The members of the initial Board of Trustees shall be identified at or prior to the hearing on Confirmation of the Plan. Such persons shall be deemed elected to the Board of Trustees, and such elections shall be deemed effective as of the Effective Date, without any requirement of further action by shareholders or trustees of the Debtor or the Reorganized Debtor. The persons identified as such in the Disclosure Statement will serve as the initial officers of the Reorganized Debtor as of the Effective Date. Subject to any requirement of Bankruptcy Court approval under section 1129(a)(5) of the Bankruptcy Code, those persons designated as trustees and officers of the Reorganized Debtor shall assume their offices as of the Effective Date and shall continue to serve in such capacities thereafter, pending further action of the Board of Trustees or shareholders of the Reorganized Debtor in accordance with the Amended and Restated Declaration of Trust and applicable state law. 5.7 Objections to Claims or Interests. Except as otherwise provided, applications of professionals for compensation and reimbursement of expenses under section 3.1.3(b), and except as otherwise ordered by the Bankruptcy Court after notice and a hearing, objections to Claims or Interests, including Administrative Claims, or to requests for payment of Class 2 Expense Claims, shall be Filed and served upon the holder of such Claim, Interest or Administrative Claim, the Outstanding Indenture Trustee, or other relevant party as applicable, not later than the later of (a) ninety (90) days after the Effective Date, and (b) ninety (90) days after a proof of claim or interest or request for payment of such Claim, Interest, Administrative Claim or Class 2 Expense Claims is timely Filed, unless this period is extended by the Bankruptcy Court. After the Effective Date, the Reorganized Debtor shall have the exclusive right to object to Claims, Interests or Class 2 Expense Claims. 5.8 Discharge of Debtor and Injunction. Except as otherwise provided in this Plan, the rights afforded in the Plan and the treatment of all Claims and Interests herein shall be in exchange for and in complete satisfaction, discharge and release of all Claims and Interests of any nature whatsoever, including any interest accrued on such Claims from and after the Petition Date, against the Debtor and the Debtor in Possession, or any of their assets or properties. Except as otherwise provided in the Plan or the Confirmation Order: (i) on the Effective Date, the Debtor shall be deemed discharged and released to the fullest extent permitted by section 1141 of the Bankruptcy Code from all Claims and Interests, including, but not limited to, demands, liabilities, Claims and Interests that arose A-16 before the Confirmation Date and all debts of the kind specified in sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not: (a) a proof of claim or proof of interest based on such debt or Interest is Filed or deemed Filed pursuant to section 501 of the Bankruptcy Code, (b) a Claim or Interest based on such debt or Interest is allowed pursuant to section 502 of the Bankruptcy Code or (c) the holder of a Claim or Interest based on such debt or Interest has accepted the Plan; and (ii) all Entities shall be precluded from asserting against the Reorganized Debtor, its successors or its assets or properties any other or further Claims or Interests based upon any act or omission, transaction or other activity of any kind or nature that occurred prior to the Confirmation Date. Except as otherwise provided in the Plan or the Confirmation Order, the Confirmation Order shall act as a discharge of any and all Claims against and all debts and liabilities of the Debtor, as provided in sections 524 and 1141 of the Bankruptcy Code, and such discharge shall void any judgment against the Debtor at any time obtained to the extent that it relates to a Claim discharged. Except as otherwise provided in the Plan or the Confirmation Order, on and after the Effective Date, all Entities who have held, currently hold or may hold a debt, Claim or Interest discharged pursuant to the terms of the Plan are permanently enjoined from taking any of the following actions on account of any such discharged debt, Claim or Interest: (1) commencing or continuing in any manner any action or other proceeding against the Debtor, the Reorganized Debtor, their successors or their respective property; (2) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order against the Debtor, the Reorganized Debtor, their successors or their respective property; (3) creating, perfecting or enforcing any lien or encumbrance against the Debtor, the Reorganized Debtor, their successors or their respective property; (4) asserting any setoff, right of subrogation or recoupment of any kind against any obligation due to the Debtor, the Reorganized Debtor, their successors or their respective property; and (5) commencing or continuing any action, in any manner, in any place that does not comply with or is inconsistent with the provisions of the Plan or the Confirmation Order. Any Entity injured by any willful violation of such injunction shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages, from the willful violator. 5.9 No Liability for Solicitation or Participation. As specified in section 1125(e) of the Bankruptcy Code, Entities that solicit acceptances or rejections of the Plan and/or that participate in the offer, issuance, sale or purchase of securities offered or sold under the Plan, in good faith and in compliance with the applicable provisions of the Bankruptcy Code, are not liable, on account of such solicitation or participation, for violation of any applicable law, rule or regulation governing the solicitation of acceptances or rejections of the Plan or the offer, issuance, sale or purchase of securities. 5.10 Limitation of Liability. To the extent permitted by applicable law, neither the Debtor, the Debtor in Possession, the Reorganized Debtor, the Senior Noteholders, the creditors' committee under the Prior Plan, nor any of their employees, officers, trustees, members, agents or representatives, nor any professional Entities employed by any of them shall have or incur any liability to any Entity for any act taken or omission made in good faith in connection with or related to formulating, implementing, confirming or consummating the Plan, the Disclosure Statement or any contract, instrument, release or other agreement or document created in connection with the Plan. 5.11 Other Documents and Actions. The Debtor, the Debtor in Possession and the Reorganized Debtor may execute such documents and take such other action as is necessary to effectuate the transactions provided for in the Plan. 5.12 Authorized Actions. The issuance of New Common Shares and New Notes, the adoption of the Amended and Restated Declaration of Trust, the selection of the persons who will serve as the initial trustees and officers of the Reorganized Debtor as of the Effective Date, the execution of the New Note Indenture, the New Collateral A-17 Documents, the adoption of the other matters under the Plan involving the corporate structure of the Debtor or the Reorganized Debtor or corporate action by the Debtor or the Reorganized Debtor shall be deemed to have occurred and be effective on and after the Effective Date without any requirement of further action by shareholders or trustees of the Debtor or the Reorganized Debtor. Without limiting the foregoing, upon entry of the Confirmation Order by the clerk of the Bankruptcy Court, the filing by the Debtor or the Reorganized Debtor of the Amended and Restated Declaration of Trust shall be authorized and approved in all respects. On the Effective Date or as soon thereafter as is practicable, pursuant to applicable state law, the Reorganized Debtor shall file with the applicable state governmental agencies or offices the Amended and Restated Declaration of Trust. 5.13 Releases. In consideration for the distributions to be made under the Plan and the releases provided for herein, and in order to protect the Reorganized Debtor from Claims for contribution or indemnity relating to pre-Effective Date acts or omissions, as of the Effective Date: (i) the creditors' committee formed under the Prior Plan, each holder of a Claim or Interest, and each of the officers, directors, employees, members and professionals of such committee or holder, shall be released to the extent permitted by applicable law from any Released Claims that the Debtor may have against any of them (the "Debtor Release"); (ii) the Debtor, the Reorganized Debtor, the creditors' committee under the Prior Plan, the Senior Noteholders, and their respective officers, directors, employees, members and professionals (collectively, the "Debtor Releasees") shall be released to the extent permitted by applicable law from any Released Claims that any holder of a Claim or Interest may have against any of the Debtor Releasees; and (iii) the Debtor Releasees shall be released to the extent permitted by applicable law from any and all actions, causes of action, claims, liabilities, demands and obligations of any kind or nature whatsoever that the Debtor, the Reorganized Debtor, the Debtor's Estate or any holder of a Claim or Interest may have against any of the Debtor Releasees that is based upon or that arises out of any alleged act or omission by any of the Debtor Releasees that is related to the Debtor, including, without limitation, the Reorganization Case, the Outstanding Notes, the Outstanding Collateral Agreement, the Prior Plan, the Outstanding Common Shares, the Outstanding Stock Rights or any of the Claims or Interests in the Reorganization Case, provided, however, that this release shall not apply to Excluded Claims against the Debtor (the release described in subparagraphs (ii) and (iii) is hereinafter referred to as the "Creditor/Shareholder Release") and no holder of a Claim shall be released until such Claim is allowed. Notwithstanding the foregoing, to the extent that a holder of a Claim or Interest elects not to grant a Creditor/Shareholder Release and receive a Debtor Release, such holder may make such election by indicating its election to opt out of such releases in the space provided for such election on the ballot for accepting or rejecting the Plan. If a holder makes such election, the Creditor/Shareholder Release shall not be enforceable against such holder, and such holder shall not be released under the Debtor Release. 5.14 Retiree Benefits. On and after the Effective Date, to the extent required by section 1129(a)(13) of the Bankruptcy Code, the Reorganized Debtor shall continue to pay all retiree benefits (if any), as the term "retiree benefits" is defined in section 1114(a) of the Bankruptcy Code, maintained or established by the Debtor prior to the Confirmation Date. ARTICLE VI CONFIRMATION 6.1 Confirmation. The Debtor requests Confirmation of the Plan under section 1129(a) and section 1129(b) of the Bankruptcy Code if any impaired class does not accept the Plan pursuant to section 1126 of the Bankruptcy Code, subject to the consent of the Senior Noteholders. The Debtor reserves the right to modify the Plan, subject to the consent of the Senior Noteholders, to the extent, if any, that Confirmation of the Plan under section 1129(b) of the Bankruptcy Code requires modification. A-18 ARTICLE VII CONFIRMATION AND EFFECTIVE DATE CONDITIONS 7.1 Conditions to Effective Date. The Plan shall not be consummated and the Effective Date shall not occur unless and until each of the following conditions has been satisfied or duly waived as specified below: 7.1.1 The Plan has been accepted by the requisite holders of Claims in Class 2 pursuant to section 1126 of the Bankruptcy Code; 7.1.2 The Clerk of the Bankruptcy Court has entered the Confirmation Order, in form and substance satisfactory to the Debtor and to the Senior Noteholders and unless otherwise agreed to by the Senior Noteholders, such order shall have become a Final Order; 7.1.3 No court shall have entered an order modifying or staying the enforcement of the Confirmation Order or any such stay shall have been vacated; 7.1.4 The New Note Indenture shall have been qualified under the Trust Indenture Act of 1939, as amended, and no stop order shall have been issued with respect thereto; and 7.1.5 The New Note Indenture and the New Collateral Documents shall have been executed and delivered by the Reorganized Debtor and each of its subsidiaries, and the New Indenture Trustee. 7.1.6 All other material documents, instruments or agreements including, without limitation, the Amended and Restated Declaration of Trust shall have been executed and delivered by the parties thereto and become effective. 7.2 Waiver of Conditions to the Effective Date. The Debtor, with the consent of the Senior Noteholders, may waive any of the conditions to the Effective Date. ARTICLE VIII RETENTION OF JURISDICTION 8.1 Retention of Jurisdiction. Notwithstanding the entry of the Confirmation Order or the occurrence of the Effective Date, the Bankruptcy Court shall retain such jurisdiction over the Reorganization Case after the Effective Date as is legally permissible, including, without limitation, jurisdiction to: 8.1.1 Allow, disallow, determine, liquidate, classify or establish the priority or secured or unsecured status of or estimate any Claim or Interest, including, without limitation, the resolution of any request for payment of any Administrative Claim or Class 2 Expense Claim and the resolution of any and all objections to the allowance or priority of Claims or Interests; 8.1.2 Grant or deny any and all applications for allowance of compensation or reimbursement of expenses authorized pursuant to the Bankruptcy Code or the Plan, for periods ending on or before the Effective Date; 8.1.3 Resolve any motions pending on the Effective Date to assume, assume and assign or reject any executory contract or unexpired lease to which the Debtor is a party or with respect to which the Debtor may be liable and to hear, determine and, if necessary, liquidate, any and all Claims arising therefrom; A-19 8.1.4 Ensure that distributions to holders of Allowed Claims and Allowed Interests are accomplished pursuant to the provisions of the Plan; 8.1.5 Decide or resolve any and all applications, motions, adversary proceedings, contested or litigated matters and any other matters or grant or deny any applications involving the Debtor that may be pending on the Effective Date; 8.1.6 Enter such orders as may be necessary or appropriate to implement or consummate the provisions of the Plan and all contracts, instruments, releases and other agreements or documents created in connection with the Plan or the Disclosure Statement; 8.1.7 Resolve any and all controversies, suits or issues that may arise in connection with consummation of the Plan; 8.1.8 Modify the Plan before or after the Effective Date pursuant to section 1127 of the Bankruptcy Code, or to modify the Disclosure Statement or any contract, instrument, release or other agreement or document created in connection with the Plan or the Disclosure Statement in accordance with section 1127 of the Bankruptcy Code; or remedy any defect or omission or reconcile any inconsistency in any Bankruptcy Court order, the Plan, the Disclosure Statement or any contract, instrument, release or other agreement or document created in connection with the Plan or the Disclosure Statement, in such manner as may be necessary or appropriate to consummate the Plan, to the extent authorized by the Bankruptcy Code; 8.1.9 Issue injunctions, enter and implement other orders or take such other actions as may be necessary or appropriate to restrain interference by any entity with consummation or enforcement of the Plan; 8.1.10 Enter and implement such orders as are necessary or appropriate if the Confirmation Order is for any reason modified, stayed, reversed, revoked or vacated; and 8.1.11 Enter an Order on a Final decree closing the Reorganization Case. If the Bankruptcy Court abstains from exercising jurisdiction or is otherwise without jurisdiction over any matter arising out of the Reorganization Case, including without limitation the matters set forth in this Article VIII, this Article VIII shall have no effect upon and shall not control, prohibit or limit the exercise of jurisdiction by any other court having competent jurisdiction with respect to such matter. ARTICLE IX MISCELLANEOUS PROVISIONS 9.1 Exemption from Transfer Taxes. Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer or exchange of notes or equity securities under the Plan, the creation of any mortgage, deed of trust or other security interest or collateral assignment of mortgage, deed of trust or other security interest, the making or assignment of any lease or sublease, the amendment of any of the foregoing that may exist prior to the date hereof, or the making or delivery of any deed or other instrument of transfer under, in furtherance of, or in connection with the Plan or in connection with any of the transactions contemplated under the Plan shall not be subject to any stamp, real estate transfer, mortgage recording or other similar tax. 9.2 Application of Distributions. If the distributions of property and interests in property hereunder on account of any Allowed Claim are less than the aggregate amount of principal and accrued but unpaid interest payable under the agreement governing, instrument evidencing or other document relating to such Allowed Claim, such distributions shall be applied first to principal and then to accrued but unpaid interest. A-20 9.3 Dissolution of Committees. On the Effective Date, any statutory committees of Creditors or Interest holders shall dissolve and the members of such committees shall be released and discharged from all further rights and duties arising from or related to the Reorganization Case. The professionals retained by any such committee and the members thereof shall not be entitled to compensation or reimbursement of expenses for any services rendered after the Effective Date, except for services rendered and expenses incurred in connection with any applications for allowance of compensation and reimbursement of expenses pending on the Effective Date or Filed after the Effective Date pursuant to section 3.1. 9.4 Modification of the Plan. Subject to the restrictions on modifications to the Plan set forth in section 1127 of the Bankruptcy Code, the Debtor, subject to the approval of the Senior Noteholders, reserves the right to alter, amend or modify the Plan before its substantial consummation. 9.5 Revocation of the Plan. The Debtor reserves the right to revoke or withdraw the Plan prior to the Confirmation Date, with the consent of the Senior Noteholders. If the Debtor revokes or withdraws the Plan, or if Confirmation does not occur or if the Plan does not become effective, then the Plan shall be null and void, and nothing contained in the Plan shall: (1) constitute a waiver or release of any Claims by or against, or any interests in, the Debtor; (2) constitute an admission of any fact or legal conclusion by the Debtor, the Debtor in Possession or any other Entity; or (3) prejudice in any manner the rights of the Debtor, the Debtor in Possession or any other Entity in any further proceedings involving the Debtor, the Debtor in Possession, or any other Entity. 9.6 Successors and Assigns. The rights, benefits and obligations of any Entity named or referred to in the Plan shall be binding on, and shall inure to the benefit of, any heir, executor, administrator, successor or assign of such Entity. 9.7 Saturday, Sunday or Legal Holiday. If any payment or act under the Plan is required to be made or performed on a date that is not a Business Day, then the making of such payment or the performance of such act may be completed on the next succeeding Business Day, but shall be deemed to have been completed as of the required date. 9.8 Post-Effective Date Effect of Evidences of Claims or Interests. Except as otherwise expressly provided in the Plan, notes, bonds, stock certificates and other evidences of Claims against or Interests in the Debtor shall, effective upon the Effective Date, represent only the right to participate in the distributions contemplated by the Plan. 9.9 Governing Law. Unless a rule of law or procedure is supplied by (i) federal law (including the Bankruptcy Code and Bankruptcy Rules), (ii) an express choice of law provision in any agreement, contract, instrument or document provided for, or executed in connection with, the Plan, or (iii) the Corporations and Associations Law article of the Annotated Code of Maryland, the rights and obligations arising under the Plan and any agreements, contracts, documents and instruments executed in connection with the Plan shall be governed by, and construed and enforced in accordance with, the laws of the State of California without giving effect to the principles of conflict of laws thereof. A-21 9.10 Severability of Plan Provisions. If prior to Confirmation any term or provision of the Plan that does not govern the treatment of Claims or Interests or the conditions to the Effective Date is held by the Bankruptcy Court to be invalid, void or unenforceable, the Bankruptcy Court shall have the power, subject to the consent of the Senior Noteholders, to alter and interpret such term or provision to make it valid or enforceable to the maximum extent practicable, consistent with the original purpose of the term or provision held to be invalid, void or unenforceable, and such term or provision shall then be applicable as altered or interpreted. Notwithstanding any such holding, alteration or interpretation, the remainder of the terms and provisions of the Plan will remain in full force and effect and will in no way be affected, impaired or invalidated by such holding, alteration or interpretation. The Confirmation Order shall constitute a judicial determination and shall provide that each term and provision of the Plan, as it may have been altered or interpreted in accordance with the foregoing, is valid and enforceable pursuant to its terms. 9.11 No Admissions. Notwithstanding anything herein to the contrary, nothing contained in the Plan shall be deemed as an admission by the Debtor with respect to any matter set forth herein including, without limitation, liability on any Claim or the propriety of any Claims classification. Dated: , 1995 Respectfully submitted, MORTGAGE AND REALTY TRUST By: _________________________________ C.W. Strong, Jr., President A-22 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ANNEX B MORTGAGE AND REALTY TRUST ---------------- AMENDED AND RESTATED DECLARATION OF TRUST AS AMENDED AND RESTATED THROUGH [ , 1995] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX TO DECLARATION OF TRUST
PAGE ---- ARTICLE 1 THE TRUST; DEFINITIONS 1.1 Name................................................................. 1 1.2 Places of Business................................................... 1 1.3 Nature of Trust...................................................... 1 1.4 Definitions.......................................................... 1 ARTICLE 2 TRUSTEES 2.1 Number, Term and Qualifications of Trustees.......................... 3 2.2 Compensation and Other Remuneration.................................. 4 2.3 Resignation, Removal and Death of Trustees........................... 4 2.4 Vacancies............................................................ 4 2.5 Successor and Additional Trustees.................................... 4 2.6 Action by Trustees................................................... 4 2.7 Non-Affiliated Trustees.............................................. 4 ARTICLE 3 TRUSTEES' POWERS 3.1 Power and Authority of Trustees...................................... 5 3.2 Specific Powers and Authorities...................................... 5 3.3 By-Laws.............................................................. 8 ARTICLE 4 ADVISORY AGREEMENT 4.1 Employment of Adviser................................................ 8 4.2 Term................................................................. 8 4.3 No Restrictions on Adviser........................................... 8 4.4 Duties of Adviser.................................................... 8 4.5 Agreement with Affiliate of Adviser.................................. 9 ARTICLE 5 INVESTMENT POLICY 5.1 General Statement of Policy.......................................... 9 5.2 REIT Provisions of the Internal Revenue Code......................... 9 5.3 Additional Investments............................................... 9 5.4 Other Permissible Investments........................................ 10 5.5 Prohibited Investments and Activities................................ 10 5.6 Additional Limitations............................................... 11 5.7 Obligor's Default.................................................... 11
i
PAGE ---- ARTICLE 6 THE SHARES AND SHAREHOLDERS 6.1 Shares............................................................. 11 6.2 Common Shares...................................................... 12 6.3 Preferred Shares................................................... 12 6.4 Legal Ownership of Trust Estate.................................... 12 6.5 Shares Deemed Personal Property.................................... 12 6.6 Share Record; Issuance and Transferability of Shares............... 13 6.7 Dividends or Distributions to Shareholders......................... 13 6.8 Transfer Agent, Dividend Disbursing Agent and Registrar............ 13 6.9 Shareholders' Meetings............................................. 13 6.10 Proxies............................................................ 14 6.11 Reports to Shareholders............................................ 14 6.12 Fixing Record Date................................................. 14 6.13 Notice to Shareholders............................................. 14 Restrictions on Transfer to Preserve Tax Benefit; Designation of 6.14 Shares-in-Trust.................................................... 14 6.15 Legend............................................................. 21 6.16 Shares-in-Trust.................................................... 22 6.17 Exchange Transactions.............................................. 24 ARTICLE 7 LIABILITY OF TRUSTEES, SHAREHOLDERS AND OFFICERS, AND OTHER MATTERS 7.1 Exculpation of Trustees and Officers............................... 24 7.2 Limitation of Liability of Shareholders, Trustees and Officers..... 24 7.3 Express Exculpatory Clauses in Instruments......................... 24 7.4 Indemnification of Trustees and Officers........................... 24 7.5 Right of Trustees and Officers to Own Shares or Other Property and to Engage in Other Business........................................ 25 7.6 Transactions Between the Trustees and the Trust.................... 25 7.7 Restriction of Duties and Liabilities.............................. 26 7.8 Persons Dealing with Trustees or Officers.......................... 26 7.9 Reliance........................................................... 26 ARTICLE 8 DURATION, AMENDMENT, TERMINATION AND QUALIFICATION OF TRUST 8.1 Duration of Trust.................................................. 26 8.2 Termination of Trust............................................... 26 8.3 Amendment Procedure................................................ 27 ARTICLE 9 MISCELLANEOUS 9.1 Applicable Law..................................................... 27 9.2 Index and Headings for Reference Only.............................. 27 9.3 Successors in Interest............................................. 27 9.4 Counterparts....................................................... 27 9.5 Provisions of the Trust in Conflict with Law or Regulations........ 27 9.6 Certifications..................................................... 28 9.7 Recording and Filing............................................... 28 9.8 Resident Agent..................................................... 28 9.9 Names and Addresses of Trustees.................................... 28
ii DECLARATION OF TRUST The below-named Trustees have agreed to hold in trust as Trustees, any and all property, real, personal or otherwise, tangible or intangible, which is transferred, conveyed, or paid to them as such Trustees and all rents, income, profits, and gains therefrom for the benefit of Shareholders hereunder subject to the terms and conditions and for the uses and purposes hereinafter set forth. ARTICLE 1 THE TRUST; DEFINITIONS 1.1 Name. The name of the Trust shall be "Mortgage and Realty Trust". As far as practicable and except as otherwise provided in this Declaration, the Trustees shall conduct the Trust's activities, execute all documents and sue or be sued in the name of the Trust or in their names as Trustees of the Trust. 1.2 Places of Business. The registered office of the Trust in the State of Maryland shall be c/o The Corporation Trust, Incorporated, 32 South Street, Baltimore, Maryland 21202. However, the Trustees may from time to time change such location and maintain other offices or places of business. 1.3 Nature of Trust. The Trust is a real estate investment trust organized under Article 78C of the Annotated Code of the State of Maryland. It is intended that the Trust shall carry on business as a "real estate investment trust" as described in the REIT Provisions of the Internal Revenue Code (as defined herein). The Trust is not intended to be, shall not be deemed to be, and shall not be treated as, a general partnership, limited partnership, joint venture, corporation, joint stock company or association (but nothing herein shall preclude the Trust from being taxable as an association under the REIT Provisions of the Internal Revenue Code), nor shall the Trustees or Shareholders or any of them for any purpose be, or be deemed or be treated in any way whatsoever to be, liable or responsible hereunder as partners or joint venturers. The relationship of the Shareholders to the Trustees shall be solely that of beneficiaries of the Trust and their rights shall be limited to those conferred upon them by this Declaration. 1.4 Definitions. The terms defined in this Section 1.4 whenever used in this Declaration shall, unless the context otherwise requires, have the respective meanings hereinafter specified in this Section 1.4. In this Declaration, words in the singular number include the plural and in the plural number include the singular. (1) Adviser. "Adviser" shall mean any person employed by the Trustees under the provisions of Section 4.1 to manage and administer the affairs of the Trust. (2) Affiliate. "Affiliate" shall mean as to any Person, any other Person which controls, is controlled by or under common control with, such Person or is an officer, director, employee, partner or trustee of such Person or of any other Person which controls, is controlled by, or under common control with, such Person. (3) Appraisal. "Appraisal" shall mean a determination of the market value, as of the date of such determination, of Real Property in its existing state or in a state to be created, taking into consideration existing or available financing where appropriate, (i) by any disinterested independent appraiser who in the judgment of the Trustees is properly qualified to make such a determination, or (ii) by an employee of the Adviser or of an Affiliate of the Adviser if such employee has no economic interest in such Real Property and (A) if such determination is relied upon by the permanent lender (other than the Trust) on the same property or (B) if such employee's appraisals are customarily accepted by institutional customers of the Adviser or an Affiliate of the Adviser which is engaged in the mortgage banking business or (C) if the property to be appraised is a one-to-four family residential property. For purposes of clause (i) above, no person who is a director, officer or employee of the Adviser or of any Affiliate of the Adviser shall be deemed to be a disinterested independent appraiser. (4) Appraised Value. "Appraised Value" shall mean the market value of Real Property as of the date of determination as determined by an Appraisal. B-1 (5) Book Value. "Book Value" of an asset or assets shall mean the value of such asset or assets on the books of the Trust, before provision for amortization, depreciation or depletion and before deducting any indebtedness or other liability in respect of such asset or assets, except that no asset shall be valued at more than its fair market value as determined by the Trustees. (6) By-Laws. "By-Laws" shall mean the regulations referred to in Section 3.3. (7) Capital Funds. "Capital Funds" shall mean Shareholders' Equity plus Long Term Debt less undistributed Net Income of the Trust. (8) Construction Loans. "Construction Loans" shall mean Mortgage loans to finance all or part of the cost of acquiring and improving land and the construction or improvement of buildings thereon. (9) Declaration. "Declaration" shall mean this Declaration of Trust and all amendments or modifications thereof. References in this Declaration to "herein" and "hereunder" shall be deemed to refer to this Declaration and shall not be limited to the particular text, article or section in which such words appear. (10) Development Loans. "Development Loans" shall mean Mortgage loans to finance all or part of the cost of developing vacant land into a site or sites suitable for the construction of buildings thereon or suitable for other residential, commercial, industrial or public uses, including the cost of acquiring land for such purpose. (11) First Mortgage. "First Mortgage" shall mean a Mortgage which takes priority or precedence over all other charges or encumbrances upon the same Real Property and which must be satisfied before such other charges or encumbrances are entitled to participate in the proceeds of any sale or disposition. Such Mortgage may be upon a lessee's interest in Real Property. Such priority shall not be deemed as abrogated by liens for taxes, assessments which are not delinquent or remain payable without penalty, contracts (other than contracts for repayment of borrowed moneys), leases, mechanic's and materialman's liens for work performed and materials furnished which are not in default or are in good faith being contested, and other claims and interests normally deemed in the local jurisdiction not to abrogate the priority of a first mortgage. (12) Indebtedness. "Indebtedness" shall mean the amount as shown on the balance sheet of the Trust of all obligations of the Trust for money borrowed and all obligations issued or assumed by the Trust as full or partial payment for property, in each case except to the extent money shall have been set aside or deposited for the payment thereof. (13) Junior Mortgage. "Junior Mortgage" shall mean any Mortgage other than a First Mortgage. (14) Long Term Debt. "Long Term Debt" shall mean Indebtedness with original final maturities of more than three years from the date of incurring such Indebtedness. (15) Mortgage. "Mortgage" shall mean a mortgage, deed of trust or other security interest in Real Property. (16) Net Assets. "Net Assets" shall mean Total Assets less all Indebtedness of the Trust. (17) Person. "Person" shall mean an individual, a corporation, a partnership, an association, a joint stock company, a trust, a joint venture, any unincorporated organization, or a government or political subdivision thereof. (18) Real Property. "Real Property" shall mean and include land, interests in land, leasehold interests (including but not limited to interests of a lessor or lessee therein), and any buildings, structures, improvements and fixtures located on or used in connection with land, leasehold interests and rights in land or interests therein, but does not include Mortgages, Mortgage loans, or interests therein. (19) REIT Provisions of the Internal Revenue Code. "REIT Provisions of the Internal Revenue Code" shall mean Part II, Subchapter M of Chapter 1, of the Internal Revenue Code of 1954, as now enacted or hereafter amended, or similar provisions of successor statutes, and regulations promulgated thereunder. B-2 (20) Securities. "Securities" shall mean any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. (21) Shareholders. "Shareholders" shall mean as of any particular time the holders of record of outstanding Shares at such time. (22) Shareholders' Equity. "Shareholders' Equity" shall mean the amount of Shareholders' equity as shown on the books of the Trust. (23) Shares. "Shares" shall mean the Common Shares and Preferred Shares in the Trust as described in Section 6.1. (24) Short Term Borrowings. "Short Term Borrowings" shall mean Indebtedness with original final maturities of three years or less from the date of incurring such Indebtedness. (25) Total Assets. "Total Assets" shall mean the total assets of the Trust as shown on its balance sheet, without deducting therefrom any liabilities of the Trust and including depreciable assets therein at the lesser of either (i) the cost of such assets on the books of the Trust less depreciation thereof determined in accordance with generally accepted accounting principles on a straight-line basis over the useful life of such assets used as the basis of depreciation in preparing the Trust's federal income tax returns, or (ii) the fair market value of such assets in the judgment of the Trustees. (26) Trust. "Trust" shall mean the Trust created by this Declaration. (27) Trust Estate. "Trust Estate" shall mean, as of any particular time any and all property, real, personal or otherwise, tangible or intangible, transferred, conveyed or paid to the Trust or Trustees, and all rents, income, profits and gains therefrom, which at such time is owned or held by the Trust or the Trustees. (28) Trustees. "Trustees" shall mean as of any particular time, Trustees holding office under this Declaration at such time, whether they be the Trustees named herein or additional or successor Trustees and shall not include the officers, representatives or agents of the Trust or the Shareholders, but nothing herein shall be deemed to preclude the Trustees from also serving as officers, representatives or agents of the Trust or owning Shares. ARTICLE 2 TRUSTEES 2.1 Number, Term and Qualifications of Trustees. There shall be not less than five nor more than fourteen Trustees, at least a majority of whom shall at all times be persons who are not Affiliates of the Adviser. The names of the Trustees are set forth in Section 9.9. Within the limits set forth in this Section 2.1, and subject to the provisions of any series of Preferred Shares which may at the time be outstanding, the number of Trustees may be increased or decreased from time to time by the Trustees. Subject to the provisions of Section 2.3, each Trustee shall hold office for one year and until the election and qualification of his successor. At each Annual Meeting of Shareholders, the Shareholders entitled to vote for the election of Trustees shall elect Trustees to serve until the next Annual Meeting of Shareholders. There shall be no cumulative voting in the election of Trustees. Trustees may be reelected. A Trustee shall be an individual at least 21 years of age who is not under legal disability. Such individual shall qualify as a Trustee when he has either signed this Declaration or agreed in writing to be bound by it. Unless otherwise required by law, no Trustee shall be required to give bond, surety or security in any jurisdiction for the performance of any duties or obligations hereunder. The Trustees in their capacity as Trustees shall not be required to devote their entire time to the business and affairs of the Trust. B-3 2.2 Compensation and Other Remuneration. The Trustees shall be entitled to receive such reasonable compensation for their services as Trustees as they may determine from time to time. The Trustees shall also be entitled to receive, directly or indirectly, remuneration for services rendered to the Trust in any other capacity, including, without limitation, services as an officer of the Trust, legal, accounting or other professional services, or services as a transfer agent, or underwriter, or otherwise. The Trustees shall be reimbursed for their reasonable expenses incurred in connection with their services as Trustees. Notwithstanding the foregoing, except as provided in Article 7, no Trustee shall receive any fee or other remuneration, directly or indirectly, as a result of any sale of property to or purchase of property from the Trust. 2.3 Resignation, Removal and Death of Trustees. A Trustee may resign at any time by giving written notice to the remaining Trustees at the principal office of the Trust. Such resignation shall take effect on the date such notice is given or at any later time specified in the notice without need for prior accounting. A Trustee may be removed at any time with or without cause by a vote or consent of holders of two-thirds of the outstanding Shares entitled to vote thereon or with cause by two-thirds of the Trustees in office. Upon the resignation or removal of any Trustee, or his otherwise ceasing to be a Trustee, he shall execute and deliver such documents as the remaining Trustees shall require for the conveyance of any Trust property held in his name, shall account to the remaining Trustee or Trustees as they require for all property which he holds as Trustee and shall thereupon be discharged as Trustee. Upon the incapacity or death of any Trustee, his legal representative shall perform the acts set forth in the preceding sentence and the discharge mentioned therein shall run to such legal representative and to the incapacitated Trustee or the estate of the deceased Trustee as the case may be. Notwithstanding failure of any Trustee or his legal representative to execute and deliver documents and to render an accounting as aforesaid, said Trustee shall cease to hold legal title to the Trust Estate as of the time of his resignation, removal, incapacity, death or his otherwise ceasing to be a Trustee. 2.4 Vacancies. If any or all of the Trustees cease to be Trustees hereunder, whether by reason of resignation, removal, incapacity, death or otherwise, such event shall not terminate the Trust or affect its continuity. Until vacancies are filled, the remaining Trustee or Trustees (even though less than three) may exercise the powers of the Trustees hereunder. Except as may otherwise be required by the provisions of any series of Preferred Shares then outstanding, vacancies (including vacancies created by increases in the number of Trustees) may be filled by the remaining Trustee or by a majority of the remaining Trustees even though less than a quorum. If at any time there shall be no Trustees in office, successor Trustees shall be elected by the Shareholders entitled to vote as provided in Section 6.9. 2.5 Successor and Additional Trustees. The right, title and interest of the Trustees in and to the Trust Estate shall also vest in successor and additional Trustees upon their qualification, and they shall thereupon have all the rights and obligations of Trustees hereunder. Such right, title and interest shall vest in the Trustees whether or not conveyancing documents have been executed and delivered pursuant to Section 2.3 or otherwise. 2.6 Action by Trustees. A quorum for all meetings of the Trustees shall be a majority of the Trustees. Unless specifically provided otherwise in this Declaration or in the provisions of any series of Preferred Shares then outstanding, any action of the Trustees may be taken at a meeting by vote of a majority of the Trustees present at such meeting if a quorum is present, or without a meeting by unanimous written consent of the Trustees. The Trustees may participate in meetings by means of conference telephone or similar means of communications equipment. Any agreement, deed, mortgage, lease or other instrument or writing executed by any one or more of the Trustees or by any one or more authorized persons shall be valid and binding upon the Trustees and upon the Trust when authorized by action of the Trustees or as provided in the By-Laws. 2.7 Non-Affiliated Trustees. In order that a majority of the Trustees shall at all times be Persons who are not Affiliates of the Adviser, if at any time, by reason of one or more vacancies, there shall not be such a majority, then within 60 days after such vacancy occurs, the continuing Trustee or Trustees then in office B-4 shall appoint, pursuant to Section 2.4, a sufficient number of other Persons who are not such Affiliates so that there shall be such a majority. ARTICLE 3 TRUSTEES' POWERS 3.1 Power and Authority of Trustees. The Trustees, subject only to the specific limitations contained in this Declaration or in the provisions of any series of Preferred Shares which may be outstanding, shall have, without further or other authorization, and free from any power or control on the part of the Shareholders, full, absolute and exclusive power, control and authority over the Trust Estate and over the business and affairs of the Trust to the same extent as if the Trustees were the sole owners thereof in their own right, and to do all such acts and things as in their sole judgment and discretion are necessary or incidental to, or desirable for, the carrying out of any of the purposes of the Trust or conducting the business of the Trust. Any determination made in good faith by the Trustees of the purposes of the Trust or the existence of any power or authority hereunder shall be conclusive. In construing the provisions of this Declaration, presumption shall be in favor of the grant of powers and authority to the Trustees. The enumeration of any specific power or authority herein shall not be construed as limiting the general powers or authority or any other specified power or authority conferred herein upon the Trustees. 3.2 Specific Powers and Authorities. Subject only to the express limitations contained in this Declaration or in the provisions of any series of Preferred Shares which may be outstanding, and in addition to any powers and authorities conferred by this Declaration or which the Trustees may have by virtue of any present or future statute or rule of law, the Trustees without any action or consent by the Shareholders shall have and may exercise at any time and from time to time the following powers and authorities which may or may not be exercised by them in their sole judgment and discretion and in such manner and upon such terms and conditions as they may from time to time deem proper: (1) To retain, invest and reinvest the capital or other funds of the Trust and, for such consideration as they deem proper, to purchase or otherwise acquire for cash or other property or through the issuance of Shares or other Securities of the Trust and hold for investment real or personal property of any kind, tangible or intangible, in entirety or in participation, all without regard to whether any such property is authorized by law for the investment of trust funds and to possess and exercise all the rights, powers and privileges appertaining to the ownership of the Trust Estate with respect thereto. (2) To increase the capital of the Trust by the issuance of additional Shares at such time or times and for such consideration as may be deemed appropriate by the affirmative vote of a majority of the Trustees, including a majority of the Trustees who are not Affiliates of the Adviser. (3) To sell, rent, lease, hire, exchange, release, partition, assign, mortgage, pledge, hypothecate, grant security interests in, encumber, negotiate, convey, transfer or otherwise dispose of or grant interests in all or any portion of the Trust Estate by deeds, trust deeds, assignments, bills of sale, transfers, leases, mortgages, financing statements, security agreements and other instruments for any of such purposes. (4) To issue other Securities, which may be secured or unsecured and may be subordinated to any indebtedness of the Trust and may be convertible into Shares, all without vote of or other action by the Shareholders, to such Persons for such cash, property or other consideration (including Securities issued or created by, or interests in, any Person) at such time or times and on such terms as may be deemed appropriate by the affirmative vote of a majority of the Trustees, including a majority of the Trustees who are not Affiliates of the Adviser, and to purchase or otherwise acquire, hold, cancel, reissue, sell and transfer any of such Securities; provided, however, that the Trust shall not (i) issue "redeemable securities" as defined in Section 2(a)(32) of the Investment Company Act of 1940; or (ii) issue Long Term Debt unless the historical cash flow of the Trust or the estimated future cash flow of the Trust excluding extraordinary non-recurring items, is sufficient to cover interest payments on such debt securities. B-5 (5) To issue Share Purchase Warrants ("Warrants") which entitle the holders thereof to subscribe for Preferred or Common Shares (which Shares shall be reserved at the time of issuance of such Warrants by the Trustees for issuance upon exercise of such Warrants) at such time or times and on such terms as the Trustees may prescribe. Warrants may be issued to such Persons and for such consideration as the Trustees may from time to time determine, and may be issued in detachable or nondetachable form in conjunction with the issuance of debt securities or as an inducement to those acquiring or underwriting Securities of the Trust, and may be redeemable at the option of the Trust. Warrants shall be evidenced by certificates in such form as the Trustees may approve. (6) To enter into leases, indentures, contracts, obligations, and other agreements for a term extending beyond the term of office of the Trustees and beyond the possible termination of the Trust or for a lesser term. (7) To borrow money, incur indebtedness and issue Securities of the Trust therefor; to guarantee, indemnify or act as surety with respect to payment or performance of obligations of third parties; to enter into other obligations on behalf of the Trust; and to assign, convey, transfer, mortgage, subordinate, pledge, grant security interests in, encumber or hypothecate the Trust Estate to secure any of the foregoing; provided, however, that in no event shall the Trust incur Long Term Debt if after giving effect thereto the total amount of Long Term Debt would exceed 400% of Net Assets or incur any Short Term Borrowings if after giving effect thereto the total amount of Short Term Borrowings would exceed 400% of Net Assets and provided further that the aggregate Long Term Debt and Short Term Borrowings shall not exceed 500% of Net Assets prior to December 31, 1972. Compliance with the provisions of the foregoing proviso shall be determined on the basis of the latest available balance sheet of the Trust (which shall be as of a date not more than 90 days prior to the date of incurring such Indebtedness) adjusted on a pro forma basis to give effect to the incurring of such Indebtedness. (8) To lend money, whether secured or unsecured. (9) To create reserve funds for any purpose. (10) To incur and pay out of the Trust Estate any charges or expenses, and disburse any funds of the Trust, which charges, expenses or disbursements are, in the opinion of the Trustees, necessary or incidental to or desirable for the carrying out of any of the purposes of the Trust or conducting the business of the Trust, including without limitation taxes and other governmental levies, charges and assessments, of whatever kind or nature, imposed upon or against the Trustees in connection with the Trust or the Trust Estate or upon or against the Trust Estate or any part thereof and for any of the purposes herein. (11) To deposit funds of the Trust in banks, trust companies, savings and loan associations and other depositories, whether or not such deposits will draw interest, the same to be subject to withdrawal on such terms and in such manner and by such Person or Persons (including any one or more Trustees, officers, agents or representatives) as the Trustees may determine. (12) To possess and exercise all the rights, powers and privileges appertaining to the ownership of any or all Mortgages or Securities issued or created by, or interests in, any Person, forming part of the Trust Estate, to the same extent that an individual might, and, without limiting the generality of the foregoing, to vote or give any consent, request or notice, or waive any notice, either in person or by proxy or power of attorney, with or without power of substitution, to one or more Persons, which proxies and powers of attorney may be for meetings or action generally or for any particular meeting or action, and may include the exercise of discretionary powers. (13) After approval by the holders of two-thirds of the outstanding Shares entitled to vote, by vote of two-thirds of the Trustees, to cause a corporation or other entity to be organized under the laws of Maryland or any other jurisdiction and transfer the assets of the Trust to it in exchange for its shares or other Securities (which Securities shall then be distributed to the Shareholders) and terminate the Trust; provided that, such new corporation or entity and its shareholders would then be entitled to federal income tax treatment substantially equal to that enjoyed by a qualified real estate investment trust and B-6 its shareholders, and the resulting investment received by Preferred or Common Shareholders would be substantially equal in quality and substantially the same in type as an investment in the Preferred or Common Shares of the Trust, as the case may be. (14) To enter into joint ventures, general or limited partnerships and any other lawful combinations or associations. (15) To elect, appoint, engage or employ officers for the Trust, who may be removed or discharged at the discretion of the Trustees, such officers to have such titles, powers and duties, and to serve such terms, as may be prescribed by the Trustees or by the By-Laws; subject to the provisions of Sections 7.5 and 7.6, to engage or employ any Persons as agents, representatives, employees, or independent contractors (including without limitation real estate advisers, investment advisers, transfer agents, registrars, underwriters, accountants, attorneys at law, real estate agents, managers, appraisers, brokers, architects, engineers, construction managers, general contractors or otherwise) in one or more capacities, and to pay compensation from the Trust for services in as many capacities as such Person may be so engaged or employed; and, except as prohibited by law, to delegate any of the powers and duties of the Trustees to any one or more Trustees, agents, representatives, officers, employees, independent contractors or other Persons except as provided in Article 4 hereof, provided, however, that no such delegation shall be made to an Affiliate of the Adviser except with the approval of a majority of the Trustees who are not Affiliates of the Adviser. (16) To appoint from among the Trustees an executive committee and other committees composed of two or more Trustees, and to delegate to such committees, in the intervals between meetings of the Trustees, any or all of the powers of the Trustees in the management of the business and affairs of the Trust, except the power to declare dividends, issue Shares or recommend to Shareholders any action requiring Shareholders' approval. (17) To determine from time to time the value of all or any part of the Trust Estate and of any services, Securities, property or other consideration to be furnished to or acquired by the Trust, and from time to time to revalue all or any part of the Trust Estate in accordance with such appraisals or other information as the Trustees, in their sole judgment, may deem necessary. (18) To collect, sue for, and receive all sums of money coming due to the Trust, and to engage in, intervene in, prosecute, join, defend, compound, compromise, abandon or adjust, by arbitration or otherwise, any actions, suits, proceedings, disputes, claims, controversies, demands or other litigation relating to the Trust, the Trust Estate or the Trust's affairs, to enter into agreements therefor, whether or not any suit is commenced or claim accrued or asserted and, in advance of any controversy, to enter into agreements regarding arbitration, adjudication or settlement thereof. (19) To renew, modify, release, compromise, extend, consolidate, or cancel, in whole or in part, any obligation to or of the Trust. (20) To extend, renew or reissue outstanding rights, warrants or options to purchase Shares of the Trust. (21) To purchase and pay for out of the Trust Estate insurance contracts and policies insuring the Trust Estate against any and all risks and insuring the Trust, the Trustees, the Shareholders or the officers of the Trust, or any or all of them, against any and all claims and liabilities of every nature asserted by any Person arising by reason of any action alleged to have been taken or omitted by the Trust or by the Trustees, Shareholders, or officers. (22) To cause legal title to any of the Trust Estate to be held by or in the name of the Trustees or, except as prohibited by law, by or in the name of the Trust or one or more of the Trustees or any other Person, on such terms, in such manner, with such powers in such Person as the Trustees may determine, and with or without disclosure that the Trust or Trustees are interested therein. (23) To adopt a fiscal year for the Trust, and from time to time to change such fiscal year. (24) To adopt and use a seal (but the use of a seal shall not be required for the execution of instruments or obligations of the Trust). B-7 (25) To file any and all documents and take any and all such other action as the Trustees, in their sole judgment, may deem necessary in order that the Trust may lawfully conduct its business in any jurisdiction. (26) To change the name of the Trust. (27) To adopt a plan for reinvestment by Shareholders of distributions of the Trust containing provision for the sale of Shares by the Trust at book value in the event market value is higher and such other provisions as the Trustees may determine. (28) To do all other such acts and things as are incident to the foregoing, and to exercise all powers which are necessary or useful to carry on the business of the Trust, to promote and attain any of the purposes for which the Trust is formed, and to carry out the provisions of this Declaration. 3.3 By-Laws. The Trustees may make, adopt, amend or repeal By-Laws containing provisions relating to the government of the Trust, and the administration of its affairs, including its rights or powers and the rights or powers of its Shareholders, Trustees or officers not inconsistent with law or with this Declaration or the provisions of any series of Preferred Shares which may then be outstanding. ARTICLE 4 ADVISORY AGREEMENT 4.1 Employment of Adviser. The Trustees are responsible for the general policies of the Trust and for such general supervision of the business of the Trust conducted by all officers, agents, employees, advisers, managers or independent contractors of the Trust as may be necessary to insure that such business conforms to the provisions of this Declaration. However, the Trustees shall not be required personally to conduct the business of the Trust, and, consistent with their ultimate responsibility as stated above, the Trustees shall have the power to appoint, employ or contract with any Person or Persons (including one or more of themselves or any Person in which one or more of them may be directors, officers, shareholders, partners or trustees) as the Trustees may deem necessary or proper for the transaction of the business of the Trust, and for such purpose may grant or delegate such authority to any such Person as the Trustees may in their sole discretion deem necessary or desirable without regard to whether such authority is normally granted or delegated by Trustees; provided, however, that any determination to employ or contract with the Adviser or an Affiliate of a Trustee or the Adviser shall be valid only if made or ratified with the approval of a majority of the Trustees who are not such Affiliates. The Trustees shall have the power to determine the terms and compensation of the Adviser or any other Person whom they may employ or with whom they may contract. The Trustees may exercise broad discretion in allowing the Adviser to administer and regulate the operations of the Trust, to act as agent for the Trust, to execute documents on behalf of the Trustees, and to take action which conforms to general policies and general principles previously established by the Trustees. 4.2 Term. The Trustees shall not enter into any contract with an Adviser unless such contract has an initial term of not more than two years and provides that it may be terminated by the Trust on not more than 60 days notice by the affirmative vote of a majority of the Trustees who are not Affiliates of the Adviser. 4.3 No Restrictions on Adviser. Nothing contained in this Declaration shall limit or restrict the right of any director, officer, employee or shareholder of the Adviser, whether or not also a Trustee, officer or employee of the Trust, to engage in any other business or to render services of any kind to any other Person. 4.4 Duties of Adviser. The Adviser shall: (i) administer the Trust's day-to- day investment operations; (ii) serve as the Trust's investment adviser and consultant on policy decisions to be made by the Trustees; (iii) present to the Trust opportunities for investment within the Trust's investment policies; (iv) investigate, select and recommend to the Trustees, and conduct relations with, accountants, mortgage loan originators and B-8 correspondents, lenders, builders, developers and others as necessary in connection with the Trust's mortgage and other investments, and enter into appropriate contracts with such persons in its own name or the Trust's; and (v) generally take such other action as the Trustees may request in connection with the conduct of the business of the Trust. 4.5 Agreement with Affiliate of Adviser. In the event that the Adviser shall be an Affiliate of a Person engaged in the mortgage banking business, the employment of the Adviser by the Trust shall be conditioned upon an undertaking by such Affiliate that such Affiliate shall consult with the Adviser and present to the Adviser, for presentation to the Trust, opportunities to acquire mortgage loans and other investments which are consistent with the investment policies of the Trust and which are generally representative of comparable investments of similar quality being made or placed by such Affiliate with other institutional investors and shall furnish the Adviser and the Trust with information as to any investments within the Trust's investment policies made or placed by such Affiliate with other institutions. The Trust may also enter into agreements with Affiliates of the Adviser for servicing any or all of the Trust's loans or for any other purposes, subject to the provisions of Section 7.6 hereof. ARTICLE 5 INVESTMENT POLICY 5.1 General Statement of Policy. It is the general investment policy of the Trust to invest in long term investments consisting principally of permanent First Mortgage loans, Junior and wrap-around Mortgage loans, net lease financings, sale leaseback transactions, leasehold Mortgage loans and ownership or other interests in Real Property or in Persons involved in owning, operating, leasing, developing, financing or dealing in Real Property, which investments shall ordinarily be made in connection with properties having proven or projected income-producing capabilities and in short term and intermediate term Mortgage loans, warehouse loans, and installment contracts. The Trustees may make commitments to make investments consistent with the foregoing policies and may also participate in investments with other investors on the same or different terms, including investors to whom the Adviser may also act as adviser. The Trustees shall endeavor to invest the Trust's assets in accordance with the investment policies set forth in this Article 5, but the failure so to invest its assets shall not affect the validity of any investment made or action taken by the Trustees. 5.2 REIT Provisions of the Internal Revenue Code. The Trustees intend at all times to make investments in such a manner as to comply with the requirements of the REIT Provisions of the Internal Revenue Code with respect to the composition of the Trust's investments and the derivation of its income; provided, however, that no Trustee, officer, employee, agent, investment adviser or independent contractor of the Trust shall be liable for any act or omission resulting in the loss of tax benefits under the Internal Revenue Code, except as provided in Section 7.1 hereof. 5.3 Additional Investments. The Trustees may also invest the Trust Estate in the ownership of or participation in the ownership of: (1) Shares of other real estate investment trusts to the extent permitted by the REIT Provisions of the Internal Revenue Code and which do not hold investments or engage in the activities prohibited by Section 5.5; (2) Securities, including but not limited to convertible or subordinated bonds, other than those referred to in Section 5.4; and (3) Office and other equipment leased to tenants of Real Property owned by the Trust or subject to the lien of a Mortgage securing a Mortgage loan owned by the Trust, if the Trustees in good faith determine that the making of such investments will not disqualify the Trust as a real estate investment trust under the REIT Provisions of the Internal Revenue Code. B-9 5.4 Other Permissible Investments. To the extent that the Trust has assets not invested in accordance with the foregoing Sections of this Article 5, the Trustees may employ such assets by investing them in: (1) Obligations of the United States Government or agencies thereof; (2) Obligations of any state or territory of the United States of America or any political subdivision thereof or any agencies of any thereof; (3) Evidences of deposits in or obligations of banking institutions and savings institutions which are members of the Federal Deposit Insurance Corporation or of the Federal Home Loan Bank System; (4) Commercial paper; and (5) Financial futures, forward and standby contracts for the deferred or future delivery of the obligations and securities described in Subsections (1) through (4) of this Section 5.4. 5.5 Prohibited Investments and Activities. The Trustees shall not engage in any of the following investment practices or activities: (1) Invest in any Mortgage loan (except those insured by the Federal Housing Administration) if immediately thereafter and as a result thereof any one borrower on any one project shall be obligated to the Trust, either primarily or secondarily, in an amount exceeding 15% of Total Assets; provided, however, that in the calculation of any obligor's obligation to the Trust for the purpose of this limitation there shall not be included any payments which any obligor may be required to make to the Trust on account of senior Mortgages held by other creditors in connection with wrap-around loans made by the Trust; (2) Purchase (which shall not be deemed to include the receipt of equity interests in connection with loans made by the Trust) Real Property at a price in excess of its Appraised Value determined by a disinterested independent appraiser as of a date not more than 90 days prior to the date of such purchase; (3) Invest more than 10% of the Total Assets of the Trust Estate in the ownership of, participation in the ownership of, or loans on, unimproved non-income-producing Real Property, other than Real Property which is expected to be improved within a reasonable period of time; (4) Make warehousing loans secured by the pledge of First Mortgage loans to the Adviser or any Affiliate of the Adviser; (5) Invest in commodities, bullion or chattels except such chattels as are required in the day-to-day business of the Trust or in connection with its Mortgage loans or Real Property; (6) Invest in any contracts for the sale of real estate; provided, however, that nothing herein shall prevent the holding of contracts of sale as additional security for Mortgage loans made by the Trust and the ownership of such contracts of sale upon the foreclosure of or realization upon such security interests; (7) Engage in any short sale, except that the Trustees may purchase or sell financial futures, forward and standby contracts for the deferred or future delivery of the obligations and securities described in Section 5.4; (8) Engage in trading as compared with investment activities or engage in underwriting or agency distribution of securities issued by others, but this prohibition shall not prevent the Trustees from selling participation in Mortgage loans or interests in Real Property or from purchasing or selling financial futures, forward and standby contracts as permitted in Section 5.4(5) and 5.5(7); (9) Invest in any Real Property which is subject to a Mortgage to any person other than a bank, insurance company, pension fund, other institutional lender, or corporation or trust engaged in the business of mortgage investments except in the case of a purchase money Mortgage; (10) Hold property primarily for sale to customers in the ordinary course of the trade or business of the Trust, but this prohibition shall not be construed to deprive the Trust of the power to sell any property which it owns at any time; B-10 (11) Invest in companies for the purpose of exercising control or management, but freedom of action is reserved with respect to exercise of voting rights in respect of securities in the portfolio of the Trust; (12) Invest in equity securities (except equity securities related to long term mortgage loans made by the Trust or leases of real property owned by the Trust) issued by any Person which to the actual knowledge of the Trustees is holding investments or engaging in activities prohibited to the Trust, if, after giving effect to the investment, the aggregate amount of such investment exceeds 5% of Total Assets. Compliance with the provisions of paragraphs (1) and (4) shall be determined on the basis of the latest available balance sheet of the Trust (which need not be audited but which shall be as of a date not more than 90 days prior to the date of making such investment) adjusted on a pro forma basis to give effect to the making of such investment. 5.6 Additional Limitations. The By-Laws may contain additional limitations on the investments of the Trust, which limitations may be changed from time to time by amendment of the By-Laws as provided therein. 5.7 Obligor's Default. Notwithstanding any provision in any Article of this Declaration, when an obligor to the Trust is in default under the terms of any obligation to the Trust, the Trustees shall have the power to pursue any remedies permitted by law which in their sole judgment are in the interest of the Trust and the Trustees shall have the power to enter into any necessary investment, commitment, or obligation of the Trust resulting from the pursuit of such remedies or necessary or desirable to dispose of property acquired in the pursuit of such remedies. ARTICLE 6 THE SHARES AND SHAREHOLDERS 6.1 Shares. (1) The units into which the beneficial interests in the Trust will be divided shall be designated as Shares, which Shares shall be of two classes, one of which shall be designated Common Shares and one of which shall be designated Preferred Shares. All such Shares shall have a par value of $1.00 per share. The certificates evidencing the Shares shall specify the class and series of such Shares and shall be in such form and signed (manually or by facsimile) on behalf of the Trust in such a manner as the Trustees may from time to time prescribe or as may be prescribed in the By-Laws. The certificates shall be negotiable and title thereto and to the Shares represented thereby shall be transferable by assignment and delivery thereof, subject, however, to the provisions of Section 6.15. The number of Common Shares which may be issued is limited to 20,000,000 and the number of Preferred Shares which may be issued is limited to 3,500,000. The Shares may be issued for such consideration as the Trustees shall determine or by way of share dividend or share split in the discretion of the Trustees; provided, however, that except in the case of a share dividend or share split, the Shares shall be issued for a consideration of at least $1.00 value per share. The Shares shall be held by at least 100 Persons. Shares reacquired by the Trust shall no longer be deemed outstanding and shall have no voting or other rights unless and until reissued. Shares reacquired by the Trust may be cancelled by action of the Trustees. All Shares shall be fully paid and nonassessable by or on behalf of the Trust upon receipt of full consideration for which they have been issued or without additional consideration if issued by way of share dividend or share split. (2) Upon the Effective Date (as hereinafter defined in Section 6.14), every 33.33 shares of outstanding Common Shares shall be automatically reclassified, changed and converted into 1 share of Common Shares and the authorized number of Common Shares will be limited to 20,000,000. No fractional shares of Common Shares shall be issued upon such conversion, but in lieu thereof, fractions of 1/2 or greater shall be rounded to the next greater whole number and fractions of less than 1/2 shall B-11 be rounded to the next lower whole number. No consideration will be paid in respect of such fractional interests that are rounded down. Unless otherwise required or requested by the holders thereof, the share certificates representing the Common Shares outstanding prior to the Effective Date shall represent such Common Shares as reclassified, changed and converted following the Effective Date. 6.2 Common Shares. All of the Common Shares shall be of the same class and shall have equal voting, dividend or distribution, liquidation and other rights. Subject to the provisions of any series of Preferred Shares which may at the time be outstanding, the holders of Common Shares shall be entitled to receive, when and as declared by the Trustees out of any funds legally available for the purpose, such dividends or distributions as may be declared from time to time by the Trustees in accordance with Section 6.7. In the event of the termination of the Trust pursuant to Section 12.3, or upon the distribution of its assets, after the payment in full or the setting apart for payment of such preferential amounts, if any, as the holders of Preferred Shares at the time outstanding shall be entitled, the remaining assets of the Trust available for payment and distribution to Shareholders shall, subject to any participating or similar rights of Preferred Shares at the time outstanding, be distributed ratably among the holders of Common Shares at the time outstanding in accordance with Section 8.2. Common Shares shall not entitle the holder to preference, conversion, exchange or preemptive rights of any kind. 6.3 Preferred Shares. The Trustees shall have power by resolution or resolutions, to the extent not inconsistent with the provisions of this Declaration, to divide and issue Preferred Shares in series, to fix the number of Preferred Shares constituting any such series and to set or change the preferences, conversion or other rights, voting powers, restrictions, including restrictions on transferability, limitations as to dividends, qualifications or terms or conditions of redemption of such Preferred Shares or any series thereof. The Trustees shall have power, unless otherwise provided in such resolution or resolutions as may be adopted pursuant to this Section 6.3 and to the extent not inconsistent with the provisions of this Declaration, to increase or decrease by resolution (but not below the number of Preferred Shares thereof then outstanding) the number of Preferred Shares of any series subsequent to the issue of Preferred Shares of that series. Except as provided by the provisions of a series of Preferred Shares, Preferred Shares of that series shall not entitle the holder to preference, conversion, exchange or preemptive rights of any kind. Before the Trust issues any Preferred Shares or any series thereof, or sets or changes the preferences, conversion or other rights, voting powers, restrictions, including restrictions on transferability, limitations as to dividends, qualifications or terms or conditions of redemption with respect to Preferred Shares or any series thereof, the Trustees shall file Articles Supplementary for record with the Department of Assessments and Taxation of the State of Maryland which shall set forth a description of the Preferred Shares or series thereof including the preferences, conversion and other rights, voting powers, restrictions, including restrictions on transferability, limitations as to dividends, qualifications and terms and conditions of redemption, as set or changed by the Trustees and which shall state that such Preferred Shares or series thereof have been classified or reclassified under the authority contained in this Declaration of Trust. 6.4 Legal Ownership of Trust Estate. The legal ownership of the Trust Estate and the right to conduct the business of the Trust are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest in the Trust conferred by their Shares issued hereunder and, subject to the provisions of Section 8.2, they shall have no right to compel any partition, division, dividend or distribution of the Trust or any of the Trust Estate. 6.5 Shares Deemed Personal Property. The Shares shall be personal property. The Common Shares shall confer upon the holders thereof only the interest and rights specifically set forth in this Declaration. The Preferred Shares shall confer upon the holders thereof only the interest and rights specifically set forth in this Declaration and in the resolution or resolutions adopted by the Trustees pursuant to Section 6.3. The death, insolvency or incapacity of a Shareholder shall not dissolve or terminate the Trust or affect its continuity nor give his legal representative any rights whatsoever, whether against or in respect of other Shareholders, the Trustees or the Trust Estate or otherwise except the sole right to demand and, subject to the provisions of this Declaration, the By-Laws and any requirements of law, to receive a new certificate for Shares registered in the name of such legal representative, in exchange for the certificate held by such Shareholder. B-12 6.6 Share Record; Issuance and Transferability of Shares. Records shall be kept by or on behalf of and under the direction of the Trustees, which shall contain the names and addresses of the Shareholders, the class, series and number of Shares held by them respectively, and the numbers of the certificates representing the Shares, and in which there shall be recorded all transfers of Shares. The Persons in whose names certificates are registered on the records of the Trust shall be deemed the absolute owners of the Shares represented thereby for all purposes of this Trust; but nothing herein shall be deemed to preclude the Trustees or officers, or their agents or representatives, from inquiring as to the actual ownership of Shares. Until a transfer is duly registered on the records of the Trust, the Trustees shall not be affected by any notice of such transfer, either actual or constructive. The payment thereof to the Person in whose name any Shares are registered on the records of the Trust or to the duly authorized agent of such Person (or if such Shares are so registered in the names of more than one Person, to any one of such Persons or to the duly authorized agent of such Person), shall be a sufficient discharge for all dividends or distributions payable or deliverable in respect of such Shares and from all liability to see to the application thereof. The By-Laws may provide for the regulation of the transfer of Share certificates and the Shares represented thereby. 6.7 Dividends or Distributions to Shareholders. The Trustees may from time to time declare and pay to holders of Preferred and Common Shares such dividends or distributions in cash or other property, out of current or accumulated income, capital, capital gains, principal, surplus, proceeds from the increase or refinancing of Trust obligations, or from the sale of portions of the Trust Estate or from any other source as the Trustees in their discretion shall determine, subject to the provisions of any series of Preferred Shares which may at the time be outstanding. Holders of Preferred and Common Shares shall have no right to any dividend or distribution unless and until declared by the Trustees. The Trustees shall furnish the holders of Preferred and Common Shares at the time of each such distribution with a statement in writing advising as to the source of the funds so distributed or that the source thereof has not then been determined, in which event a statement in writing as to such source shall be sent to each Shareholder who received the distribution not later than 90 days after the close of the fiscal year in which the distribution was made. 6.8 Transfer Agent, Dividend Disbursing Agent and Registrar. The Trustees shall have power to employ one or more transfer agents, dividend disbursing agents and registrars and to authorize them on behalf of the Trust to keep records, to hold and disburse any dividends and distributions, and to have and perform in respect of all original issues and transfers of Shares, dividends and distributions and reports and communications to Shareholders, such powers and duties customarily had and performed by transfer agents, dividend disbursing agents and registrars as may be conferred upon them by the Trustees. 6.9 Shareholders' Meetings. There shall be an annual meeting of the Shareholders at such time and at such convenient place within or without the State of Maryland as provided in or pursuant to the By-Laws at which Trustees shall be elected and any other proper business may be conducted. The Annual Meeting of Shareholders shall be held after delivery to the Shareholders of the report specified in Section 6.11 and within six months after the end of each fiscal year. Special meetings of Shareholders may be called by the Trustees and such other Persons as shall be provided in the By-Laws and shall be called upon the written request of Shareholders holding not less than 25% of the outstanding Shares of the Trust entitled to vote, in the manner provided in or pursuant to the By-Laws. If there shall be no Trustees, a special meeting of the Shareholders shall be held promptly for the election of successor Trustees. Notice of any special meeting shall state the purposes of the meeting. At each Shareholders' meeting each Shareholder of record of a Common Share shall be entitled to one vote for each Common Share standing in his name on the books of the Trust. The holders of Preferred Shares of any series shall be entitled to vote upon any matter at any Shareholders' meeting only to the extent specified in the resolution or resolutions providing for such series adopted by the Trustees. A majority of the outstanding Shares entitled to vote at any meeting represented in person or by proxy shall constitute a quorum at such meeting. The vote or consent of the holders of two-thirds of the outstanding Shares entitled to vote shall be required to approve the nature and amount of the consideration and the other principal terms of any transaction involving the sale, lease, exchange or other disposition of substantially all of the Trust Estate as a whole. Whenever Shareholders are required or permitted to take any action, such B-13 action may be taken, except as otherwise provided by this Declaration or the provisions of any series of Preferred Shares which may be outstanding or required by law, by a majority of the votes cast at a meeting of Shareholders at which a quorum is present by holders of Shares entitled to vote thereon, or without a meeting by written consent setting forth the action so taken signed by the holders of a majority of the outstanding Shares entitled to vote thereon or such larger proportion thereof as would be required for a vote of Shareholders at a meeting. Written notice of any action taken by written consent shall be given all Shareholders who have not signed such consent at least ten days prior to the effective date of such action. The vote or consent of Shareholders shall not be required for the pledging, hypothecating, granting security interests in, mortgaging, or encumbering of all or any of the Trust Estate, or for the sale, lease, exchange or other disposition of less than substantially all of the Trust Estate as a whole. 6.10 Proxies. Whenever the vote or consent of Shareholders is required or permitted under this Declaration, such vote or consent may be given either directly by the Shareholder or by a proxy in the form provided in or pursuant to the By-Laws. The Trustees may solicit such proxies from the Shareholders or any of them in any matter requiring or permitting the Shareholders' vote or consent. 6.11 Reports to Shareholders. (1) Not later than 120 days after the close of each fiscal year of the Trust, the Trustees shall mail a report of the business and operation of the Trust during such fiscal year to the Shareholders, which report shall constitute the accounting of the Trustees for such fiscal year. The report shall be in such form and have such content as the Trustees deem proper. Each Annual Report shall include a balance sheet and statement of surplus of the Trust as of the close of the preceding fiscal year and a statement of income of the Trust for such preceding fiscal year together with a comparable statement of income for the preceding fiscal year. Such financial statements shall be accompanied by a report of an independent certified public accountant. A manually signed copy of the accountant's report shall be filed with the Trustees. (2) Within 90 days after the close of each of the first three quarters of each fiscal year, the Trustees shall send interim reports containing summary financial statements (which may be unaudited) to the Shareholders, having such form and content as the Trustees deem proper. 6.12 Fixing Record Date. The By-Laws may provide for fixing or, in the absence of such provision, the Trustees may fix, in advance, a date as the record date for determining the Shareholders entitled to notice of or to vote at any meeting of Shareholders or to express consent to any proposal without a meeting, or for the purpose of determining Shareholders entitled to receive payment of any dividend or distribution (whether before or after a termination of the Trust) or any report or other communication from the Trustees; or for any other purpose. The record date so fixed shall be not less than ten days nor more than 60 days prior to the date of the meeting or event for the purposes of which it is fixed. 6.13 Notice to Shareholders. Any notice of meeting or other notice, communication or report to any Shareholders shall be deemed duly delivered to such Shareholder when such notice, communication or report is deposited, with postage thereon prepaid, in the United States mail, addressed to such Shareholder at his address as it appears on the records of the Trust or is delivered in person to such Shareholder. 6.14 Restrictions on Transfer to Preserve Tax Benefit; Designation of Shares- in-Trust. (1) Definitions. For the purposes of this Declaration of Trust, the following terms shall have the following meanings: "Beneficial Ownership" shall mean ownership of Capital Stock, either directly or constructively, through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) and Section 856(h)(3) of the Code. The terms "Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall have the correlative meanings. "Beneficiary" shall mean, with respect to any Special Trust, one or more organizations described in each of Section 170(b)(1)(A) (other than clauses (vii) and (viii) thereof) and Section 170(c)(2) of the Code B-14 which are named by the Special Trustee as the beneficiary or beneficiaries of such Special Trust, in accordance with the provisions of Section 6.16(1), provided that the selection of such beneficiary or beneficiaries would not cause any of the restrictions set forth in Section 6.14(2) to be violated. "Capital Stock" shall mean Common Shares or Preferred Shares and shall include all Preferred Shares or Common Shares that are held as Shares-in- Trust in accordance with the provisions of Section 6.16(1). "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto. "Constructive Ownership" shall mean ownership, either directly or constructively, through the application of Section 318 of the code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns," and "Constructively Owned" shall have the correlative meanings. "Constructive Ownership Limit" shall mean 9.9% of the value of the outstanding Capital Stock of the Trust. "Effective Date" shall mean the "Effective Date" as defined in the Plan of Reorganization of Mortgage and Realty Trust under Chapter 11 of the Bankruptcy Code, as filed with the United States Bankruptcy Court for the Central District of California during the Company's fiscal year ended September 30, 1995, as the same may be amended from time to time. "Equity Shares" shall mean either Common Shares or Preferred Shares that are not held as Shares-in-Trust in accordance with the provisions of Section 6.16(1). "Existing Constructive Holder" shall mean any Person that is an Existing Holder. "Existing Holder" shall mean (i) Heine Securities Corporation, and any entity for which it may hold shares of Capital Stock as agent, including without limitation, Mutual Series Fund, Inc., Broadway Ventures, Mutual Beacon Fund, Mutual Discovery Fund, The Common Fund, Orion Fund Ltd. and any entity for which any of the foregoing may hold shares of Capital Stock as agent (collectively, the "Mutual Group"), (ii) Fidelity Management & Research Company, any entity for which it may hold shares of Capital Stock as agent, including without limitation, Fidelity Capital & Income Fund, Inc. and Belmont Capital Partners II, L.P. and any entity for which any of the foregoing may hold shares of Capital Stock as agent (collectively, the "Fidelity Group"), (iii) Angelo Gordon & Co., L.P., any entity for which it may hold shares of Capital Stock as agent, including without limitation, GAM Arbitrage Investments, Inc., GAM Special Situations, L.P., AG Arb Partners, L.P., AG Eleven Partners, L.P., Common Fund 103-70700-2-8, Common Fund 103-70600-2-9, A.G.C.P., L.P., 40153 Partnership, 40154 Partnership, Montrose Corporation, AG Super Fund, L.P., AG Super Fund International Partners, L.P., Treetop Partners, L.P., and Nutmeg Partners, L.P., and any entity for which any of the foregoing may hold shares of Capital Stock as agent (collectively, the "Angelo Gordon Group") and (iv) Intermarket Corporation and any entity for which it may hold shares of Capital Stock as agent, including without limitation, Fernwood Associates, L.P., Fernwood Restructuring Ltd., Fernwood Total Return Fund, L.P., Fernwood Total Return Holdings, Ltd., and Fernwood Foundation Fund and any entity for which any of the foregoing may hold shares of Capital Stock as agent (collectively, the "Intermarket Group"). Each individual entity or other member of the Mutual Group, Fidelity Group or Angelo Gordon Group together with Intermarket Corporation shall be an Existing Holder. "Existing Holder Limit" (i) for Belmont Capital Partners II, L.P. initially shall mean the greater of the Ownership Limit and 15% of the value of the outstanding Capital Stock of the Trust, (ii) for Fernwood Associates, L.P. initially shall mean the greater of the Ownership Limit and 15% of the value of the outstanding Capital Stock of the Trust, (iii) for Fernwood Restructurings, Ltd. initially shall mean the greater of the Ownership Limit and 15% of the value of the outstanding Capital Stock of the Trust, (iv) for Fidelity Capital & Income Fund, Inc. initially shall mean the greater of the Ownership Limit and 12% of the value of the outstanding Capital Stock of the Trust, (v) for Mutual Beacon Fund initially shall mean the greater of the Ownership Limit and 40% of the value of the outstanding Capital Stock of B-15 the Trust, (vi) for Mutual Discovery Fund initially shall mean the greater of the Ownership Limit and 12% of the value of the outstanding Capital Stock of the Trust, and (vii) for any other member of the Mutual Group, Fidelity Group, Angelo Gordon Group or Intermarket Group initially shall mean 9.9% of the value of the outstanding Capital Stock of the Trust; provided, however, that the Existing Holder Limit shall mean 100% of the outstanding Capital Stock of the Trust for any Existing Holder for the period during which the Existing Holder is described in Section 6.14(11). From and after the Effective Date, the secretary of the Trust shall maintain and, upon request, make available to each Existing Holder a schedule which sets forth the then current Existing Holder Limits for each Existing Holder. "Existing Holder Shares" shall have the meaning assigned to such term in Section 6.14(12). "Market Price" on any date shall mean the average of the Closing Price for the five consecutive Trading Days ending on such date. The "Closing Price" on any date shall mean the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Equity Shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Equity Shares are listed or admitted to trading, or, if the Equity Shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or if not so quoted, the average of the high bid and low asked prices in the over-the- counter market, as reported by the NASDAQ National Market system, or, if such system is no longer in use, the principal other automated quotations system that may then be in use or, if the Equity Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Equity Shares selected by the Trustees. "Trading Day" shall mean a day on which the principal national securities exchange on which the Equity Shares are listed or admitted to trading is open for the transaction of business or, if the Equity Shares are not listed or admitted to trading on any national securities exchange, shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "Non-Transfer Event" shall mean an event other than a purported Transfer that would cause (i) any Person to Beneficially Own Capital Stock in excess of the Ownership Limit (in the case of any Person other than an Existing Holder) or the applicable Existing Holder Limit (in the case of an Existing Holder) or (ii) any Person, other than an Existing Constructive Holder, to Constructively Own Capital Stock in excess of the Constructive Ownership Limit. "Ownership Limit" shall mean 9.9% of the value of the outstanding Capital Stock of the Trust. "Permitted Transferee" shall mean any Person designated as a Permitted Transferee in accordance with the provisions of Section 6.16(5). "Person" shall mean an individual, corporation, partnership, estate, limited liability company, unincorporated organization, joint venture, state or political subdivision, governmental agency, trust, a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, an association, a private foundation within the meaning of Section 509(a) of the Code, a joint stock company, other entity, or a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. "Prohibited Owner" shall mean, with respect to any purported Transfer described in Section 6.14(2) or Non-Transfer Event, any Person who, but for the provisions of Section 6.14(2), would own record title to Capital Stock. "REIT" shall mean a real estate investment trust under the REIT Provisions. "REIT Provisions" shall mean Sections 856 through 860 of the Code, and the regulations thereunder. "Restriction Termination Date" shall mean the first day after the Effective Date on which the Trustees determine that it is no longer in the best interests of the Trust to attempt to continue to qualify as a REIT. B-16 "Shares-in-Trust" shall mean any Capital Stock designated as Shares-in- Trust pursuant to Section 6.14(3). "Special Trust" shall mean any separate trust created pursuant to Section 6.16(1) and administered in accordance with the terms of Section 6.16, for the exclusive benefit of any Beneficiary. "Special Trustee" shall mean any person or entity unaffiliated with the Trust, any Prohibited Owner (and, if different, any purported beneficial transferee for whom the Prohibited Owner would have acquired Capital Stock but for Section 6.14(2)) and any Beneficiary, such Special Trustee to be designated by the Trust to act as trustee of any Special Trust, or any successor trustee thereof. "Transfer" shall mean any issuance, sale, transfer, gift, hypothecation, pledge, assignment devise, or other disposition of Capital Stock (including, without limitation, (i) the granting of any option or entering into any agreement for the sale, transfer, assignment, or other disposition of Capital Stock or (ii) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Capital Stock), whether voluntary or involuntary, whether of record, constructively, or beneficially and whether by operation of law or otherwise. "Transfer Violation" shall have the meaning assigned to such term in Section 6.14(3). "Underwriter" shall mean a securities firm or similar entity solely in its capacity as a party to an underwriting agreement with the Trust entered into with the intent of such firm or other entity of acquiring securities of the Trust for resale, but only to the extent any Capital Stock is held by it in its capacity as an Underwriter (and then, only for a period not to exceed ninety days). "Unrecovered Excess Dividends" shall mean, with respect to a Prohibited Owner, the dollar amount of any dividends or distributions received by such Prohibited Owner which are described in the second sentence of Section 6.16(2), but only to the extent such amount has not been recovered by the Trust and paid over to the Special Trustee or for the benefit of the Beneficiary in accordance with Section 6.16(2). (2) Restrictions on Ownership and Transfers. The following restrictions on ownership and transfers are subject to Sections 6.14(11) and 6.14(13) of this Declaration of Trust: (i) Except as otherwise provided in Section 6.14(10), from and after the Effective Date and prior to the Restriction Termination Date, no Person (other than an Existing Holder) shall Beneficially Own Capital Stock in excess of the Ownership Limit, and no Existing Holder shall Beneficially Own Capital Stock in excess of the Existing Holder Limit for such Existing Holder. (ii) Except as otherwise provided in Section 6.14(10), from and after the Effective Date and prior to the Restriction Termination Date, no Person (other than an Existing Constructive Holder) shall Constructively Own Capital Stock in excess of the Constructive Ownership Limit. (iii) Except as otherwise provided in Section 6.14(10), from and after the Effective Date and prior to the Restriction Termination Date, any Transfer that, if effective, would result in any Person other than an Existing Holder Beneficially Owning Capital Stock in excess of the Ownership Limit shall be void ab initio as to the Transfer of that number of shares of Capital Stock which would be otherwise Beneficially Owned by such Person in excess of the Ownership Limit, and the intended transferee shall acquire no rights or interest whatsoever in such excess shares of Capital Stock. (iv) Except as otherwise provided in Section 6.14(10), from and after the Effective Date and prior to the Restriction Termination Date, any Transfer that, if effective, would result in any Existing Holder Beneficially Owning Capital Stock in excess of the applicable Existing Holder Limit shall be void ab initio as to the Transfer of that number of shares of Capital Stock which would be otherwise Beneficially Owned by such Person in excess of the applicable Existing Holder Limit, and such Existing Holder shall acquire no rights or interest whatsoever in such excess shares of Capital Stock. (v) Except as otherwise provided in Section 6.14(10), from and after the Effective Date and prior to the Restriction Termination Date, any Transfer that, if effective, would result in any Person (other than an Existing Constructive Holder) Constructively Owning Capital Stock in excess of the Constructive Ownership Limit shall be void ab initio as to the Transfer of that number of shares of Capital Stock which would be otherwise Constructively Owned in excess of the Constructive B-17 Ownership Limit, and the intended transferee shall acquire no rights or interest whatsoever in such excess shares of Capital Stock. (vi) Except as otherwise provided in Section 6.14(10), from and after the Effective Date and prior to the Restriction Termination Date, any Transfer or Non-Transfer Event that, if effective, would result in the shares of Capital Stock being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution) shall be void ab initio as to the Transfer of that number of shares of Capital Stock which would be otherwise beneficially owned (determined without reference to any rules of attribution) by the transferee, and the intended transferee shall acquire no rights or interest whatsoever in such shares of Capital Stock. (vii) From and after the Effective Date and prior to the Restriction Termination Date, any Transfer that, if effective, would result in the Trust being "closely held" within the meaning of Section 856(h) of the code, shall be void ab initio as to the Transfer of that number of shares of Capital Stock which would cause the Trust to be "closely held" within the meaning of Section 856(h) of the Code, and the intended transferee shall acquire no rights or interest whatsoever in such excess shares of Capital Stock. (3) Transfer in Trust. (i) If, notwithstanding the other provisions contained in Sections 6.14 through 6.16 and subject to Section 6.17 hereof, at any time on or after the Effective Date and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event such that any Person would Beneficially Own shares of Capital Stock in excess of the Ownership Limit (in the case of any Person other than an Existing Holder) or Existing Holder Limit (in the case of an Existing Holder), then, except as otherwise provided in Sections 6.14(10), (11), (12) or (13), (A) the purported transferee shall acquire no right or interest (or, in the case of a Non-Transfer Event, the person holding record title to the shares of Capital Stock Beneficially Owned by such Beneficial Owner shall cease to own any right or interest) in such number of shares of Capital Stock which would cause such Beneficial Owner to Beneficially Own shares of Capital Stock in excess of the Ownership Limit or the Existing Holder Limit, as the case may be; (B) such number of shares of Capital Stock in excess of the Ownership Limit or the Existing Holder Limit (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with Section 6.16(1), transferred automatically and by operation of law to a Special Trust; and (C) such purported transferee or record holder (as the case may be) shall submit to the Trust certificates for such number of shares of Capital Stock to be transferred to the Special Trust for registration in the name of the Special Trustee. Such transfer to a Special Trust and the designation of the Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the purported Transfer or Non-Transfer Event, as the case may be. Subject to Section 6.14(12), in determining which shares of Capital Stock are so transferred and so designated in the case of a Non- Transfer Event, shares of Capital Stock directly owned by any Person who caused the Non-Transfer Event to occur shall be so transferred and so designated before any shares of Capital Stock not so held are so transferred and so designated. Subject to Section 6.14(12), where several Persons are similarly situated, such transfer and such designation shall be pro rata. (ii) If, notwithstanding the other provisions contained in Sections 6.14 through 6.16 and subject to Section 6.17 hereof, at any time on or after the Effective Date and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event such that any Person would Constructively Own shares of Capital Stock in excess of the Constructive Ownership Limit (other than an Existing Constructive Holder), then, except as otherwise provided in Sections 6.14(10), (11), (12) or (13), (A) the purported transferee shall acquire no right or interest (or, in the case of a Non-Transfer Event, the person holding record title to the shares of Capital Stock Constructively Owned by such Constructive Owner shall cease to own any right or interest) in such number of shares of Capital Stock which would cause such Constructive Owner to Constructively Own shares of Capital Stock in excess of the Constructive Ownership limit; (B) such number of shares of Capital Stock in B-18 excess of the Constructive Ownership Limit (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with Section 6.16(1), transferred automatically and by operation of law to a Special Trust; and (C) such purported transferee or record holder (as the case may be) shall submit to the Trust certificates for such number of shares of Capital Stock to be transferred to the Special Trust for registration in the name of the Special Trustee. Such transfer to a Special Trust and the designation of the Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the purported Transfer or Non-Transfer Event, as the case may be. Subject to Section 6.14(12), in determining which shares of Capital Stock are so transferred and so designated in the case of a Non-Transfer Event, shares of Capital Stock directly owned by any Person who caused the Non-Transfer Event to occur shall be so transferred and so designated before any shares of Capital Stock not so held are so transferred and so designated. Subject to Section 6.14(12), where several Persons are similarly situated, such transfer and such designation shall be pro rata. (iii) If, notwithstanding the other provisions contained in Sections 6.14 through 6.16 and subject to Section 6.17 hereof, at any time on or after the Effective Date and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event that, if effective, would cause the Trust to (x) be beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution) or (y) become "closely held" within the meaning of Section 856(h) of the Code (each, a "Transfer Violation"), then, except as otherwise provided in Sections 6.14(10), (11), (12), or (13), (A) the purported transferee shall not acquire any right or interest (or, in the case of a Non- Transfer Event, the person holding record title of the shares of Capital Stock with respect to which such Non-Transfer Event occurred, shall cease to own any right or interest) in such number of shares of Capital Stock, the ownership of which by such purported transferee or record holder would result in a Transfer Violation; (B) such number of shares of Capital Stock (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with the provisions of Section 6.16(1), transferred automatically and by operation of law to one or more Special Trusts to be held in accordance with that Section 6.16; and (C) such purported transferee or record holder (as the case may be) shall submit to the Trust certificates for such number of shares of Capital Stock to be transferred to the Special Trust or Special Trusts for registration in the name of the Special Trustee. Such transfer to a Special Trust and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. Subject to Section 6.14(12), in determining which shares of Capital Stock are so transferred and so designated in the case of a Non-Transfer Event, shares of Capital Stock directly owned by any Person who caused the Non-Transfer Event to occur shall be so transferred and so designated before any shares of Capital Stock not so held are so transferred and so designated. Subject to Section 6.14(12), where several Persons are similarly situated, such transfer and such designation shall be pro rata. (4) Remedies For Breach. If the Trustees or their designees shall at any time determine in good faith that a Transfer has taken place in violation of Section 6.14 or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive Ownership of any shares of Capital Stock of the Trust in violation of Section 6.14, or that any such Transfer or acquisition, intended or attempted, would jeopardize the status of the Trust as a REIT under the Code, the Trustees or their designees shall take such actions as it or they deem advisable to refuse to give effect or to prevent such Transfer or acquisition, including, but not limited to, refusing to give effect or to prevent such Transfer or acquisition on the books of the Trust or instituting proceedings to enjoin such Transfer or acquisition; provided, however, that, except as provided in Section 6.14(10), (11), (12) or (13), any Transfers, attempted Transfers or acquisitions in violation of Section 6.14(2) shall be void ab initio and automatically result in the designation described in Section 6.14(3) hereof, irrespective of any action (or non-action) by the Trustees or their designees. (5) Notice of Restricted Transfer. Any Person who acquires or attempts to acquire shares of Capital Stock in violation of Section 6.14(2), or any Person who owned shares of Capital Stock that were B-19 transferred to a Special Trust pursuant to the provisions of Section 6.14(3), shall immediately give written notice to the Trust of such event, shall submit to the Trust certificates for such number of shares of Capital Stock to be transferred to the Special Trust, and shall provide to the Trust such other information as the Trust may request in order to determine the effect, if any, of such Transfer or Non-Transfer Event, as the case may be, on the Trust's status as a REIT. (6) Remedies Not Limited. Nothing contained in this Section 6.14 through Section 6.16 shall limit the authority of the Trustees to take such other action as it deems necessary or advisable to protect the Trust and the interests of its shareholders by preservation of the Trust's status as a REIT and to ensure compliance with the Ownership Limit, the Existing Holder Limit, the Constructive Ownership Limit, and the REIT Provisions. (7) Ambiguity. In the case of an ambiguity in the application of any of the provisions of Section 6.14, including any definition contained in Section 6.14(1), the Trustees shall have the power to determine the application of the provisions of this Section 6.14 with respect to any situation based on the facts known to it. (8) Modification of Ownership Limit. Subject to the limitations provided in Section 6.14(9), the Trustees may from time to time increase the Existing Holder Limit for an Existing Holder. (9) Limitations on Modifications. Notwithstanding any other provision of Sections 6.14 through 6.16: (i) The Existing Holder Limit may not be increased if, after giving effect to such increase, five or fewer Beneficial Owners that are (i) individuals for purposes of Section 542(a)(2) of the Code, or (ii) trusts to which the provisions of Section 856(h)(3)(A)(i) of the Code apply, could Beneficially Own, in the aggregate, more than 49.9% in value of the outstanding shares of Capital Stock. (ii) Prior to the modifications of the Existing Holder Limit pursuant to Section 6.14(8), the Trustees may require such opinions of counsel, affidavits, undertakings, or agreements as they may deem necessary or advisable in order to determine or ensure the Trust's status as a REIT. (10) Exception. The Trustees, upon receipt of a ruling from the Internal Revenue Service, an opinion of counsel, or such other evidence that the Trustees deem satisfactory, in each case to the effect that the restriction contained in Section 6.14(2)(vii) will not be violated, shall, subject to such terms and conditions as the Trustees deem appropriate, exempt a Person from the Ownership Limit, the Existing Holder Limit, or the Constructive Ownership Limit if (x) in the case of any exemption from the Ownership Limit or an Existing Holder Limit, such Person is (i) not an individual for purposes of Section 542(a)(2) of the Code, or (ii) a trust to which the provisions of Section 856(h)(3)(A)(i) of the Code apply, (y) the Trustees obtain such representations, undertakings or other arrangements from such Person as the Trustees deem necessary or appropriate to ensure that the granting of the exemption will not jeopardize the Trust's status as a REIT, and (z) such Person agrees that any violation or attempted violation of the terms or conditions of the exemption, the Ownership Limit, an Existing Holder Limit, or the Constructive Ownership Limit will result in a transfer to a Special Trust of Equity Shares in accordance with Section 6.14(3). (11) Exception for Certain Existing Holders. Notwithstanding any provision of Section 6.14 of this Declaration of Trust to the contrary, the restrictions on ownership and transfers contained in Section 6.14(2) shall not apply to an Existing Holder that is (i) a regulated investment company (within the meaning of the Investment Company Act of 1940), so long as no more than 9.9% of the value of the outstanding equity interests therein is Beneficially Owned by a Person who is treated as an individual for purposes of Section 542(a)(2) of the Code, (ii) a mutual life insurance company, or (iii) a trust described in Section 401(a) of the Code, so long as the actuarial interest of any individual in such trust does not exceed 9.9% of the total actuarial interests in such trust. (12) Ordering Rule for Shares-in-Trust. Notwithstanding any provision of Section 6.14 of this Declaration of Trust to the contrary, any shares of Capital Stock held or acquired by an Existing Holder as record or beneficial owner (without applying any rules of attribution under the Code) shall not be B-20 considered to violate the restrictions on ownership and Transfer in Section 6.14(2) or be designated as Shares-in-Trust pursuant to Section 6.14(3) unless the shares of Capital Stock held or acquired by the Existing Holder as record or beneficial owner (without applying any rules of attribution under the Code) exceed the Existing Holder Limit for such Existing Holder and such Existing Holder is not described in clauses (i), (ii) or (iii) of Section 6.14(11). This Section 6.14(12) is to be interpreted and applied so that if (A) any shares of Capital Stock held or acquired by an Existing Holder as record or beneficial owner (without applying any rules of attribution under the Code) are treated as being Beneficially Owned or Constructively Owned by another Person ("Existing Holder Shares") and (B) that Person Beneficially Owns shares of Capital Stock in excess of the Constructive Ownership Limit, then no Existing Holder Shares may be deemed to violate the restrictions of Section 6.14(2) or be designated Shares-in- Trust pursuant to Section 6.14(3) until all of the shares of Capital Stock Beneficially Owned or Constructively Owned by such Person (other than Existing Holder Shares) have been so designated, and then only to the extent the Existing Holder Shares held or acquired by the Existing Holder as record or beneficial owner (without applying any attribution rules of the Code) violate the Existing Holder Limit for such Existing Holder and such Existing Holder is not described in clauses (i), (ii) or (iii) of Section 6.14(11). (13) Exception for Certain Underwriters. Unless an exception is otherwise provided pursuant to Section 6.14(10), the restrictions on ownership and transfers contained in Section 6.14(2) shall not apply to an Underwriter unless the ownership of Capital Stock by the Underwriter would result in the Trust being "closely held" (within the meaning of Section 856(h) of the Code) or otherwise would result in the Trust failing to qualify as a REIT. 6.15 Legend. Each certificate for Capital Stock shall bear the following legend: "THE SHARES OF CAPITAL STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON OWNERSHIP AND TRANSFER FOR THE PURPOSE OF THE TRUST'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). SUBJECT TO CERTAIN PROVISIONS OF THE TRUSTS DECLARATION OF TRUST, NO PERSON MAY (A) BENEFICIALLY OWN SHARES OF CAPITAL STOCK IN EXCESS OF THE OWNERSHIP LIMIT UNLESS SUCH PERSON IS AN EXISTING HOLDER (IN WHICH CASE, THE EXISTING HOLDER LIMIT SHALL BE APPLICABLE); (B) TRANSFER SHARES OF CAPITAL STOCK IF SUCH TRANSFER WOULD RESULT IN THE SHARES OF CAPITAL STOCK BEING OWNED BENEFICIALLY BY FEWER THAN 100 PERSONS; (C) BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK WHICH WOULD RESULT IN THE TRUST BEING "CLOSELY HELD" UNDER SECTION 856(H) OF THE CODE OR (D) CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK IN EXCESS OF 9.9% OF THE VALUE OF THE OUTSTANDING CAPITAL STOCK OF THE TRUST (UNLESS SUCH PERSON IS AN EXISTING CONSTRUCTIVE HOLDER). ANY PERSON WHO ATTEMPTS TO BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF CAPITAL STOCK IN EXCESS OF THE ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE TRUST. FOR PURPOSES OF THE OWNERSHIP RESTRICTION DESCRIBED IN CLAUSE (A) ABOVE, THE "OWNERSHIP LIMIT" MEANS 9.9% OF THE VALUE OF THE OUTSTANDING SHARES OF CAPITAL STOCK OF THE TRUST. CERTAIN TRANSACTIONS NOT INVOLVING THE DIRECT TRANSFER OF CAPITAL STOCK OF THE TRUST MAY RESULT IN THE APPLICATION OF THE RESTRICTIONS REFERRED TO ABOVE. ALL DEFINED TERMS IN THIS LEGEND HAVE THE MEANINGS DEFINED IN THE TRUSTS DECLARATION OF TRUST, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON TRANSFER, WILL BE SENT WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS IN WRITING WITHIN FIVE (5) DAYS AFTER RECEIPT OF THE WRITTEN REQUEST. IF THE RESTRICTIONS ABOVE ARE VIOLATED, THE SHARES OF CAPITAL STOCK REPRESENTED HEREBY WILL BE TRANSFERRED AUTOMATICALLY AND BY OPERATION OF LAW TO A SPECIAL TRUST AND SHALL BE DESIGNATED SHARES-IN-TRUST." B-21 6.16 Shares-in-Trust. (1) Special Trust. Any shares of Capital Stock transferred to a Special Trust and designated Shares-in-Trust pursuant to Section 6.14(3) shall be held for the exclusive benefit of the Beneficiary or Beneficiaries. The Special Trustee shall name a Beneficiary or Beneficiaries of each Special Trust within five (5) days after discovery of the existence thereof Any transfer to a Special Trust, and subsequent designation of shares of Capital Stock as Shares-in-Trust, pursuant to Section 6.14(3) shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer event that results in the transfer to the Special Trust. Shares-in-Trust shall remain issued and outstanding shares of Capital Stock of the Trust and shall be entitled to the same rights and privileges on the identical terms and conditions as are all other issued and outstanding shares of Capital Stock of the same class and series. When transferred to the Permitted Transferee in accordance with the provisions of Section 6.16(5), such Shares-in-Trust shall cease to be designated as Shares-in-Trust. (2) Dividend Rights. The Special Trustee, as record holder of Shares-in- Trust, shall be entitled to receive all dividends and distributions as may be declared by the Trustees on such shares of Capital Stock and shall hold such dividends or distributions in trust for the benefit of the Beneficiary or Beneficiaries. The Prohibited Owner with respect to Shares-in-Trust shall repay to the Special Trustee the amount of any dividends or distributions received by it (i) that are attributable to any shares of Capital Stock designated Shares-in-Trust and (ii) the record date of which was on or after the effective date of the designation of such shares as Shares-in-Trust. The Trust shall take all measures that it determines reasonably necessary to recover the amount of any such dividend or distribution paid to a Prohibited Owner, including, if necessary, withholding any portion of future dividends or distributions payable on shares of Capital Stock of the Person who, but for the provisions of Section 6.14(3), would Constructively Own or Beneficially Own the Shares- in-Trust; and, as soon as reasonably practicable following the Trust's receipt or withholding thereof, shall pay over to the Special Trustee for the benefit of the Beneficiary or Beneficiaries the dividends so received or withheld, as the case may be. (3) Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Trust, each holder of Shares-in-Trust shall be entitled to receive, ratably with each other holder of shares of Capital Stock of the same class or series, that portion of the assets of the Trust which is available for distribution to the holders of such class and series of shares of Capital Stock. The Special Trustee shall distribute to the Prohibited Owner the amounts received upon such liquidation, dissolution, or winding up; provided, however, that (i) the Prohibited Owner shall not be entitled to receive amounts pursuant to this subsection (3) in excess of, (x) in the case of a purported Transfer in which the Prohibited Owner gave value for shares of Capital Stock and which Transfer resulted in the transfer of the shares to the Special Trust, the price per share, if any, such Prohibited Owner paid for the shares of Capital Stock and, (y) in the case of a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value or such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Special Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer; and (ii) that any amount otherwise payable to the Prohibited Owner pursuant to this subsection (3) shall be reduced by any Unrecovered Excess Dividends of such Prohibited Owner, but only to the extent the amount thereof has been specified in a written notice by the Trust to the Special Trustee. Any remaining amount in such Special Trust shall be distributed to the Beneficiary or Beneficiaries. (4) Voting Rights. The Special Trustee shall be entitled to vote all Shares-in-Trust. The Trustees shall take all measures that they determine to be reasonably necessary and in the best interests of the Trust, subject to applicable law, to invalidate or rescind any vote case by a Prohibited Owner as a holder of shares of Capital Stock prior to the discovery by the Trust that the shares of Capital Stock are Shares-in-Trust. In the event that the Trustees take action to invalidate or rescind any vote case by a Prohibited Owner in accordance with the preceding sentence, subject to applicable law, the Prohibited Owner shall be deemed to have given, as of the close of business on the business day prior to the date of the purported B-22 Transfer or Non-Transfer Event that results in the transfer to the Special Trust of the shares of Capital Stock under Section 6.14(3), an irrevocable proxy to the Special Trustee to vote the Shares-in-Trust, in which case such Shares-in-Trust shall be deemed to have voted by the Special Trustee in the same proportions as the votes cast by holders of shares of Capital Stock other than Shares-in-Trust. (5) Designation of Permitted Transferee. The Special Trustee shall have the exclusive and absolute right to designate a Permitted Transferee of any and all Shares-in-Trust. To the extent reasonably practicable, and in an orderly fashion so as not to materially adversely affect the Market Price of the Shares-in-Trust, the Special Trustee shall designate any Person as a Permitted Transferee, provided, however, that (i) the Permitted Transferee so designated purchases for valuable consideration (whether in a public or private sale) the Shares-in-Trust, (ii) the Permitted Transferee so designated may acquire such Shares-in-Trust without such acquisition resulting in a transfer to a Special Trust and the redesignation of such shares of Capital Stock so acquired as Shares-in-Trust under Section 6.14(3) and (iii) the Trust shall have waived its right, pursuant to Section 6.16(7), to repurchase such Shares-in-Trust or such right shall have expired. Upon the designation by the Special Trustee of a Permitted Transferee in accordance with the provisions of this subsection (5) (and the payment by the Permitted Transferee of the consideration provided in clause (i) above), the Special Trustee of a Special Trust shall (A) cause to be transferred to the Permitted Transferee that number of Shares-in- Trust acquired by the Permitted Transferee; (B) cause to be recorded on the books of the Trust that the Permitted Transferee is the holder of record of such number of shares of Capital Stock; and (C) distribute to the Beneficiary any and all amounts held with respect to the Shares-in-Trust after making the payment to the Prohibited Owner provided for pursuant to Section 6.16(6). (6) Compensation to Record Holder of Equity Shares that Become Shares-In- Trust. Any Prohibited Owner shall be entitled (following discovery by the Trust that shares of Capital Stock owned by such Prohibited Owner are Shares-in-Trust and subsequent designation of the Permitted Transferee in accordance with Section 6.16(5)) to receive from the Special Trustee the lesser of (i) in the case of (A) a purported Transfer in which the Prohibited Owner gave value for shares of Capital Stock and which Transfer resulted in the transfer of the shares to the Special Trust, the price per share, if any, such Prohibited Owner paid for the shares of Capital Stock, or (B) a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Special Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer, and (ii) the price per share received by the Special Trustee of the Special Trust from the sale or other disposition of such Shares-in- Trust in accordance with Section 6.16(5); provided, however, that any amount otherwise payable to the Prohibited Owner pursuant to this subsection (6) shall be reduced by any Unrecovered Excess Dividends of such Prohibited Owner, but only to the extent the amount hereof has been specified in a written notice by the Trust to the Special Trustee. Any amounts received by the Special Trustee in respect of such Shares-in-Trust in excess of such amounts to be paid to the Prohibited Owner pursuant to this Section 6.16(6) shall be distributed to the Beneficiary in accordance with the provisions of Section 6.16(5). Each Beneficiary and Prohibited Owner waives any and all claims that such Beneficiary or Prohibited Owner may have against the Special Trustee and the Trust arising out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with misconduct of, or any failure to make payments in accordance with Section 6.16 by, such Special Trustee or the Trust. (7) Purchase Right in Shares-in-Trust. Shares-in-Trust shall be deemed to have been offered for sale to the Trust, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that created such Shares-in-Trust (or, in case of devise, gift, or Non- Transfer Event, the Market Price at the time of such device, gift, or Non- Transfer Event) and (ii) the Market Price on the date the Trust, or its designee, accepts such offer. The Trust shall have the right to accept such offer for a period of ninety (90) days after the later of (A) the date of the Non-Transfer Event or purported Transfer which resulted in such Shares- in-Trust and (B) the date the Trust determines in good faith that B-23 a Transfer or Non-Transfer Event resulting in Shares-in-Trust has occurred, if the Trust does not receive a notice of such Transfer or Non-Transfer or Non-Transfer Event pursuant to Section 6.14(5). 6.17 Exchange Transactions. Nothing in this Declaration of Trust shall preclude the settlement of any transaction with respect to the Capital Stock of the Trust entered into through the facilities of the New York Stock Exchange. As set forth in Sections 6.14 through 6.16, certain transactions may be settled by designating shares of Capital Stock Beneficially Owned or Constructively Owned by a Person in violation of the Ownership Limit, the Existing Holder Limit, or the Constructive Ownership Limit, as the case may be, as Shares-in- Trust. ARTICLE 7 LIABILITY OF TRUSTEES, SHAREHOLDERS AND OFFICERS, AND OTHER MATTERS 7.1 Exculpation of Trustees and Officers. (1) No Trustee or officer of the Trust shall be liable to the Trust or to any Trustee for any act or omission of any other Trustee, Shareholder, officer or agent of the Trust or be held to any personal liability whatsoever in tort, contract or otherwise in connection with the affairs of the Trust except only that arising from his own willful misfeasance, bad faith, gross negligence or reckless disregard of duty. (2) To the maximum extent that the laws of the State of Maryland in effect from time to time permit limitation of the liability of Trustees and Officers, no Trustee or Officer of the Trust shall be liable to the Trust or its Shareholders for money damages. Neither the amendment nor appeal of this Section, nor the adoption or amendment of any other provision of the Declaration of Trust or By-laws inconsistent with this Section, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. (3) The provisions of subsection (a) shall be applicable to any act or omission by a Trustee or officer of the Trust occurring prior to the filing of Articles of Amendment adopting subsections (b) and (c) hereof with the State Department of Assessments and Taxation of Maryland (the "Effective Date"). For acts or omissions occurring on or after the Effective Date, the provisions of subsection (b) shall also be applicable. 7.2 Limitation of Liability of Shareholders, Trustees and Officers. The Trustees and officers of the Trust in incurring any debts, liabilities or obligations, or in taking or omitting any other actions for or in connection with the Trust are, and shall be deemed to be, acting as Trustees or officers of the Trust and not in their own individual capacities. Except to the extent provided in Section 7.1, no Trustee or officer of the Trust shall, nor shall any Shareholder, be liable for any debt, claim, demand, judgment, decree, liability or obligation of any kind of, against or with respect to the Trust, arising out of any action taken or omitted for or on behalf of the Trust and the Trust shall be solely liable therefor and resort shall be had solely to the Trust Estate for the payment or performance thereof. Each Shareholder shall be entitled to pro rata indemnity from the Trust Estate if, contrary to the provisions hereof, such Shareholder shall be held to any such personal liability. 7.3 Express Exculpatory Clauses in Instruments. As far as practicable, the Trustees shall cause any written instrument creating an obligation of the Trust to include a reference to this Declaration and to provide that neither the Shareholders nor the Trustees nor the officers of the Trust shall be liable thereunder and that the other parties to such instrument shall look solely to the Trust Estate for the payment of any claim thereunder or for the performance thereof; provided, however, that the omission of such provision from any such instrument shall not render the Shareholders or any Trustee or officer of the Trust liable nor shall the Trustees or any officer of the Trust be liable to anyone for such omission. 7.4 Indemnification of Trustees and Officers. The Trust shall indemnify the Trustees and officers of the Trust to the full extent permitted by the general laws of the State of Maryland now or hereafter in force with B-24 respect to the indemnification of directors of a Maryland corporation, including the advance of expenses under the procedures provided by such laws. Any reference in such laws to directors shall be deemed to refer to Trustees of the Trust and to the corporation shall be deemed to refer to the Trust. The foregoing shall not limit the authority of the Trust to indemnify officers who are not Trustees and other employees and agents of the Trust consistent with law. 7.5 Right of Trustees and Officers to Own Shares or Other Property and to Engage in Other Business. (1) Any Trustee or officer of the Trust may acquire, own, hold and dispose of Shares and other Securities of the Trust for his individual account, and may exercise all rights of a Shareholder to the same extent and in the same manner as if he were not a Trustee or officer. Any Trustee or officer of the Trust may have personal business interests and may engage in personal business activities, which interests and activities may include the acquisition, syndication, holding, management, operation or disposition, for his own account or for the account of others, of interests in Mortgages, interests in Real Property, or interests in Persons engaged in the real estate business, provided the same do not (except as permitted in subsection 7.5(2)) directly compete with the actual business being conducted by the Trust. Subject to the provisions of Article 4, any Trustee or officer of the Trust may be interested as trustee, officer, director, stockholder, partner, member, adviser or employee, or otherwise have a direct or indirect interest in any Person who may be engaged to render advice or services to the Trust, and may receive compensation from such Person as well as compensation as Trustee, officer or otherwise hereunder and no such activities shall be deemed to conflict with his duties and powers as Trustee or officer. (2) Nothing in this Declaration shall be deemed: (i) to prohibit a Trustee or officer of the Trust who is also engaged in rendering professional services from rendering such professional services to any Person or from acting as trustee, director, member, adviser, officer or representative of any such Person to whom he renders or has rendered such services; or (ii) to prohibit a Trustee or officer of the Trust from having personal business interests or engaging in personal business activities which: (A) the Trustees (by vote or consent sufficient for such purpose without counting the vote of the interested Trustee) have decided should not be acquired or engaged in by the Trust; or (B) the Trust could not have acquired or engaged in without violating any provision of this Declaration or applicable law, even though any such Person, interests or activities are or could be in competition, in any way, with the Trust, or any such Person is in the same or similar business as that of the Trust. 7.6 Transactions Between the Trustees and the Trust. Notwithstanding any other provisions of this Declaration, the Trust shall not knowingly, directly or indirectly, (i) acquire any property from, or sell, lend, or otherwise transfer any property to, any Trustee, or (ii) make any such transaction with any Affiliate of any Trustee or any Person of which a Trustee owns more than 1% of the voting securities, unless such transaction has been approved by the affirmative vote of a majority of the Trustees who are not Affiliates of such Trustee or any Person of which a Trustee owns more than 1% of the voting securities, after full disclosure as to the interest of the Trustee or his Affiliate or such Person in such transaction, is on terms not less favorable to the Trust than those then prevailing for comparable transactions at arm's length, is fair and reasonable to the Shareholders, and relates to (i) acquisition by the Trust from Affiliates of a Trustee or the Adviser or any Person of which a Trustee owns more than 1% of the voting securities, of participation in any Mortgage loans if such Affiliate or Person retains, on no more favorable terms than the Trust, at least a 25% participation therein, provided that no such participation need be retained by an Affiliate which is principally engaged in the mortgage banking business and has undertaken to provide the Trust with investment opportunities within the Trust's investment policies, (ii) acquisition or disposition of assets at the formation of the Trust or within 120 days thereafter or when purchased with the proceeds of subsequent B-25 offerings of securities of the Trust, (iii) repayment of Construction Loans at maturity or upon completion of the construction, or (iv) acquisition of properties by the Trust at prices not exceeding fair value as determined by independent appraisal. The Trustees are not restricted by this Section 7.6 from forming a corporation, partnership, trust or other business association owned by the Trustees or by their nominees for the purpose of holding title to property of the Trust or managing property of the Trust provided the Trustees' motive for the formation of such business association is not their own enrichment. 7.7 Restriction of Duties and Liabilities. To the extent that the nature of this Trust will permit, the duties and liabilities of Shareholders, Trustees and officers shall in no event be greater than the duties and liabilities of shareholders, directors and officers of a Maryland corporation. The Shareholders, Trustees and officers shall in no event have any greater duties or liabilities than those imposed by applicable law as shall be in effect from time to time. 7.8 Persons Dealing with Trustees or Officers. Any act of the Trustees or officers purporting to be done in their capacity as such shall, as to any Persons dealing with such Trustees or officers, be conclusively deemed to be within the purposes of this Trust and within the powers of the Trustees and officers. No Person dealing with the Trustees or any of them, or with the authorized officers, agents or representatives of the Trust, shall be bound to see to the application of any funds or property passing into their hands or control. The receipt of the Trustees or any of them, or of authorized officers, agents, or representatives of the Trust, for moneys or other consideration, shall be binding upon the Trust. 7.9 Reliance. The Trustees and officers may consult with counsel (which may be a firm in which one or more of the Trustees or officers is or are members) and the advice or opinion of such counsel shall be full and complete personal protection to all of the Trustees and officers in respect of any action taken or suffered by them in good faith and in reliance on or in accordance with such advice or opinion. In discharging their duties, Trustees and officers, when acting in good faith, may rely upon financial statements of the Trust represented to them to be correct by the President or the officer of the Trust having charge of its books of account, or stated in a written report by an independent certified public accountant fairly to present the financial position of the Trust. The Trustees may rely, and shall be personally protected in acting, upon any instrument or other document believed by them to be genuine. ARTICLE 8 DURATION, AMENDMENT, TERMINATION AND QUALIFICATION OF TRUST 8.1 Duration of Trust. Unless terminated as provided herein, the Trust created hereby shall have perpetual existence; provided, however, anything herein to the contrary notwithstanding, if at any time prior to the first date on which the Shares of the Trust shall be owned beneficially by more than 100 Persons all of the Trustees named in Section 9.9 shall have ceased to be living, the Trust created hereby shall terminate immediately upon the death of the last survivor of such Trustees. 8.2 Termination of Trust. (1) The Trust may be terminated by the vote or consent of the holders of two-thirds of the outstanding Shares entitled to vote thereon. Upon the termination of the Trust: (i) The Trust shall carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust Estate to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, Securities or other property of any kind, discharge or pay its liabilities, and do all B-26 other acts appropriate to liquidate its business; provided that any sale, conveyance, assignment, exchange, transfer or other disposition of substantially all of the Trust Estate as a whole shall require approval of the principal terms of the transaction and the nature and amount of the consideration by vote or consent of the holders of a majority of the outstanding Shares entitled to vote thereon. (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements, as they deem necessary for their protection, the Trustees shall, subject to the provisions of any Preferred Shares which may then be outstanding, distribute the remaining Trust Estate, in cash or in kind or partly each, among the Shareholders pro rata according to the number of Common Shares held by each. (2) After termination of the Trust and distribution to the Shareholders as herein provided, the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further liabilities and duties hereunder and the rights and interests of all Shareholders hereunder shall thereupon cease. 8.3 Amendment Procedure. (1) This Declaration may be amended by the vote or consent of the holders of a majority of the outstanding Shares entitled to vote thereon, except that Section 7.2 and the prohibition against assessment upon Shareholders in Section 6.1 shall be amended only by the vote or consent of the holders of all outstanding Shares entitled to vote thereon. The Trustees may also amend this Declaration without the vote or consent of Shareholders if they deem it necessary to conform this Declaration to the requirements of the REIT Provisions of the Internal Revenue Code or to other applicable federal laws or regulations, but the Trustees shall not be liable for failing to do so. (2) A certification in recordable form signed by a majority of the Trustees setting forth an amendment and reciting that it was duly adopted by the Shareholders or by the Trustees as aforesaid or a copy of the Declaration, as amended, in recordable form, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust. ARTICLE 9 MISCELLANEOUS 9.1 Applicable Law. This Declaration and the rights of all parties and the construction and effect of every provision hereof shall be subject to and construed according to the statutes and laws of Maryland. 9.2 Index and Headings for Reference Only. The index and headings preceding the text, articles and sections hereof have been inserted for convenience and reference only and shall not be construed to affect the meaning, construction or effect of this Declaration. 9.3 Successors in Interest. This Declaration and the By-Laws shall be binding upon and inure to the benefit of the undersigned Trustees and their successors, assigns, heirs, distributees and legal representatives, and every Shareholder and his successors, assigns, heirs, distributees and legal representatives. 9.4 Counterparts. This Declaration may be simultaneously executed in several counterparts, each of which when so executed shall be deemed to be an original and such counterparts together shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart. 9.5 Provisions of the Trust in Conflict with Law or Regulations. (1) The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any one or more of such provisions (the "Conflicting Provisions") would have the effect of preventing the Trust from qualifying as a "real estate investment trust" under the REIT Provisions of the Internal Revenue Code or are in conflict with other applicable federal laws and B-27 regulations, the Conflicting Provisions shall be deemed never to have constituted a part of the Declaration; provided, however, that such determination by the Trustees shall not affect or impair any of the remaining provisions of this Declaration or render invalid or improper any action taken or omitted (including but not limited to the election of Trustees) prior to such determination. A certification in recordable form signed by a majority of the Trustees setting forth any such determination and reciting that it was duly adopted by the Trustees, or a copy of this Declaration, with the Conflicting Provisions removed pursuant to such a determination, in recordable form, signed by a majority of the Trustees, shall be conclusive evidence of such determination when lodged in the records of the Trust. The Trustees shall not be liable for failure to make any determination under this Section 9.5(1). Nothing in this Section 9.5(1) shall in any way limit or affect the right of the Trustees to amend this Declaration provided in Section 8.3(1). (2) If any provision of this Declaration shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other provision of this Declaration, and this Declaration shall be carried out as if any such invalid or unenforceable provision were not contained herein. 9.6 Certifications. The following certifications shall be final and conclusive as to any persons dealing with the Trust: (1) A certification of a vacancy among the Trustees by reason of resignation, removal, increase in the number of Trustees, incapacity, death or otherwise, when made in writing by a majority of the remaining Trustees; (2) A certification as to the persons holding office as Trustees or officers at any particular time, when made in writing by the Secretary of the Trust or by any Trustee; (3) A certification that a copy of this Declaration or of the By-Laws is a true and correct copy thereof as then in force, when made in writing by the Secretary of the Trust or by any Trustee; (4) The certifications referred to in Sections 8.3(2) and 9.5(1) hereof; (5) A certification as to any action by Trustees, other than those referred to in paragraph (4) above, or the Shareholders when made in writing by the Secretary of the Trust or by any Trustee. 9.7 Recording and Filing. A copy of this instrument and any amendments to the Declaration shall be filed with the Department of Assessments and Taxation of Maryland. This Declaration and any amendments may also be filed or recorded in such other places as the Trustees deem appropriate. 9.8 Resident Agent. The name and post office address of the resident agent of the Trust in the State of Maryland is The Corporation Trust, Incorporated, 32 South Street, Baltimore, Maryland 21202. Said resident is a citizen of the State of Maryland actually residing therein. The resident agent may be removed and a vacancy existing in such office for any reason may be filled by a majority of the Trustees. 9.9 Names and Addresses of Trustees. [The names and addresses of the Trustees shall be inserted as they are determined as of the Effective Date.] B-28 ANNEX C [Paste-up Logo of Kenneth Leventhal & Company] Mortgage and Realty Trust Elkins Park, Pennsylvania This report sets forth a summary of the work performed by Kenneth Leventhal & Company ("KL") at the request of Mr. C. W. Strong, Jr., President, Mortgage and Realty Trust ("MRT"). The work performed included the procedures outlined in our engagement letter dated April 12, 1995 (Exhibit A). It is our understanding that the work performed by KL as summarized herein will be utilized by MRT in connection with a judicial restructuring of MRT. Accordingly, this report is intended solely for your use in connection with such judicial restructuring transaction and is not to be otherwise used, circulated, quoted or referred to in any manner. In addition, our letter of April 12, 1995 contains specific limitations with respect to the analytical procedures performed in connection with this engagement and is incorporated in its entirety by reference herein. ENGAGEMENT APPROACH We obtained selected financial information prepared by MRT as of March 31, 1995. Utilizing this information, we selected 26 assets representing mortgage loans, investments, in substance foreclosure assets, and real estate equities owned. The selection was divided between the "West Coast" and "East Coast" portfolios and generally represented the assets with the highest dollar values in the portfolio. In addition, as summarized in Exhibit B to this report, the selection of assets included different portfolio classifications. For the assets selected as outlined above, the following procedures were performed: . We obtained the most recent "Argus" property cash flow projections. . We obtained, where applicable, the most recent operating rent roll and other financial information. . We obtained the most recent appraisals, where applicable and available. . We obtained the previous KL analytical procedures performed as of March 1993 and July 1994. . We discussed the current status of each selected asset with the respective MRT asset manager to determine loan status, property characteristics, current occupancy, existing market rental rates, new leases, current payoff discussions, asset sales, etc. . We reviewed limited market information including selected submarket information, if available. . We modified the MRT assumptions, as necessary, to conform to certain known current market conditions and our understanding of the assets. . We updated the valuation model prepared by KL in 1993 and 1994 utilizing current market and/or assumption modifications determined from the procedures outlined above. The valuation model utilizes a monthly discounting methodology whereby NOI and capital expenses are discounted on a monthly basis. This monthly methodology approximates a "mid-year" discounting convention. . We calculated estimated asset values on a going concern basis (as defined below). We believe that the procedures outlined above, when applied to 26 of the largest assets in the MRT portfolio, provide a sufficient mathematical basis for extrapolation of the values to the remaining portfolio in order to calculate a range of valuation on a going concern basis as defined below. C-1 The results of our procedures as outlined above are summarized in Exhibit B. You have requested that we determine the valuation of the portfolio on a going concern basis. The assumptions utilized by MRT and reviewed by us included expected collection of amounts due on mortgage loans and cash flows from operating properties. To determine a going concern valuation, the assumptions are predicated on the orderly collection and selected disposal of assets over a period of several years. The going concern valuation is not reflective of values which would result from a distressed sale, forced liquidation or disposition of the portfolio in a bulk sale or any other accelerated manner. In addition to the specific portfolio valuation procedures outlined above, you further requested that we approximate a range of valuation for the total enterprise as of March 31, 1995. Such enterprise valuation is presented in Exhibit C. The enterprise valuation as of March 31, 1995 utilizes the most recently available financial statements of MRT and adjusts for the portfolio analyses as determined above, and other modifications as summarized in the notes to Exhibit C included herein. Kenneth Leventhal & Company May 15, 1995 C-2 - -------------------------------------------------------------------------------- SUMMARY OF EXHIBITS - -------------------------------------------------------------------------------- A. Engagement Letter dated April 12, 1995 B. Book Balance and Valuation for Selected Assets and Extrapolated Values C. Range of Enterprise Going Concern Value C-3 EXHIBIT A (1 OF 3) [Kenneth Leventhal & Company Logo] April 12, 1995 Mr. C.W. Strong, Jr. President Mortgage and Realty Trust 3500 West Olive Avenue Suite 600 Burbank, CA 91505-4628 Dear Mr. Strong: In accordance with your request, this letter sets forth our understanding and agreement with respect to the work Kenneth Leventhal & Company will perform in connection with the valuation of Mortgage and Realty Trust's investment portfolio, including mortgage loans, property acquired through foreclosure and held for sale, in-substance foreclosures, participating loans, amortizing loans, realty equities, real estate equities and investments in partnerships. Our work is being performed to update our previous work to assist MRT and its various interested creditor parties in determining an appropriate basis of valuation for a potential restructuring transaction. This letter summarizes the scope of services we will provide, project approach, engagement staffing, timing and estimated fees. BACKGROUND AND OUR UNDERSTANDING Kenneth Leventhal & Company ("KL") is familiar with the Mortgage and Realty Trust ("MRT") portfolio as a result of a comprehensive due diligence project undertaken in early 1993 on behalf of a potential equity investor and individual asset valuations and an "Entity" valuation as of June 30, 1994 undertaken for MRT. At the time of the 1993 engagement, KL performed comprehensive due diligence of all assets in the MRT portfolio. The asset valuations as of June 30, 1994, updated the valuations for 26 of MRT's assets. It is our understanding that MRT desires assistance in determining valuations for the MRT portfolio (as described above) for the purposes of considering various restructuring alternatives. MRT, through its various financial advisors and in connection with its ongoing discussions with various creditor groups, has performed comprehensive analyses of their investment portfolio and certain other interim valuations have been performed by other outside consultants. It is contemplated that all previous data and information relative to the portfolio maintained by MRT will be made available to KL to assist them in performing the presently requested services. The valuation consulting services applied to the MRT portfolio as of June 30, 1994 will be updated to March 31, 1995. The valuation services to be provided will not constitute independent asset appraisals performed in accordance with standards established by the Appraisal Institute or other professional bodies. The procedures will be designed to determine an estimated range of value of the MRT portfolio on a going-concern basis, that is, on a basis that does not contemplate an accelerated liquidation, bulk sale of assets or other form of distressed sale. The procedures will also be designed to present a range of liquidation values for the MRT portfolio to approximate the amount that may be realized upon a current market accelerated liquidation. C-4 EXHIBIT A (2 OF 3) ENGAGEMENT APPROACH In consideration of the previous work performed by KL, this engagement will be designed to utilize all existing information to the fullest extent possible. The procedures of this engagement will be designed to update the June 30, 1994 values as of March 31, 1995 and will be substantially similar to those performed for the valuation as of June 30, 1994. This work will be conducted on the 26 assets previously valued. Any of those 26 assets which have been disposed of will be replaced by assets with the highest book value that were not previously tested. In summary, the procedures to be performed in connection with the 26 assets will include the following. . Obtain the most recent "Argus" property cashflow projections. . Obtain the most recent operating rent rolls and other financial information. . Obtain the most recent appraisals, where available. . Obtain the previous KL portfolio analyses from March 1993 and June 30, 1994. . Discuss the current status with the asset manager to determine loan status, foreclosure property characteristics, including current occupancy, existing market rental rates, new leases, current payoff discussions, asset sales, etc. . Review and update market information for the properties, including selected submarket information, if available. . Modify MRT assumptions, as necessary, to conform to current updated market conditions. . Update the valuation model prepared by KL in 1993 utilizing current market and/or assumption modifications determined from the procedures provided above. . Calculate estimated range of asset values on both a going-concern and liquidation value basis. We believe that the procedures outlined above, applied to 26 of the largest assets in the MRT portfolio, will provide a sufficient mathematical basis for extrapolation of characteristics to the remaining portfolio and, therefore, provide an acceptable basis for the calculation of appropriate valuation ranges on both the going-concern and liquidation basis. In addition to the specific valuation procedures outlined above, KL is prepared to assist both MRT and its creditor groups with further refinements to the valuation and other assistance which may be required in connection with the potential restructuring alternatives presently considered. ENGAGEMENT STAFFING In light of the accelerated timetable mandated for this engagement, the project will be undertaken by KL personnel on the east coast and west coast simultaneously. Stephen G. Finn will serve as the overall engagement partner, assisted by Mr. Frederick Chin, the Director of KL's valuation practice in Los Angeles. Both Mr. Chin and Mr. Finn will be assisted by staff from KL's various offices. It is anticipated that the procedures outlined above will require approximately 30 to 45 business days to complete and, therefore, a date of May 31, 1995 is the projected completion date. ESTIMATED FEES It is anticipated that the procedures outlined above will utilize, to a significant extent, data prepared by KL and MRT in connection with the previous portfolio analyses. Our work will also encompass a review of the portfolio updated valuation procedures performed by MRT to provide a basis for us to conclude the appropriateness of extrapolating the valuation characteristics of the 26 assets selected to the entire portfolio. The estimated fees to perform updated valuations of the 26 selected assets will be $2,000 per asset plus applicable out-of-pocket expenses. The total estimated fees for this update, exclusive of any professional services requested to comply with Bankruptcy or SEC reporting requirements, will be $50,000--$60,000. C-5 EXHIBIT A (3 OF 3) As noted above, the engagement is being approached so as to permit modification or expansion of procedures to the entire portfolio, if considered necessary by MRT and its advisors. To the extent an expansion of procedures is considered necessary or additional tasks are required, supplemental letters of understanding will be prepared with appropriate estimates of fees and tasks described herein. It is understood that the work outlined herein is being performed at the request of MRT for their use in connection with discussions with various interested creditor groups. It is further understood that certain portions of KL's work product may be made available to MRT for use in their bankruptcy/SEC proxy filing. As the engagement progresses, KL will make periodic status reports to MRT. It is understood that the work undertaken by KL is of a confidential nature and will not be utilized by KL or communicated to any other parties without the express, written authorization from MRT. In addition to the valuation services outlined above, KL is available to assist MRT with implementation issues associated with "Fresh Start" accounting (FAS-SOP-90-7). This assistance may include allocation methodology for asset valuations or the determination of the "Fresh Start" Balance Sheet. Our charges for this additional assistance will be made at our standard billing rates, with a budget estimate, per task approved by you in advance. As noted above, KL may be called upon to present additional information, reports, consents, testimony, meetings and consultations in connection with the restructuring process currently under way. The charges outlined above to update our valuation do not attempt to estimate such restructuring process costs. To the extent services are requested outside the scope of the work contemplated above, we will 1) notify you and 2) bill such time at our normal standard rates of $80--$350 per hour. Either party may terminate this letter agreement at any time upon written notice, without liability or continuing obligation, except that neither the termination nor completion of this assignment shall affect: (a) any compensation earned by KL up to the date of termination or completion, as the case may be, or (b) the reimbursement of expenses incurred by KL up to the date of termination or completion, as the case may be. We appreciate the opportunity to be of continued service to Mortgage and Realty Trust and look forward to beginning this work immediately. Very truly yours, /s/ Stephen G. Finn ------------------------------------- Stephen G. Finn of Kenneth Leventhal & Company SGF/ld cc: Frederick Chin Accepted: MORTGAGE AND REALTY TRUST /s/ C.W. Strong, Jr. April 12, 1995 - ------------------------------------- ---------------------------------------- C.W. Strong, Jr. Date President C-6 EXHIBIT B (1 OF 2) MORTGAGE AND REALTY TRUST BOOK BALANCE AND VALUATION FOR SELECTED ASSETS AND EXTRAPOLATED VALUES AS OF MARCH 31, 1995
3/31/95 3/31/95 TOTAL PORTFOLIO 3/31/95 3/31/95 3/31/95 3/31/95 ASSET PV ASSET PV % BOOK VALUE ASSET ASSET BOOK BOOK BALANCE UPDATED ASSET PV PERCENTAGE OF BV 3/31/95 NO. PROPERTY NAME CODE BALANCE BY ASSET TYPE VALUATION BY ASSET TYPE OF BOOK VALUE BY ASSET TYPE BY ASSET TYPE ----- ---------------- ----- ------------ ------------- ------------ ------------- ------------- ------------- --------------- 594 Six Sentry A $ 750,000 $ 638,068 85.08% Associates (1 bldg) 655 Pacesetter A 8,867,030 8,738,012 98.54% Business 658 Caltrans-- A 12,043,371 10,176,887 84.50% Freeway Corp. Park 621 Lion Associates A 16,608,233 15,687,347 94.46% - ---------------------------------------------------------------------------------------------------------------------------------- SUBTOTALS FOR $ 38,268,634 $ 35,240,314 92.09% $ 59,077,108 ASSET CODE A - ---------------------------------------------------------------------------------------------------------------------------------- 641 Midis Property B 6,251,012 5,365,783 85.84% - ---------------------------------------------------------------------------------------------------------------------------------- SUBTOTALS FOR 6,251,012 5,365,783 85.84% 18,048,800 ASSET CODE B - ---------------------------------------------------------------------------------------------------------------------------------- 452 Keewaydin C 5,172,957 3,216,785 62.18% 590 Berdon Plaza C 7,547,467 6,752,852 89.47% - ---------------------------------------------------------------------------------------------------------------------------------- SUBTOTALS FOR 12,720,424 9,969,637 78.38% 34,416,865 ASSET CODE C - ---------------------------------------------------------------------------------------------------------------------------------- 609 Cascade Drive D 7,862,638 6,068,928 77.19% 639 East Bradford D 10,612,663 8,579,892 80.85% Associates - ---------------------------------------------------------------------------------------------------------------------------------- SUBTOTALS FOR 18,475,301 14,648,820 79.29% 30,407,726 ASSET CODE D - ---------------------------------------------------------------------------------------------------------------------------------- 646 McLaughlin E 4,296,330 3,658,732 85.16% 421 Parkway Business E 5,160,009 3,302,134 63.99% Center 467 North County E 5,845,086 4,848,818 82.96% 647 Moreno Valley E 5,899,121 5,391,718 91.40% 574 Burtonsville E 5,999,782 5,061,194 84.36% Commerce 687 Six Sentry E 6,537,739 4,903,919 75.01% Parkway (5 bldgs) 498 Junipers at E 7,605,269 8,591,887 112.97% Yarmouth 673 Arcade E 7,650,833 5,839,994 76.33% 643 Villa Del Cresta E 9,022,369 9,054,281 100.35% - ---------------------------------------------------------------------------------------------------------------------------------- SUBTOTAL FOR 58,016,538 50,652,677 87.31% 72,641,217 ASSET CODE E - ---------------------------------------------------------------------------------------------------------------------------------- 563 Slauson Business F 6,434,348 2,694,681 41.88% Center 447 Riverside Center F 7,641,272 6,642,051 86.92% 558 Pinebrook F 8,099,165 3,918,719 48.38% Business Center 448 Stadium Towers F 8,511,892 3,821,480 44.90% 672 Paseo Padre F 23,930,469 21,896,218 91.50% - ---------------------------------------------------------------------------------------------------------------------------------- SUBTOTALS FOR 54,617,146 38,973,149 71.36% 56,939,709 ASSET CODE F - ---------------------------------------------------------------------------------------------------------------------------------- 576 Keystone 1 G 4,769,853 5,035,946 105.58% 591 Creekside Center G 7,492,088 6,489,692 86.62% Associates 630 Newark C & C G 9,615,859 7,354,002 76.48% Associates - ---------------------------------------------------------------------------------------------------------------------------------- SUBTOTALS FOR 21,877,800 18,879,640 86.30% 26,511,072 ASSET CODE G - ---------------------------------------------------------------------------------------------------------------------------------- SUBTOTALS FOR ASSET Overall Average Assumed = > 82.64% 642,206 CODE H - ---------------------------------------------------------------------------------------------------------------------------------- SUBTOTALS FOR ASSET Overall Average Assumed = > 82.64% 25,392 CODE I - ---------------------------------------------------------------------------------------------------------------------------------- TOTALS $210,226,855 $210,226,855 $173,730,020 $173,730,020 82.64% $298,710,095 - ---------------------------------------------------------------------------------------------------------------------------------- EXTRAPOLATED ASSET PORTFOLIO PV NO. PROPERTY NAME BY ASSET TYPE ----- ---------------- ------------- 594 Six Sentry Associates (1 bldg) 655 Pacesetter Business 658 Caltrans-- Freeway Corp. Park 621 Lion Associates - --------------------------------------------- SUBTOTALS FOR ASSET CODE A $ 54,402,147 - --------------------------------------------- 641 Midis Property - --------------------------------------------- SUBTOTALS FOR ASSET CODE B 15,492,842 - --------------------------------------------- 452 Keewaydin 590 Berdon Plaza - --------------------------------------------- SUBTOTALS FOR ASSET CODE C 26,974,231 - --------------------------------------------- 609 Cascade Drive 639 East Bradford Associates - -------------------------------------------- SUBTOTALS FOR ASSET CODE D 24,109,881 - -------------------------------------------- 646 McLaughlin 421 Parkway Business Center 467 North County 647 Moreno Valley 574 Burtonsville Commerce 687 Six Sentry Parkway (5 bldgs) 498 Junipers at Yarmouth 673 Arcade 643 Villa Del Cresta - -------------------------------------------- SUBTOTAL FOR ASSET CODE E 63,421,090 - -------------------------------------------- 563 Slauson Business Center 447 Riverside Center 558 Pinebrook Business Center 448 Stadium Towers 672 Paseo Padre - --------------------------------------------- SUBTOTALS FOR ASSET CODE F 40,630,460 - --------------------------------------------- 576 Keystone 1 591 Creekside Center Associates 630 Newark C & C Associates - --------------------------------------------- SUBTOTALS FOR ASSET CODE G 22,877,963 - --------------------------------------------- SUBTOTALS FOR ASSET CODE H 530,715 - --------------------------------------------- SUBTOTALS FOR ASSET CODE I 20,984 - --------------------------------------------- TOTALS $248,460,312 - --------------------------------------------- ---------- OVERALL AVERAGE PV PERCENTAGE OF BOOK VALUE = > 83.18% ---------- (BASED UPON EXTRAPOLATION BY ASSET TYPE)
C-7 EXHIBIT B (2 OF 2) MORTGAGE AND REALTY TRUST INDEX TO ASSET CODES
ASSET CODE MRT ASSET TYPE DESCRIPTION ---------- -------------- ----------- A Earn Mtg Performing Mortgage B NE ISF In-Substance Foreclosure (Non-Earning) C NE REO Real Estate Owned (Non-Earning) D E ISF In-Substance Foreclosure (Earning) E E REO Real Estate Owned (Earning) F Equity Investments in Real Estate G Part Investments in Real Estate (Partnership) H Note Rec Note Receivable I NE Mtge Non-Earning Mortgage
C-8 EXHIBIT C (1 OF 2) MORTGAGE AND REALTY TRUST RANGE OF ENTERPRISE GOING CONCERN VALUE* AS OF MARCH 31, 1995
(000 OMITTED) Extrapolated Valuation of Portfolio as of March 31, 1995 per Exhibit A (Note A).......................................... $248,500 Adjustments (B) Add: Cash on Hand........................................... 1,500 Marketable Securities.................................... 71,600 Accounts Receivable and Other Assets..................... 3,700 ----------------- 325,300 Less: Outstanding Debt--Imperial............................ 17,600 Deferred Compensation.................................... 400 Accounts Payable and Accrued Expenses.................... 3,400 Employee Termination Pay Plan............................ 1,400 ----------------- 302,500 Less: NPV of operating expenses (C)......................... 27,300 ----------------- $275,200 ================= Range of Enterprise Going Concern Value March 31, 1995 (D)... $265,000--285,000 =================
- -------- *Rounded to the nearest $100,000 (See Next Page for Notes) C-9 EXHIBIT C (2 OF 2) MORTGAGE AND REALTY TRUST RANGE OF ENTERPRISE GOING CONCERN VALUE AS OF MARCH 31, 1995 NOTES (A) The valuation of the asset portfolio assumes continued operation of the portfolio for several years. Sales and pay-offs of certain assets occur throughout the analysis period. Property cash flows, loan payments and pay- offs, and reversion amounts (based on normalized capital expenditures in the reversion year) were discounted to present value at 12 percent per year. Amounts DO NOT include extraordinary expenses for reorganization or litigation. (B) Amounts per Mortgage and Realty Trust--Quarterly Report pursuant to Section 12 or 15(d) of the Securities Exchange Act of 1934--period ended March 31, 1995. (C) For purposes of determining enterprise value, it was assumed that operating expenses (G&A) would be incurred at the following levels in the future:
AMOUNT YEAR ------ ---- $4,000,000 1 3,500,000 2 3,000,000 3 3,000,000 4 3,000,000 5 3,000,000 6
The impact of G&A expenses has been reflected as a direct reduction of total value. The present value of the G&A expenses was calculated by applying a capitalization rate of 10 percent to Year 6 stabilized G&A expenses and discounting both the capitalized, stabilized Year 6 expenses and the annual expenses at 12 percent. (D) The enterprise valuation assumes the portfolio is operated during the projection period and that no additional investments are made. An alternative enterprise valuation could be presented wherein the proceeds from portfolio operations are used for alternative business purposes, e.g., new mortgages, other real estate investments, etc., and general and administrative expenses are incurred to sustain such operations. Such alternative valuation has not been presented herein. The Range of Enterprise Going Concern Value is presented excluding liabilities for senior notes outstanding and accrued and unpaid interest. C-10 ANNEX D [Paste-up of Kenneth Leventhal & Company] Mortgage and Realty Trust Elkins Park, Pennsylvania This report sets forth a summary of the work performed by Kenneth Leventhal & Company ("KL") at the request of Mr. C. W. Strong, Jr., President, Mortgage and Realty Trust ("MRT"). The work performed included the procedures outlined in our engagement letter dated April 12, 1995 (Exhibit A). It is our understanding that the work performed by KL as summarized herein will be utilized by MRT in connection with a judicial restructuring of MRT. Accordingly, this report is intended solely for your use in connection with such judicial restructuring transaction and is not to be otherwise used, circulated, quoted or referred to in any manner. In addition, our letter of April 12, 1995 contains specific limitations with respect to the analytical procedures performed in connection with this engagement and is incorporated in its entirety by reference herein. ENGAGEMENT APPROACH We obtained selected financial information prepared by MRT as of March 31, 1995. Utilizing this information, we selected 26 assets representing mortgage loans, investments, in substance foreclosure assets, and real estate equities owned. The selection was divided between the "West Coast" and "East Coast" portfolios and generally represented the assets with the highest dollar values in the portfolio. In addition, as summarized in Exhibit B to this report, the selection of assets included different portfolio classifications. For the assets selected as outlined above, the following procedures were performed: . We obtained the most recent "Argus" property cash flow projections. . We obtained, where applicable, the most recent operating rent roll and other financial information. . We obtained the most recent appraisals, where applicable and available. . We obtained the previous KL analytical procedures performed as of March 1993 and July 1994. . We discussed the current status of each selected asset with the respective MRT asset manager to determine loan status, property characteristics, current occupancy, existing market rental rates, new leases, current payoff discussions, asset sales, etc. . We reviewed limited market information including selected submarket information, if available. . We modified the MRT assumptions, as necessary, to conform to certain known current market conditions and our understanding of the assets. . We updated the valuation model prepared by KL in 1993 and 1994 utilizing current market and/or assumption modifications determined from the procedures outlined above. . We capitalized Net Operating Income from Year 2 as derived by the KL valuation model at both 14 and 16 percent capitalization rates to determine a high and low range of liquidation values for the selected assets. We believe that the procedures outlined above, when applied to 26 of the largest assets in the MRT portfolio, provide a sufficient mathematical basis for extrapolation of the values to the remaining portfolio in order to calculate a range of liquidation values. The liquidation valuation as of March 31, 1995 utilizes the most recently available financial statements of MRT and adjusts the analyses outlined above as summarized in the notes to Exhibit B included herein. D-1 The results of our procedures as outlined above are summarized in Exhibit B. You have requested that we determine the valuation of the portfolio on a liquidation basis. The assumptions utilized by MRT and reviewed by us included expected collection of amounts due on mortgage loans and cash flows from operating properties. The Range of Liquidation Values (Exhibit B) approximates the amounts that may be realized upon an immediate liquidation of MRT. For purposes of this analysis it was assumed that the portfolio would be liquidated within a twelve-month period of time under a judicially mandated liquidation process. The MRT portfolio is diverse in type as well as geographic distribution. The liquidation scenario presented herein assumes the accelerated liquidation of the portfolio in a series of individual and discrete transactions. Other liquidation scenarios could be presented which might include the disposition of the portfolio in bulk or selected pool dispositions of assets with similar qualities, characteristics and geographic locations. Kenneth Leventhal & Company May 15, 1995 D-2 - -------------------------------------------------------------------------------- SUMMARY OF EXHIBITS - -------------------------------------------------------------------------------- A. Engagement Letter dated April 12, 1995 B. Range of Liquidation Values and Supporting Analyses D-3 EXHIBIT A (1 OF 3) April 12, 1995 Mr. C.W. Strong, Jr. President Mortgage and Realty Trust 3500 West Olive Avenue Suite 600 Burbank, CA 91505-4628 Dear Mr. Strong: In accordance with your request, this letter sets forth our understanding and agreement with respect to the work Kenneth Leventhal & Company will perform in connection with the valuation of Mortgage and Realty Trust's investment portfolio, including mortgage loans, property acquired through foreclosure and held for sale, in-substance foreclosures, participating loans, amortizing loans, realty equities, real estate equities and investments in partnerships. Our work is being performed to update our previous work to assist MRT and its various interested creditor parties in determining an appropriate basis of valuation for a potential restructuring transaction. This letter summarizes the scope of services we will provide, project approach, engagement staffing, timing and estimated fees. BACKGROUND AND OUR UNDERSTANDING Kenneth Leventhal & Company ("KL") is familiar with the Mortgage and Realty Trust ("MRT") portfolio as a result of a comprehensive due diligence project undertaken in early 1993 on behalf of a potential equity investor and individual asset valuations and an "Entity" valuation as of June 30, 1994 undertaken for MRT. At the time of the 1993 engagement, KL performed comprehensive due diligence of all assets in the MRT portfolio. The asset valuations as of June 30, 1994, updated the valuations for 26 of MRT's assets. It is our understanding that MRT desires assistance in determining valuations for the MRT portfolio (as described above) for the purposes of considering various restructuring alternatives. MRT, through its various financial advisors and in connection with its ongoing discussions with various creditor groups, has performed comprehensive analyses of their investment portfolio and certain other interim valuations have been performed by other outside consultants. It is contemplated that all previous data and information relative to the portfolio maintained by MRT will be made available to KL to assist them in performing the presently requested services. The valuation consulting services applied to the MRT portfolio as of June 30, 1994 will be updated to March 31, 1995. The valuation services to be provided will not constitute independent asset appraisals performed in accordance with standards established by the Appraisal Institute or other professional bodies. The procedures will be designed to determine an estimated range of value of the MRT portfolio on a going-concern basis, that is, on a basis that does not contemplate an accelerated liquidation, bulk sale of assets or other form of distressed sale. The procedures will also be designed to present a range of liquidation values for the MRT portfolio to approximate the amount that may be realized upon a current market accelerated liquidation. ENGAGEMENT APPROACH In consideration of the previous work performed by KL, this engagement will be designed to utilize all existing information to the fullest extent possible. The procedures of this engagement will be designed to update the June 30, 1994 values as of March 31, 1995 and will be substantially similar to those performed for the valuation as of June 30, 1994. This work will be conducted on the 26 assets previously valued. Any of those 26 assets which have been disposed of will be replaced by assets with the highest book value that were not previously tested. D-4 EXHIBIT A (2 OF 3) In summary, the procedures to be performed in connection with the 26 assets will include the following. . Obtain the most recent "Argus" property cashflow projections. . Obtain the most recent operating rent rolls and other financial information. . Obtain the most recent appraisals, where available. . Obtain the previous KL portfolio analyses from March 1993 and June 30, 1994. . Discuss the current status with the asset manager to determine loan status, foreclosure property characteristics, including current occupancy, existing market rental rates, new leases, current payoff discussions, asset sales, etc. . Review and update market information for the properties, including selected submarket information, if available. . Modify MRT assumptions, as necessary, to conform to current updated market conditions. . Update the valuation model prepared by KL in 1993 utilizing current market and/or assumption modifications determined from the procedures provided above. . Calculate estimated range of asset values on both a going-concern and liquidation value basis. We believe that the procedures outlined above, applied to 26 of the largest assets in the MRT portfolio, will provide a sufficient mathematical basis for extrapolation of characteristics to the remaining portfolio and, therefore, provide an acceptable basis for the calculation of appropriate valuation ranges on both the going-concern and liquidation basis. In addition to the specific valuation procedures outlined above, KL is prepared to assist both MRT and its creditor groups with further refinements to the valuation and other assistance which may be required in connection with the potential restructuring alternatives presently considered. ENGAGEMENT STAFFING In light of the accelerated timetable mandated for this engagement, the project will be undertaken by KL personnel on the east coast and west coast simultaneously. Stephen G. Finn will serve as the overall engagement partner, assisted by Mr. Frederick Chin, the Director of KL's valuation practice in Los Angeles. Both Mr. Chin and Mr. Finn will be assisted by staff from KL's various offices. It is anticipated that the procedures outlined above will require approximately 30 to 45 business days to complete and, therefore, a date of May 31, 1995 is the projected completion date. ESTIMATED FEES It is anticipated that the procedures outlined above will utilize, to a significant extent, data prepared by KL and MRT in connection with the previous portfolio analyses. Our work will also encompass a review of the portfolio updated valuation procedures performed by MRT to provide a basis for us to conclude the appropriateness of extrapolating the valuation characteristics of the 26 assets selected to the entire portfolio. The estimated fees to perform updated valuations of the 26 selected assets will be $2,000 per asset plus applicable out-of-pocket expenses. The total estimated fees for this update, exclusive of any professional services requested to comply with Bankruptcy or SEC reporting requirements, will be $50,000 -$60,000. As noted above, the engagement is being approached so as to permit modification or expansion of procedures to the entire portfolio, if considered necessary by MRT and its advisors. To the extent an expansion of procedures is considered necessary or additional tasks are required, supplemental letters of understanding will be prepared with appropriate estimates of fees and tasks described herein. D-5 EXHIBIT A (3 OF 3) It is understood that the work outlined herein is being performed at the request of MRT for their use in connection with discussions with various interested creditor groups. It is further understood that certain portions of KL's work product may be made available to MRT for use in their bankruptcy/SEC proxy filing. As the engagement progresses, KL will make periodic status reports to MRT. It is understood that the work undertaken by KL is of a confidential nature and will not be utilized by KL or communicated to any other parties without the express, written authorization from MRT. In addition to the valuation services outlined above, KL is available to assist MRT with implementation issues associated with "Fresh Start" accounting (FAS-SOP-90-7). This assistance may include allocation methodology for asset valuations or the determination of the "Fresh Start" Balance Sheet. Our charges for this additional assistance will be made at our standard billing rates, with a budget estimate, per task approved by you in advance. As noted above, KL may be called upon to present additional information, reports, consents, testimony, meetings and consultations in connection with the restructuring process currently under way. The charges outlined above to update our valuation do not attempt to estimate such restructuring process costs. To the extent services are requested outside the scope of the work contemplated above, we will 1) notify you and 2) bill such time at our normal standard rates of $80--$350 per hour. Either party may terminate this letter agreement at any time upon written notice, without liability or continuing obligation except that neither the termination nor completion of this assignment shall affect: (a) any compensation earned by KL up to the date of termination or completion, as the case may be, or (b) the reimbursement of expenses incurred by KL up to the date of termination or completion, as the case may be. We appreciate the opportunity to be of continued service to Mortgage and Realty Trust and look forward to beginning this work immediately. Very truly yours, /s/ Stephen G. Finn ------------------------------------- Stephen G. Finn of Kenneth Leventhal & Company SGF/ld cc: Frederick Chin Accepted: MORTGAGE AND REALTY TRUST /s/ C.W. Strong, Jr. April 12, 1995 - ------------------------------------- ---------------------------------------- C.W. Strong, Jr. Date President D-6 EXHIBIT B (1 OF 4) MORTGAGE AND REALTY TRUST RANGE OF LIQUIDATION VALUES AS OF MARCH 31, 1995
RANGE ----------------- LOW HIGH -------- -------- (000 OMITTED) Extrapolated Liquidation Value of Portfolio (A).............. $192,600 $218,100 Adjustments: Add: Cash on Hand (B)....................................... 1,500 1,500 Marketable Securities (B)................................ 71,600 71,600 Accounts Receivable and Other Assets (A)(B).............. 1,800 3,700 -------- -------- 267,500 294,900 Less: Outstanding Debt--Imperial (B)........................ 17,600 17,600 Deferred Compensation (B)................................ 400 400 Accounts Payable and Accrued Expenses (B)................ 3,400 3,400 Termination Pay Plan (A) (C)............................. 1,400 1,400 Wind Down G&A Expenses (A)............................... 5,000 5,000 Legal, Liquidation Costs, etc. (A)....................... 10,000 8,000 -------- -------- $229,700 $259,100 ======== ======== Range of Liquidation Values, March 31, 1995.................. $220,000 $260,000 ======== ========
(See Next Page for Notes) D-7 EXHIBIT B (2 OF 4) MORTGAGE AND REALTY TRUST RANGE OF LIQUIDATION VALUES AS OF MARCH 31, 1995 NOTES (A) For the purpose of determining a range of liquidation values, the following assumptions were utilized: . All assets in the portfolio were disposed of within a twelve-month period under a judicially mandated process. . The assets were sold in discrete individual transactions, not in a bulk sale. . The Extrapolated Liquidation Value of the Portfolio was determined by applying capitalization rates of 14 percent (high) and 16 percent (low) to the net operating income for selected assets for the 12 month period from April 1996 to March 1997. These capitalized values were extrapolated to the entire MRT portfolio. Real estate assets with outstanding offers for sale at the valuation date were included at their offer price. Sales proceeds were reduced by estimated selling expenses of five percent. . Performing real estate loans were assumed sold at discounts from book value of 10 percent (high) and 20 percent (low). . Accounts Receivable and Other Assets are considered 50 percent collectible (low) or 100% collectible (high). . Termination Pay Plan has been estimated at approximately $1.4 million. . Wind Down G&A expenses were assumed to be $5 million. . Legal, accounting and other costs associated with the judicial liquidation were assumed to be between $8 million (high) and $10 million (low). (B) Amounts per Mortgage and Realty Trust--Quarterly Report pursuant to Section 12 or 15(d) of the Securities Exchange Act of 1934--period ended June 10, 1994. (C) Amount per Mortgage and Realty Trust Form 10Q as of March 31, 1995. D-8 EXHIBIT B (3 OF 4) MORTGAGE AND REALTY TRUST LIQUIDATION VALUE CAPITALIZED AT 14%
APRIL 1996 APRIL 1996 NET ASSET NOI ASSET ASSET ASSET OPERATING CAPPED @ CONTROL # TYPE ASSET NAME TYPE INCOME 14% --------- ----- ---------- ------------- ----------- ------------ 594 A Six Sentry Parkway (1 Earn Mtg. 62,430 445,929 bldg.) - ----------------------------------------------------------------------------------- 658 A Caltrans-Freeway Corp. Earn Mtg. 1,825,187 13,037,050 Park - ----------------------------------------------------------------------------------- 655 A Pacesetter Business Earn Mtg. 1,110,377 7,931,264 - ----------------------------------------------------------------------------------- 621 A Gordon Drive Earn Mtg. 2,312,788 16,519,914 - ----------------------------------------------------------------------------------- 641 B Midis Property NE ISF 651,619 4,654,421 - ----------------------------------------------------------------------------------- 590 C Berdon Plaza NE REO 917,141 6,551,007 - ----------------------------------------------------------------------------------- 452 C Keewaydin NE REO 394,853 2,820,379 - ----------------------------------------------------------------------------------- 639 D East Bradford Associates E ISF 883,152 6,308,229 - ----------------------------------------------------------------------------------- 609 D Cascade Drive E ISF 872,415 6,231,536 - ----------------------------------------------------------------------------------- 643 E Villa Del Cresta E REO 1,163,212 8,308,657 - ----------------------------------------------------------------------------------- 421 E Parkway Business Center E REO 506,442 3,617,443 - ----------------------------------------------------------------------------------- 467 E North County E REO 628,208 4,487,200 - ----------------------------------------------------------------------------------- 498 E Junipers at Yarmouth E REO 860,871 6,149,079 - ----------------------------------------------------------------------------------- 647 E Moreno Valley (BIF) E REO 539,161 3,851,150 - ----------------------------------------------------------------------------------- 646 E McLaughlin Apartments E REO 456,150 3,258,214 - ----------------------------------------------------------------------------------- 673 E Arcade E REO 737,397 5,267,121 - ----------------------------------------------------------------------------------- 687 E Six Sentry Parkway (5 E REO 665,225 4,751,607 bldgs.) - ----------------------------------------------------------------------------------- 574 E Burtonsville Commerce E REO 653,772 4,669,800 - ----------------------------------------------------------------------------------- 447 F Riverside Center Equity 860,845 6,148,893 - ----------------------------------------------------------------------------------- 563 F Slauson Business Center Equity 299,965 2,142,607 - ----------------------------------------------------------------------------------- 672 F Paseo Padre Equity 2,541,631 18,154,507 - ----------------------------------------------------------------------------------- 558 F Pinebrook Business Equity 645,255 4,608,964 Center - ----------------------------------------------------------------------------------- 448 F Stadium Towers Equity 529,117 3,779,407 - ----------------------------------------------------------------------------------- 591 G Creekside Center Participation 809,083 5,779,164 Associates - ----------------------------------------------------------------------------------- 630 G Newark C&C Associates Participation 943,059 6,736,136 - ----------------------------------------------------------------------------------- 576 G Keystone I Participation 543,016 3,878,686 - ----------------------------------------------------------------------------------- TOTALS $22,412,371 $160,088,364 --------------------------------------------------------------------- Extrapolated Portfolio NOI Capped at 14% 227,468,610 ADD: 90% of Face Value of Performing Loans $ 53,169,397 ADD: Proceeds from Sale of Junipers at Yarmouth 9,000,000 LESS: Extrapolated Value of Performing Loans (53,900,420) LESS: Capitalized NOI of Junipers at Yarmouth (6,149,079) ------------ Subtotal: 229,588,509 ------------ LESS: Selling and Disposition Expenses (11,479,425) ------------ EXTRAPOLATED VALUE OF PORTFOLIO $218,109,083 ============
D-9 EXHIBIT B (4 OF 4) MORTGAGE AND REALTY TRUST LIQUIDATION VALUE CAPITALIZED AT 16%
APRIL 1996 APRIL 1996 NET ASSET NOI ASSET ASSET ASSET OPERATING CAPPED @ CONTROL # TYPE ASSET NAME TYPE INCOME 16% --------- ----- ---------- ------------- ----------- ------------ 594 A Six Sentry Parkway (1 Earn Mtg. 62,430 390,188 bldg.) - ----------------------------------------------------------------------------------- 658 A Caltrans-Freeway Corp. Earn Mtg. 1,825,187 11,407,419 Park - ----------------------------------------------------------------------------------- 655 A Pacesetter Business Earn Mtg. 1,110,377 6,939,856 - ----------------------------------------------------------------------------------- 621 A Gordon Drive Earn Mtg. 2,312,788 14,454,925 - ----------------------------------------------------------------------------------- 641 B Midis Property NE ISF 651,619 4,072,619 - ----------------------------------------------------------------------------------- 590 C Berdon Plaza NE REO 917,141 5,732,131 - ----------------------------------------------------------------------------------- 452 C Keewaydin NE REO 394,853 2,467,831 - ----------------------------------------------------------------------------------- 639 D East Bradford Associates E ISF 883,152 5,519,700 - ----------------------------------------------------------------------------------- 609 D Cascade Drive E ISF 872,415 5,452,594 - ----------------------------------------------------------------------------------- 643 E Villa Del Cresta E REO 1,163,212 7,270,075 - ----------------------------------------------------------------------------------- 421 E Parkway Business Center E REO 506,442 3,165,263 - ----------------------------------------------------------------------------------- 467 E North County E REO 628,208 3,926,300 - ----------------------------------------------------------------------------------- 498 E Junipers at Yarmouth E REO 860,871 5,380,444 - ----------------------------------------------------------------------------------- 647 E Moreno Valley (BIF) E REO 539,161 3,369,756 - ----------------------------------------------------------------------------------- 646 E McLaughlin Apartments E REO 456,150 2,850,938 - ----------------------------------------------------------------------------------- 673 E Arcade E REO 737,397 4,608,731 - ----------------------------------------------------------------------------------- 687 E Six Sentry Parkway (5 E REO 665,225 4,157,656 bldgs.) - ----------------------------------------------------------------------------------- 574 E Burtonsville Commerce E REO 653,772 4,086,075 - ----------------------------------------------------------------------------------- 447 F Riverside Center Equity 860,845 5,380,281 - ----------------------------------------------------------------------------------- 563 F Slauson Business Center Equity 299,965 1,874,781 - ----------------------------------------------------------------------------------- 672 F Paseo Padre Equity 2,541,631 15,885,194 - ----------------------------------------------------------------------------------- 558 F Pinebrook Business Equity 645,255 4,032,844 Center - ----------------------------------------------------------------------------------- 448 F Stadium Towers Equity 529,117 3,306,981 - ----------------------------------------------------------------------------------- 591 G Creekside Center Participation 809,083 5,056,769 Associates - ----------------------------------------------------------------------------------- 630 G Newark C&C Associates Participation 943,059 5,894,119 - ----------------------------------------------------------------------------------- 576 G Keystone I Participation 543,016 3,393,850 - ----------------------------------------------------------------------------------- TOTALS $22,412,371 $140,077,319 --------------------------------------------------------------------- Extrapolated Portfolio NOI Capped at 14% 199,035,034 ADD: 80% of Face Value of Performing Loans $ 47,261,686 ADD: Proceeds from Sale of Junipers at Yarmouth 9,000,000 LESS: Extrapolated Value of Performing Loans (47,162,867) LESS: Capitalized NOI of Junipers at Yarmouth (5,380,444) ------------ Subtotal: 202,753,409 ------------ LESS: Selling and Disposition Expenses (10,137,670) ------------ EXTRAPOLATED VALUE OF PORTFOLIO $192,615,739 ============
D-10 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1994 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-6613 MORTGAGE AND REALTY TRUST (Exact name of registrant as specified in its charter) MARYLAND 23-1862664 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 8380 OLD YORK ROAD, SUITE 300 19027 ELKINS PARK, PENNSYLVANIA (Zip code) (Address of principal executive offices)
Registrant's telephone number, including area code: 215-881-1525 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ----------------------------------------------- ------------------------------- Common Shares, par value $1.00 per share New York Stock Exchange Pacific Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. /X/ The aggregate market value of the Common Shares held by non-affiliates of the registrant at December 14, 1994, computed by reference to the closing sale price of such shares as reported in the Consolidated Transaction Reporting System, was $1,750,000. The number of Common Shares outstanding at December 14, 1994 was 11,226,215. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes _X_ No ___ ------------------------ DOCUMENTS INCORPORATED BY REFERENCE None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL Mortgage and Realty Trust (the "Trust") is a Maryland real estate investment trust engaged in the business of managing its portfolio of mortgage loans and real estate investments. The Trust was organized in 1970 as PNB Mortgage and Realty Investors. In 1979, Sutro Mortgage Investment Trust combined into the Trust. In 1984, the Trust changed its name to Mortgage and Realty Trust. The Trust is organized under a Declaration of Trust as amended through February 17, 1993 and conducts its business in such a fashion as to qualify as a real estate investment trust under Sections 856-860 of the Internal Revenue Code of 1986, as amended. The Trust is currently managed by seven Trustees, each of whom is elected annually by the Trust's shareholders at the annual meeting of shareholders. Although the annual meeting of shareholders is customarily held in February of each year, the Trust has determined for 1995 to postpone the meeting pending any restructuring agreed upon with the holders of the Trust's Senior Secured Uncertificated Notes due 1995 (the "Senior Notes"). The Trust has six executive officers, two of whom are also Trustees. PREVIOUS CHAPTER 11 PROCEEDING AND PLAN OF REORGANIZATION On April 12, 1990, the Trust filed a voluntary petition for reorganization under chapter 11 of the United States Code, as amended (the "Bankruptcy Code"), in the United States Bankruptcy Court for the Central District of California. The decision of the Trustees of the Trust to file a voluntary petition for reorganization was reached following a series of events commencing on March 12, 1990, when Standard & Poor's Corporation downgraded the rating for the commercial paper of the Trust from A-2 to A-3. As a result of this downgrading, the Trust was unable to access the commercial paper markets, resulting in a series of defaults under the Trust's outstanding indebtedness. After unsuccessfully negotiating with a group of lenders to establish a replacement credit arrangement, the Trustees of the Trust decided on April 12, 1990, that the interests of shareholders and other parties in interest would be better served by filing for reorganization under Chapter 11. On November 21, 1990, a Joint Plan of Reorganization (the "1991 Plan") proposed by the Trust, the official creditors' committee and the official equity security holders' committee was filed with the bankruptcy court pursuant to section 1121 of the Bankruptcy Code. The 1991 Plan was confirmed by the bankruptcy court by an order entered February 27, 1991. The 1991 Plan was filed as Exhibit 4.4 to the Trust's Annual Report on Form 10-K for the fiscal year ended September 30, 1991. An amendment to the 1991 Plan effected as part of the 1992 Restructuring (discussed below) was filed as Exhibit 4.4 to the Trust's Annual Report on Form 10-K for the fiscal year ended September 30, 1992. The 1991 Plan provided that the holders of claims against the Trust were to receive payments in installments over a period ending on June 30, 1995, with the right of the Trust to defer certain principal amounts for up to 24 months, up to December 31, 1995. Interest was payable initially at Bank of America N.T. & S.A.'s reference rate plus one percent, increasing by 0.25% every six months, with interest on deferred amounts at the adjusted rate plus two percent. The 1991 Plan also included numerous financial, affirmative and negative covenants, including covenants relating to the ratio of the Trust's outstanding debt to its capital base, the ratio of earning assets to outstanding debt and the amount of non-earning assets, and covenants severely limiting the Trust's ability to make new investments or to incur new indebtedness. The forecast upon which the 1991 Plan was based assumed that the real estate markets would begin to improve in fiscal 1992. However, the markets continued to materially deteriorate. Despite these conditions, the Trust was able to make all required interest payments and to exceed the required amortization payments, reducing the debt to $374,000,000 at June 30, 1991 as opposed to the requirement of $380,000,000 and to $329,000,000 at January 3, 1992 as opposed to the requirement of $340,000,000 at December 31, 1991. These results were achieved through liquidating Trust assets at substantial discounts from their acquisition cost. 1 The continued deterioration of the real estate markets made it impossible for the Trust to meet the amortization payment at June 30, 1992, which was required to reduce the Trust's debt to $291,250,000, taking into account deferrals permitted under the 1991 Plan. The deterioration also precluded the Trust from being able to meet the financial covenants of the 1991 Plan. To adjust its operations to current market conditions, by 1992 the Trust had redirected its focus. The Trust had historically emphasized earnings growth, and the accompanying asset acquisitions. Because of changes in the economy and the financial and real estate markets, which adversely affected the Trust's business and asset values, management moved to an emphasis on improving cash flow in order to meet its obligations under the 1991 Plan and then to provide an opportunity for growth and increased shareholder value in the future when the United States real estate markets would, eventually, stabilize and return to a more traditional environment. Meeting the interest and principal payments required under the 1991 Plan was one of the Trust's important objectives. Management focused efforts on generating sufficient liquidity through active and asset-specific management of its overall portfolio to meet those payments, while at the same time maximizing future shareholder value. However, in light of the impending June 30, 1992 interest and principal payments, which aggregated approximately $44.4 million under the 1991 Plan, and the continued stagnation in the real estate market, in late 1991 and early 1992 the Trust determined that it was necessary to defer a portion of the principal payments of the outstanding debt and limit certain future cash interest payments to allow sufficient time for liquidity to return to the United States real estate markets. As part of the ongoing effort to strengthen the Trust's capital structure, of which the 1992 Restructuring (as defined below) was to be an important element, the Trust also considered raising cash through structured financings such as asset securitizations. However, the Trust was ultimately unable to generate funds through such transactions. 1992 RESTRUCTURING At the end of the Trust's fiscal year ending September 30, 1991, it was evident to the Trust that conditions in the real estate markets were continuing to deteriorate. Commencing in the first quarter of fiscal 1992, the Trust held discussions with the official creditors' committee to discuss a rescheduling of the debt obligations under the 1991 Plan. Throughout the balance of the first quarter of fiscal 1992 and during the second and third quarters of fiscal 1992, the Trust negotiated with the official creditors' committee to develop a prudent rescheduling of such debt. Pursuant to the Trust's negotiations with its official creditors' committee, on June 15, 1992 the Trust commenced a solicitation of acceptances to certain modifications (the "1992 Modifications") to the outstanding debt obligations of the Trust and to a prepackaged plan of reorganization (the "Proposed 1992 Plan") to effect the same 1992 Modifications. In order to effect the 1992 Modifications without implementing the Proposed 1992 Plan, the Trust was required to obtain acceptances from holders of 100% of the outstanding debt obligations. The proposed modifications to the outstanding debt were identical under the proposed out-of-court restructuring and the Proposed 1992 Plan. The Trust received 100% acceptance of the 1992 Modifications and, on July 15, 1992, the Trust successfully restructured its outstanding debt in accordance with the proposed 1992 Modifications (the "1992 Restructuring"). Pursuant to the 1992 Restructuring, the outstanding debt was restructured in the form of the Senior Notes. The 1992 Modifications provided, among other things, for (i) an increase in the amounts of required principal payments which could be deferred (while retaining the final payment date for deferred payments at December 31, 1995), (ii) an extension of the permitted repayment period of such deferred amounts from 24 months to 30 months from the date a deferral is utilized, (iii) the establishment of a limit on the maximum rate of interest to be paid in cash on a current basis at 9% through June 30, 1994, with any excess being accrued and paid at December 31, 1995, (iv) changes in certain required financial covenants to reflect the then-existing financial condition of the Trust and the then-existing real estate markets, (v) with the approval of the holders of 66 2/3% of the Senior Notes, the release of collateral for certain financings by the Trust, provided such financings would result in the reduction in the amount of Senior Notes, and (vi) the payment of additional consideration (the 2 restructuring fee) to the holders of the Senior Notes equal to one percent of the principal amount of the Senior Notes, payable in four semi-annual installments commencing on the date the 1992 Restructuring became effective. Pursuant to the 1992 Restructuring, the Trust entered into the Indenture (the "Indenture") governing the Senior Notes with Wilmington Trust Company, as trustee (the "Indenture Trustee"), entered into a second amendment to the Trust's outstanding collateral and security agreement dated as of February 21, 1991 (as amended, the "Collateral Agreement") with the Indenture Trustee and William J. Wade, as collateral agents (the "Collateral Agents"), and amended the 1991 Plan. CURRENT DEBT SERVICE REQUIREMENTS AND DEFAULTS AND FORECAST SHORTFALL IN OPERATING CASH FLOW The face amount of the Senior Notes at September 30, 1994 was $290,000,000. The Senior Notes provide that the holders of Senior Notes will receive semi-annual payments of principal on June 30 and December 31 of each year until June 30, 1995 when all undeferred principal is due. The Senior Note Indenture also provides for quarterly additional payments of principal in an amount equal to available cash (as defined in the Indenture) held by the Trust at the end of each quarter in excess of $10 million, less certain dividend overpayments, if any. The Trust has the right to defer certain principal payments for up to 30 months until December 31, 1995 at which time no more principal payments may be deferred and all deferred amounts are due. The Senior Notes provide for payments of interest quarterly on March 31, June 30, September 30 and December 31 of each year. Interest on the Senior Notes was payable initially in 1991 at Bank of America N.T. & S.A.'s reference rate plus one percent, increasing 0.25% every six months. The interest rate spread over such reference rate in effect on September 30, 1994 was 2.75%, with the next scheduled date for an increase in the rate being January 1, 1995. Interest on deferred principal is payable at such adjusted rate plus two percent. The Senior Note Indenture also contains numerous financial, affirmative and negative covenants as described above. The financial forecast upon which the 1992 Restructuring was based assumed that the real estate markets in which the Trust holds assets would stop or slow their decline by 1993 with some improvement in 1994. Instead, since the effective date of the 1992 Restructuring, these markets have failed to improve or otherwise substantially rebound. The Trust's business, including its ongoing efforts to refinance and sell property, did not generate cash flow sufficient to service the Senior Notes during the fiscal years ended September 30, 1993 and 1994. In any event, the Senior Notes will need to be refinanced on or about June 30, 1995. Because its operating income has declined due to the continued deterioration of the real estate markets, the Trust was not able to meet its scheduled June 30, 1993 principal payment on the Senior Notes of $20,000,000, which was required to reduce the principal amount of the Senior Notes to $270,000,000, taking into account deferrals permitted under the Senior Note Indenture. The Trust's failure to make the June 30 principal payment constituted an event of default under the Senior Note Indenture. The deterioration of the real estate markets also precluded the Trust from being able to meet certain ratios set forth in the financial covenants of the Senior Note Indenture effective March 31, June 30, and September 30, 1993, constituting additional events of default. Certain of these covenants were previously amended in or prior to the 1992 Restructuring. On May 26, 1993, the Trust received from the holders of more than 66 2/3% in principal amount of Senior Notes a waiver relating to the March 31 financial covenant default. The Trust timely paid the June 30 and September 30, 1993 interest payments of $6.8 million and $6.6 million, respectively. The Trust also paid the final payment of the restructuring fee of $812,500 on September 30, 1993. An additional $33.8 million in principal (taking into account permitted deferrals) and $6.6 million in interest was due on December 31, 1993; another $6,400,000 in interest was due on March 31, 1994; an additional $30,000,000 in principal (taking into account permitted deferrals) and $7,200,000 in interest was due on June 30, 1994; and another $7,900,000 in interest was due on September 30, 1994. Consistent with the then ongoing negotiation with the principal holders of the 3 Senior Notes and an agreement in principal reached in August 1993 (see "1993-1994 Negotiations With the Creditors' Committee" below), the Trust did not pay the interest or principal due at December 31, 1993, constituting additional events of default under the Indenture. The Trust currently has no agreement with any holders of Senior Notes that it will not pay interest, principal or other amounts due or to become due on the Senior Notes; however, the Trust has continued to suspend payments on the Senior Notes. Because the Trust did not make otherwise required payments on June 30, 1993, December 31, 1993, March 31, 1994, June 30, 1994 and September 30, 1994, at the end of the first quarter of fiscal 1994 (ending December 31, 1993) the Trust held approximately $17.8 million in available cash (as defined in the Indenture), at the end of the second quarter of fiscal 1994 (ending March 31, 1994) the Trust held approximately $32.8 million in available cash, at the end of the third quarter of fiscal 1994 (ending June 30, 1994) the Trust held approximately $53.2 million in available cash, and at the end of fiscal year 1994 (ending September 30, 1994) the Trust held approximately $57.3 million in available cash. Assuming no other payment defaults, the Trust would have been obligated to pay the excess of such available cash over $10 million to Senior Note holders as an additional principal payment. The Trust forecasts that it will have continuing difficulty meeting its obligations under the Senior Note Indenture without a substantial restructuring of such debt. Notwithstanding the uncured events of default, neither the Indenture Trustee nor any holders of the Senior Notes have accelerated the Senior Notes or exercised any other remedy available upon the occurrence of the events of default described above. On July 2, 1993 holders of approximately 81% of the Senior Notes agreed, subject to certain conditions, not to accelerate the Senior Notes or take any other remedial or enforcement action during a defined standstill period (the "Standstill Period") initially expiring July 31, 1993. The Standstill Period was extended by holders of more than 66 2/3% of the Senior Notes on August 3, August 20, September 23, October 5 and November 23, 1993. However, the Standstill Period expired on December 3, 1993. The Company believes that no further extensions of the Standstill Period will be granted. Subsequent to the expiration of the Standstill Period, on or about December 8, 1993, the Indenture Trustee notified the Trust's bank of the Indenture Trustee's security interest in the Trust's deposit accounts and instructed the bank to freeze the Trust's cash until otherwise instructed by the Indenture Trustee. Since that date, the Trust has operated on an ad hoc basis with the Indenture Trustee in administering its cash, with all cash use subject to review and approval by the Indenture Trustee. On or about February 3, 1994, the Company and the Indenture Trustee and Collateral Agents reached further understanding regarding the Trust's use of cash and administration of its assets in the absence of a new or extended standstill period. Pursuant to the understanding, which is terminable at will by the Indenture Trustee or Collateral Agents, the Trust will continue to use its cash on an ad hoc basis, subject to Indenture Trustee and Collateral Agent approval, and the Trust will administer its assets as if no default had occurred and was continuing. In May 1994, the Trust's bank notified the Trust that it intended to close all of the Trust's operating accounts with the bank on May 31, 1994. Consequently, the Trust established new operating accounts at Wilmington Trust Company and transferred all of its bank balances to such accounts. Concurrently, the Trust and the Indenture Trustee entered into a First Supplemental Indenture, dated as of May 25, 1994, amending the Indenture to provide for the new accounts. The Trust also entered into a Deposit Account Security Agreement relating to such accounts and supplemented the February operating arrangement with the Indenture Trustee and the Collateral Agents to provide for the new accounts. Although the Trust has entered into the First Supplemental Indenture and amended its operating arrangement with the Indenture Trustee and the Collateral Agents, there can be no assurance that the Indenture Trustee or Collateral Agents will not terminate the amended cash use arrangement or take further remedial or enforcement action with respect to the Trust's bank accounts or other properties, including acceleration of the Senior Notes and foreclosure. Such action, or the failure of the Indenture Trustee to consent to necessary use of cash or releases of collateral in the conduct of the Trust's business would have a material adverse effect on the Trust's operations and could cause the Trust to seek relief under chapter 11 of the Bankruptcy Code. 4 Lack of liquidity for real estate has continued since the end of the Trust's fiscal year. The Trust's operating cash flow has declined as it has been forced to sell assets currently yielding higher returns. Approximately half of the Trust's portfolio is in California where the general economy and the real estate markets continue to be in recession. See "Investments" below. 1993-1994 NEGOTIATIONS WITH THE OFFICIAL CREDITORS' COMMITTEE During the second fiscal quarter of 1993, it became apparent to the Trust and its financial advisors that the Trust's projected cash flow would not be adequate to meet its obligations in the future. In February 1993 the Trust contacted its official creditors' committee to apprise the official creditors' committee and its advisors of the Trust's forecast difficulties. In or about February 1993, the Trust and its advisors met with its official creditor's committee and its advisors to discuss the Trust's condition and prospects. Thereafter, in March 1993, the Trust and the official creditors' committee commenced negotiations regarding a restructuring of the Senior Notes. Beginning with the initial formal meeting in March 1993, throughout the period from March through August 1993, the Trust and its advisors met with the official creditors' committee and its advisors to negotiate a restructuring. In August 1993, the Trust and the official creditors' committee met and agreed to the broad outlines of the economic terms of a restructuring, subject to the approval of the Trustees of the Trust. Under the agreement in principle, the Senior Notes would be exchanged for approximately $195 million of new senior secured notes and common shares representing 85% of the equity of the Trust. Thereafter, on August 18, 1993, the Trustees of the Trust approved the economic terms of the restructuring of the Senior Notes subject to, among other things, receipt of indications of support for the restructuring from individual members of the official creditors' committee and other holders of the Senior Notes reasonably sufficient to effect the restructuring pursuant to a prepackaged plan of reorganization (typically holders of at least two-thirds in principal amount and one half in number of claims). On August 19, 1993, the Trust announced that it had reached a non-binding agreement in principle with the official creditors' committee (representing approximately 43% of the Senior Notes) to restructure the indebtedness represented by the Senior Notes. While the Trust was negotiating with the official creditors' committee, the Trust was also discussing possible third-party investment in the restructuring. Although all potential third-party investors were offered an opportunity to propose restructuring alternatives, only three such investors made formal proposals to the Trust. The official creditors' committee advised the Trust that the offers were not acceptable and they did not believe that it was in their best interests in the restructuring to pursue such third-party participation. As a result, the Trust suspended the solicitation of interested parties, and the Trust and the official creditors' committee agreed on the internal restructuring contained in the August 1993 agreement in principle. Commencing again in November 1993, as the prospects for implementing the August 1993 agreement in principle waned, the Trust resumed responding to inquiries from third parties about participation in a restructuring of the Trust. Commencing at about the time of the agreement in principle between the Trust and the official creditors' committee, certain of the Senior Notes began to trade. Interest in the trading of Senior Notes increased after announcement of the terms of the restructuring and, by December 1993, in excess of 50% of the principal amount of the Senior Notes had traded. Included in the Senior Notes initially traded were all of the Senior Notes held by two of the five members of the official creditors' committee who had negotiated the August 1993 agreement in principle. In or about October 1993 four of the holders who had acquired Senior Notes and who then held a significant amount of Senior Notes signed confidentiality letters with the Trust and requested to be named to the official creditors' committee and receive financial and operating information relating to the Trust. The three then-remaining members of the official creditors' committee did not grant committee membership to the holders but acquiesced in the Trust's delivery of confidential information to the investing holders. In October 1993, the investing holders commenced their due diligence review of the Trust, which included financial and other information provided by the Trust. At the request of the investing holders, the Trust agreed to pay certain fees and expenses of a financial 5 advisor to the investing holders. In or about November 1993, the investing holders retained Smith Barney Shearson Inc. ("Smith Barney") as their financial advisor. Smith Barney immediately commenced its analysis of the financial condition and operations of the Trust and the proposed agreement in principle. Subsequently, another member of the official creditors' committee sold all of its Senior Notes, part to a member of the official creditors' committee and the balance to other persons. That sale left the official creditors' committee with two members, one of whom held, as a result of secondary claims purchases, at September 30, 1994 in excess of 33 1/3% of the Senior Notes (the "33 1/3% Holder"). Because of the substantial trading in the Senior Notes and the inability of the Trust to obtain satisfactory indications of support for the August 1993 agreement in principle from any holders of Senior Notes, any action by the Trust to implement the Trust's original agreed restructuring was suspended. In or about September 1994, another of the members of the official creditors' committee sold all of its Senior Notes. With that sale, the only remaining member of the official creditors' committee was the 33 1/3% Holder. On September 9, 1994, the Trust's counsel received telephonic notice from counsel to the official creditors' committee that it believed that the official creditors' committee had ceased to operate. NEGOTIATIONS REGARDING A RESTRUCTURING Throughout the second and third quarters of fiscal 1994, the Trust's management and advisors continued discussions with certain principal holders of the Senior Notes and their representatives to explore various alternatives for restructuring the Senior Notes. In March 1994, the principal holders requested that the Trust agree to pay certain fees and expenses of legal counsel to the principal holders. The Trust agreed, and in March 1994, the principal holders retained counsel to advise them in the Trust's financial restructuring. Thereafter, in June 1994, the principal holders requested and the Trust agreed to pay certain fees and expenses of a new financial advisor to the principal holders. The negotiations among the Trust, the various creditor constituencies and other interested parties in the Trust's financial restructuring continued into the fourth quarter of fiscal 1994. If a restructing cannot be consummated, or if the holders of Senior Notes or the Indenture Trustee take action or fail to cooperate with the Trust in such a manner that the business or operations of the Trust are jeopardized, the Trust will consider other alternatives, including the filing of a voluntary bankruptcy petition under chapter 11 of the Bankruptcy Code. On November 17, 1994, the Trust issued a press release announcing that it had reached an agreement in principle with a substantial number of holders of its Senior Notes on the terms of a restructuring of the Senior Notes. A copy of the press release and the term sheet to the restructuring were attached as exhibits to the Current Report on Form 8-K filed on November 28, 1994 with the Securities and Exchange Commission (the "Commission"). Pursuant to the agreement in principle, holders of the Senior Notes in the aggregate principal amount of $290 million plus accrued interest of $41.7 million through December 31, 1994 will receive under a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code $110 million of new senior secured notes due 2002, approximately $50 million in cash and 97% of the restructured equity of the Trust (or substantially all the restructured equity if holders of the Trust's outstanding common shares do not vote to accept the prepackaged plan). If holders of the outstanding common shares vote to accept the prepackaged plan, such holders will retain 3% of the equity of the restructured Trust. The agreement in principle anticipates that the new senior secured notes will mature in 2002 and bear interest at the rate of 11 1/8% per annum. It is also anticipated that holders of unsecured claims will receive cash in the allowed amount of their claims. It is contemplated that the Trust will prepare a "shelf" registration statement for the new securities issued pursuant to the prepackaged plan. 6 The agreement to pursue the restructuring proposal is subject to a number of conditions and the Trust intends to effect the restructuring through a prepackaged chapter 11 bankruptcy. At this time there can be no assurance that the conditions to consummation of the proposed restructuring will be satisfied. Other details of the agreement, including the additional conditions to commencement and consummation of the restructuring, have not been finalized pending the filing of proxy solicitation materials with the Commission and distribution of a disclosure statement for the solicitation of votes for the prepackaged plan to holders of the Trust's outstanding securities. No consents will be accepted other than pursuant to such disclosure statement and proxy statement. The advisors to the Trust and the various holders of Senior Notes are negotiating additional terms of the new debt securities to be received by the Senior Note holders under the prepackaged plan, as well as the formal documentation necessary to the restructuring. Details of the agreement in principle will be disclosed in that formal documentation. OTHER EVENTS In a letter dated November 29, 1994, the New York Stock Exchange (the "NYSE") notified the Trust that in light of the Trust's present financial condition, as well as its November 17, 1994 press release regarding the Trust's intention to file a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code, the NYSE is reviewing the continued listing of the Trust. Although the Trust is working with representatives of the NYSE to allow the Trust to continue to be listed, there can be no assurance that the NYSE will not determine to commence a formal delisting action. INVESTMENTS Although the Trust has continued to fund previously existing investment commitments and to fund limited tenant improvements and similar investments necessary to retain or obtain tenants, the Trust has not made any new investments since its chapter 11 filing, but it has continued to manage its investment portfolio. The Trust's future investment strategy cannot be formulated until the Trust's debt restructuring terms are finalized. The Trust's investments include short and intermediate-term standing loans, long-term participating loans and investments in real estate. Loans may be secured by first or junior mortgages as well as mortgages secured by leaseholds. Loans made by the Trust are secured by mortgages on income-producing properties, including office buildings, shopping centers, industrial projects, apartments and condominium projects. When the Trust made investments, it abided by various restrictions consisting principally of loan-to-value ratios, investment ranges and percentage of total assets invested in loans to a single borrower. The Trust's investments are primarily located in major metropolitan areas throughout the United States. As of September 30, 1994, the Trust held investments in mortgage loans, investments in real estate and other interests in real properties located in 19 states. Total loans and investment commitments outstanding at September 30, 1994 were $310,588,000 of which $615,000 remained to be disbursed. The following pages contain summaries of the Trust's commitments and investments at September 30, 1994 and certain information pertaining to non-earning loans, delinquent earning loans, non-earning in-substance foreclosures and non-earning foreclosed properties. 7 MORTGAGE AND REALTY TRUST SUMMARY OF INVESTMENTS AT SEPTEMBER 30, 1994
AMOUNT AMOUNT COMMITTED OUTSTANDING ---------------- ---------------- TYPE OF INVESTMENTS SHORT AND INTERMEDIATE-TERM Mortgage Loans: Standing loans............................................................ $ 62,469,000 $ 61,854,000 Properties Acquired Through Foreclosure and Held for Sale: Earning................................................................... 68,437,000 68,437,000 Non-earning............................................................... 32,282,000 32,282,000 In-Substance Foreclosures: Earning................................................................... 62,405,000 62,405,000 Non-earning............................................................... 10,228,000 10,228,000 Notes Receivable............................................................ 760,000 760,000 ---------------- ---------------- Total Short and Intermediate-Term....................................... 236,581,000 235,966,000 ---------------- ---------------- LONG-TERM Participating Loans: Participating Phase....................................................... 4,718,000 4,718,000 Amortizing Loans............................................................ 2,908,000 2,908,000 Investment in Real Estate Equities.......................................... 56,857,000 56,857,000 Investment in Partnerships.................................................. 9,524,000 9,524,000 ---------------- ---------------- Total Long-Term......................................................... 74,007,000 74,007,000 ---------------- ---------------- Total Invested Assets....................................................... $ 310,588,000 309,973,000 ---------------- ---------------- Less Deferred Fees........................................................ (496,000) ---------------- Total Invested Assets....................................................... $ 309,477,000 ---------------- ----------------
MORTGAGE AND REALTY TRUST NON-EARNING IN-SUBSTANCE FORECLOSURES AND NON-EARNING FORECLOSED PROPERTY HELD FOR SALE (BY GEOGRAPHIC DISTRIBUTION AND PROPERTY TYPE) SEPTEMBER 30, 1994 (000 OMITTED)
RETAIL INDUSTRIAL OFFICE CENTER CENTER BUILDING TOTAL --------- --------- --------- --------- California.......................................................... $ -- $ 10,513 $ 10,031 $ 20,544 Massachusetts....................................................... 5,039 2,712 1,027 8,778 New Hampshire....................................................... -- 5,157 -- 5,157 New Jersey.......................................................... -- -- 5,392 5,392 Pennsylvania........................................................ -- 2,609 -- 2,609 --------- --------- --------- --------- $ 5,039 $ 20,991 $ 16,450 $ 42,480 --------- --------- --------- --------- --------- --------- --------- ---------
8 MORTGAGE AND REALTY TRUST GEOGRAPHIC DISTRIBUTION OF INVESTMENTS BY COMMITTED AMOUNTS SEPTEMBER 30, 1994
RETAIL RESEARCH & STATE APARTMENTS HOTEL INDUSTRIAL OFFICE RESIDENTIAL BUILDINGS DEVELOPMENT TOTALS % - ------------------- ----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------ ------- Arizona........... $ 4,384,479 $ 4,384,479 1.41% California........ $ 254,283 41,353,733 $23,332,370 $ 74,197 $62,855,920 $24,132,073 152,002,576 49.07% Colorado.......... 37,924 204,931 242,855 0.08% Delaware.......... 204,312 204,312 0.07% Georgia........... 62,752 62,752 0.02% Indiana........... 4,315,288 4,315,288 1.39% Maine............. 7,690,408 7,690,408 2.48% Maryland.......... 9,211,305 816,481 10,027,786 3.24% Massachusetts..... 5,420,203 5,282,263 3,639,943 14,342,409 4.63% Michigan.......... 6,694,782 6,694,782 2.16% Minnesota......... 2,341,987 2,840,655 5,182,642 1.67% Missouri.......... 9,006,582 9,006,582 2.91% Nevada............ $3,060,000 3,060,000 0.99% New Hampshire..... 5,157,610 1,398,963 6,556,573 2.12% New Jersey........ 5,391,693 5,391,693 1.74% Oregon............ 6,976,545 6,976,545 2.25% Pennsylvania...... 24,108,284 21,077,135 13,856,155 9,872,505 68,914,079 22.24% Virginia.......... 138,676 138,676 0.04% Washington........ 4,633,272 4,633,272 1.49% ----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------ ------- Totals............ $27,961,343 $3,060,000 $87,399,568 $71,271,311 $1,334,342 $81,955,912 $36,845,233 $309,827,709 ----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------ ----------- ---------- ----------- ----------- ---------- ----------- ----------- ------------ Percentage........ 9.02% 0.99% 28.20% 23.00% 0.43% 26.47% 11.89% 100.00% ----------- ---------- ----------- ----------- ---------- ----------- ----------- ------- ----------- ---------- ----------- ----------- ---------- ----------- ----------- -------
NON-EARNING INVESTMENTS, DELINQUENT EARNING LOANS AND FORECLOSED PROPERTIES EARNING MORTGAGE LOANS MORE THAN 60 DAYS DELINQUENT -- The Trust generally considers loans as delinquent if payment of interest and/or principal, as required by the term of the note, is more than 60 days past due. At September 30, 1994, there were no loans which were so delinquent as to principal and/or interest. NON-EARNING MORTGAGE LOANS -- At September 30, 1994, there were no loans classified as non-earning. NON-EARNING IN-SUBSTANCE FORECLOSURES -- A loan is considered an in-substance foreclosure if (1) the debtor has little or no equity considering the fair value of the collateral, (2) proceeds for the repayment can be expected to come only from operation or sale of the collateral, and (3) the debtor has either formally or effectively abandoned control of the collateral. In-substance foreclosures are classified as non-earning if they do not produce a minimum annualized return of 5% or greater cash flow yield for two consecutive calendar quarters. At September 30, 1994, there were two loans classified as non-earning in-substance foreclosed which totalled $10,198,000. Descriptions of the two investments are as follows: (1) The Trust has a first mortgage loan on six industrial buildings totalling 157,480 square feet located in Chula Vista, California. The loan was classified as non-earning in-substance foreclosed in April 1994. The property is currently 74% leased and occupied. (2) The Trust has a first mortgage loan on 10 industrial buildings containing 106,663 square feet located in Chino, California. The loan was placed on non-earning status in June 1993 and reclassified as non-earning in-substance foreclosed in September 1994. The property is currently 77% leased and occupied. 9 NON-EARNING PROPERTIES ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE -- At September 30, 1994, there were eleven non-earning properties acquired through foreclosure and held for sale which totalled $32,282,000. Descriptions of the eleven investments are as follows: (1) The Trust had a first mortgage loan on an office/warehouse building containing 119,000 square feet located in Hopkinton, Massachusetts. The Trust acquired title to this property in January 1991. The project is currently unleased. (2) The Trust had a first mortgage loan on a retail shopping center containing 111,339 square feet located in Fairhaven, Massachusetts. The Trust acquired title to this property in April 1991. The project is currently 30% leased and occupied. Subsequent to September 1994, a 20 year lease with Shaw's Supermarkets, Inc. for a 65,000 square feet supermarket anchor store was completed, with occupancy expected in mid-1995, which will result in the project being 88% leased and occupied. (3) The Trust had a first mortgage loan on a 3-story office building containing 37,800 square feet located in Piscataway, New Jersey. The Trust acquired title to this property in August 1991. The project is currently 80% leased and occupied. (4) The Trust had a first mortgage loan on an industrial building containing 57,900 square feet located in Framingham, Massachusetts. The Trust acquired title to this property in April 1992. The property is currently 65% leased and occupied. (5) The Trust had a first mortgage loan on two adjoining office buildings containing 39,087 square feet located in Woodland Hills, California. The Trust acquired title to this property in May 1992. The property is currently 80% leased and occupied. (6) The Trust had first and second mortgage loans on two office/industrial buildings containing 91,710 square feet and a 33,600 square foot warehouse building located in Salem, New Hampshire. The Trust acquired title to this property in August 1992. The project is currently 72% leased and occupied. (7) The Trust had a first mortgage loan on a manufacturing/warehouse building containing 251,090 square feet located in Moreno Valley, California. The Trust acquired title to this property in November 1992. The property is 100% leased to one tenant who will begin making rental payments in November 1994. (8) The Trust had a first mortgage loan on a 4-story office building containing 99,666 square feet located in Cherry Hill, New Jersey. The Trust acquired title to this property in November 1992. The project is currently 48% leased and occupied. (9) The Trust had a first mortgage loan on an industrial building containing 120,000 square feet located in Willow Grove, Pennsylvania. The Trust acquired title to this property in June 1993. The project is currently unleased. (10) The Trust had a first mortgage loan on a 2-story office building containing 30,000 square feet located in Sudbury, Massachusetts. The Trust acquired title to this property in June 1993. The property is currently unleased. (11) The Trust had a first mortgage loan on 21,600 square feet of vacant land located in Los Angeles, California. The Trust acquired title to this property in June 1994. ALLOWANCE FOR LOSSES An allowance for losses is maintained based upon the Trustees' evaluation of the Trust's investments. A review of all investments is made quarterly to determine the adequacy of the allowance for losses. During the Trust's fiscal year ended September 30, 1994, there were additions of $2,000,000 to the allowance for losses and there were charges of $378,000, net of recoveries, against the allowance. 10 The amount of the allowance for losses at September 30, 1994 was $13,430,000 (4.3% of the Trust's invested assets). For a description of the Trust's method of determining the allowance for losses, see Notes 1 and 3 of Notes to the Financial Statements. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITIONS AND OFFICES WITH THE TRUST - ---------------------- --- ------------------------------------------------- Victor H. Schlesinger 69 Chairman and Trustee C. W. Strong, Jr. 65 President, Chief Executive Officer and Trustee Executive Vice President and Chief Operating James A. Dalton 51 Officer Daniel F. Hennessey 53 Treasurer and Chief Financial Officer Donald W. Burnes, Jr. 45 Senior Vice President Douglas R. Eckard 48 Senior Vice President
The officers of the Trust serve a one-year term of office and are elected to their positions each year by the Trustees at the annual organization meeting of Trustees which normally immediately follows the annual meeting of shareholders. All of the foregoing were last elected as officers at such meeting on February 10, 1993, with Mr. Eckard being promoted from Vice President to Senior Vice President on August 17, 1993. Messrs. Schlesinger, Strong and Hennessey have served as officers of the Trust for more than the past five years. Messrs. Dalton and Eckard were first elected as officers of the Trust on September 20, 1989 in connection with the Trust becoming self-administered. Mr. Burnes was first elected as an officer of the Trust on February 14, 1990. From 1982 to 1989, Mr. Dalton was the President of GMAC Realty Advisors. From 1984 to 1989, Mr. Eckard was a Vice President of GMAC Realty Advisors. GMAC Realty Advisors advised the Trust prior to its becoming a self-administered REIT in 1989. From 1981 to August 1989 Mr. Burnes was a Senior Vice President of Heller Financial Incorporated. From August 1989 to December 1989 Mr. Burnes was a Vice President at Sun State Savings in Arizona. ITEM 2. PROPERTIES. The Trust's real estate portfolio consists primarily of equity investments in completed, income-producing properties such as industrial/research and development buildings, office buildings and retail buildings located primarily in southern California and mid-atlantic states. The Trust's real estate portfolio at September 30, 1994 (net of accumulated depreciation) consists of the following investments:
NUMBER OF INVESTMENT % OF TYPE OF PROPERTIES PROPERTIES AMOUNT TOTAL - ---------------------------------------------------------------- --------------- ----------- --------- (IN THOUSANDS) Apartments...................................................... 3 $ 21,012 13% Office Buildings................................................ 13 56,655 34% Industrial Buildings............................................ 12 46,741 28% Retail Buildings................................................ 4 36,707 22% Research and Development Buildings.............................. 2 5,985 3% -- ----------- --------- 34 $ 167,100 100% -- -- ----------- --------- ----------- ---------
The Trust does not own any real property for use in connection with its day-to-day operations. Office space for the Trust's principal office at 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania is leased for a three-year term ending August 31, 1995. The Trust's only other office, located at 3500 West Olive Avenue, Suite 600, Burbank, California, is leased for a five-year term ending October 31, 1995. The total rental expense for the fiscal year ended September 30, 1994 for both properties was $345,000. The Trust has become, and may from time to time become, the owner or lessor of real estate in connection with its investment and lender activities. See Item 1, "Business -- Investments." 11 ITEM 3. LEGAL PROCEEDINGS. A discussion of events surrounding the Trust's bankruptcy filing and an explanation of the material terms of the Trust's reorganization under the 1991 Plan are set forth in the section entitled "Previous Chapter 11 Proceeding and the Plan of Reorganization" under Item 1 above. Notwithstanding the confirmation of the 1991 Plan, as of September 30, 1994, the bankruptcy court continued to have jurisdiction to, among other things, resolve disputes that may arise under the 1991 Plan; however, the bankruptcy case relating to the 1991 Plan was closed on November 4, 1994 pursuant to a final order of the bankruptcy court and the official equity security holders' committee officially disbanded on November 22, 1994. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS. (a) MARKET PRICE AND DIVIDENDS The Trust's Common Shares are listed for trading on the New York Stock Exchange and the Pacific Stock Exchange under the symbol MRT. The following table shows the high and low sales prices for each fiscal quarter during the past two years and dividends declared attributable to such quarters:
HIGH LOW DIVIDENDS --------- --------- ------------- 1994 First Quarter.................................................... $ 5/8 $ 3/8 $ -0- Second Quarter................................................... 5/8 3/8 -0- Third Quarter.................................................... 1/2 3/8 -0- Fourth Quarter................................................... 1/2 1/4 -0- 1993 First Quarter.................................................... $ 1 3/8 $ 7/8 $ -0- Second Quarter................................................... 2 1/2 1 1/4 -0- Third Quarter.................................................... 1 7/8 3/8 -0- Fourth Quarter................................................... 7/8 3/8 -0-
The Trust incurred net operating losses for tax purposes in fiscal 1991, 1992, 1993 and 1994, all of which will be available as a loss carryforward to future years' taxable income. (See Note 1 of Notes to the Financial Statements - --- "Income Taxes" regarding limitation of net operating losses.) (b) HOLDERS OF COMMON SHARES There were approximately 5,348 record holders of the Trust's Common Shares at December 14, 1994. (c) The Trust did not declare or pay any dividends during the fiscal year ended September 30, 1994 or the fiscal year ended September 30, 1993. In addition, the Indenture governing the Senior Notes prohibits the Trust from paying any dividends to shareholders other than dividends required for the Trust to maintain its REIT status and inadvertent overpayments of such dividends. 13 ITEM 6. SELECTED FINANCIAL DATA. MORTGAGE AND REALTY TRUST SELECTED FINANCIAL DATA YEARS ENDED SEPTEMBER 30
1994 1993 1992 1991 1990 ---------------- ---------------- ---------------- ---------------- ---------------- OPERATING DATA Total income..................... $ 36,277,000 $ 38,342,000 $ 42,009,000 $ 56,253,000 $ 68,233,000 Interest and other operating expenses........................ 47,668,000 43,967,000 42,077,000 51,736,000 47,601,000 Depreciation and amortization.... 5,839,000 5,500,000 4,470,000 3,062,000 2,391,000 Loss before provision for losses, reorganization expenses and gain on sales of real estate......... (17,230,000) (11,125,000) (4,538,000) 1,455,000 18,241,000 Provision for losses............. 2,000,000 37,000,000 32,000,000 33,000,000 23,790,000 Reorganization expenses, net..... 2,360,000 5,844,000 934,000 4,352,000 5,051,000 Gain on sale of real estate...... -- -- 244,000 244,000 Net loss......................... (21,590,000) (53,969,000) (37,472,000) (35,653,000) (10,356,000) PER SHARE DATA Net loss......................... $(1.92) $(4.87) $(3.38) $ (3.22) $ (.94) Dividends........................ -0- -0- -0- -0- .45 Book value....................... 1.79 3.71 8.63 12.01 15.23 BALANCE SHEET DATA Total assets..................... $ 364,244,000 $ 353,874,000 $ 427,268,000 $ 514,754,000 $ 595,640,000 Invested assets.................. 309,477,000 347,526,000 424,394,000 505,600,000 547,480,000 Allowance for losses............. 13,430,000 11,808,000 19,353,000 14,707,000 10,792,000 Senior Notes..................... 290,000,000 290,000,000 312,000,000 374,000,000 403,884,000 Loan on equity investment........ 17,593,000 17,572,000 15,515,000 -- -- Shareholders' equity............. 20,033,000 41,623,000 95,592,000 133,064,000 168,717,000 Debt/equity ratio (1)............ 13.97:1 7.15:1 3.30:1 2.70:1 2.21:1 - ------------------------- (1) Includes interest payable and is reduced by cash and cash equivalents.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES -- A Plan of Reorganization under Chapter 11 of the Bankruptcy Code was confirmed at a hearing held in the Bankruptcy Court in Los Angeles, California, on February 21, 1991, and an order was entered February 27, 1991, confirming the Plan. As a result of the liquidity problems in the commercial real estate markets, the Trust was not able to meet the required amortization at June 30, 1992 and the debt was restructured in July 1992 with the unanimous consent of the creditors. The debt is now governed by an indenture dated as of July 15, 1992. At December 31, 1992, debt outstanding was reduced to $290 million, the maximum debt level permitted under the Plan on that date. Due to continued lack of liquidity in the real estate marketplace, the Trust has not been able to meet payment and other obligations on its outstanding debt. See Item 1, "Business" for additional information regarding current debt service requirements and events of default. 14 Under the financial covenants of the Indenture governing the Senior Notes, the Trust was required to maintain a ratio of outstanding securities to its capital base (as defined in the Indenture) of 515% at March 31, 1993. In addition, under the Indenture the Trust was required to maintain a ratio of outstanding securities to its capital base of 438% at June 30, 1993 and September 30, 1993, 358% at December 31, 1993 and March 31, 1994, and 313% at June 30, 1994 and September 30, 1994, and a ratio of earning assets (as defined in the Indenture) to outstanding securities of 113% at June 30, 1993 and September 30, 1993, 116% at December 31, 1993 and March 31, 1994 and 117% at June 30, 1994 and September 30, 1994. The Trust failed to meet each of these ratios, constituting events of default under the Indenture. However, on May 26, 1993, the Trust received from the holders of more than 66-2/3% in principal amount of Senior Notes a waiver relating to the March 31 default. Management has continued discussions with the representatives of the creditors to explore various alternatives for restructuring the outstanding debt obligations. The Trust's present intention is to reach a consensual restructuring agreement. If such an agreement cannot be reached with the Trust's debt holders, the Trust will have to consider other alternatives, including the filing of a voluntary bankruptcy petition under chapter 11 of the Bankruptcy Code. Although the holders of more than 66-2/3% of the Trust's debt securities had agreed with the Trust to temporarily forebear further creditor action on the defaults for a defined standstill period, such standstill period expired on December 3, 1993. The Company believes that no further extension of the standstill will be granted. The Trust intends, therefore, to continue to operate its business and seek Senior Note holder consent on an ad hoc basis as such consent is required. Although the Trust believes that such consents, if requested, would be in the best interest of the Trust, its shareholders and the Senior Note holders, there can be no assurance that the Trust will obtain sufficient consents as they are required. Currently, the Trust is in default under the Indenture and has continued to suspend payments on the Senior Notes. Consequently, there can be no assurance that the Indenture Trustee and the Collateral Agents will not take remedial or enforcement action, including acceleration of the Senior Notes and foreclosure. If it becomes impossible for the Trust to continue operations under such circumstances, it may be necessary for Mortgage and Realty Trust to explore other alternatives, including seeking relief under chapter 11 of the Bankruptcy Code. See Item 1, "Business -- General - --- Current Debt Service Requirements and Defaults and Forecast In Operating Cash Flow" and "-- Subsequent Events." At September 30, 1994, the Trust had cash and cash equivalents of $60.3 million. Included in cash and cash equivalents are $1.4 million of restricted cash which represents the funding of the employee retention plan and $1.9 million related to borrowers' deposits. The Trust's unfunded loan commitments totalled $615,000 at September 30, 1994. RESULTS OF OPERATIONS -- The Trust reported a net loss for fiscal 1994 of $21.6 million or $1.92 per share compared to a net loss of $54.0 million or $4.87 per share for fiscal 1993 and a net loss of $37.5 million or $3.38 per share for fiscal 1992. The 1994 loss includes a provision for losses of $2.0 million or $.18 per share and net expense for reorganization and debt restructuring items of $2.4 million or $.21 per share compared to a provision for losses of $37 million or $3.34 per share and net expense for reorganization and debt restructuring items of $5.8 million or $.53 per share for the 1993 loss and a provision for losses of $32.0 million or $2.89 per share and net expense for reorganization and debt restructuring items of $934,000 or $.08 per share for the 1992 loss. Interest and fee income on mortgage loans was $14.7 million for fiscal 1994 compared to $19.0 million in fiscal 1993. The decrease results primarily from a reduction in average earning mortgage loans (including earning in-substance foreclosures) which totalled $131.4 million at September 30, 1994 compared to $168.7 million at September 30, 1993. Since September 30, 1993, earning mortgage loans of approximately $13.1 million have been transferred to investment in real estate and $25.5 million have been repaid. Interest and fee income decreased from $26.2 million in fiscal 1992 to $19 million in fiscal 1993. The decrease resulted primarily from repayment of earning mortgage loans and transfer of mortgage loans to in-substance foreclosure, foreclosed properties and investments in partnerships. 15 Rental income was $18.4 million for fiscal 1994 compared to $17.4 million in fiscal 1993 and $13.7 million in fiscal 1992. In addition to rental income, the Trust received reimbursement of certain operating expenses totalling $1.7 million, $1.6 million and $1.3 million for fiscal 1994, 1993 and 1992, respectively. Operating expenses and depreciation and amortization on rental properties increased to $15.7 million for both fiscal 1994 and 1993 compared to $12.3 million for fiscal 1992. The increases in income and expenses on rental properties results from continued growth in real estate equities and properties acquired through foreclosure and held for sale. Interest on short-term investments was $1.2 million for fiscal 1994, $237,000 for fiscal 1993 and $537,000 for fiscal 1992. The increase was due to the continuing accumulation of available cash. Available cash increased due to: (1) no payment of principal and interest on the Secured Notes since September 30, 1993 and (2) a net increase of $32.4 million in cash provided by investing activities. Interest expense decreased from $29 million in 1992 and $28.5 million in 1993 to $33.0 million in fiscal 1994. This was due primarily to an increase in the average borrowing rate from 8.34% in 1992 and 9.23% in 1993 to 10.73% in 1994. Offsetting the increase, the average borrowings decreased from $336.4 million in 1992 and $293.2 million in 1993 to $290 million in 1994. At September 30, 1994, the blended interest rate on the Senior Notes was 12.12%, composed of interest at 11.50% on $200 million of Senior Notes (including default interest at 1%) and 13.50% on $90 million of deferred amounts of Senior Notes (including default interest at 1%). The entire unamortized cost of restructuring of the Senior Notes was charged off during fiscal 1993 as a result of the monetary default. The Trust expensed $3.4 million in fiscal 1993, of which $2.4 million related to the acceleration of costs due to the June 1993 monetary default. Prior to the default, these costs were being amortized using the interest method over the term of the debt. Other operating expenses were $4.8 million for fiscal 1994 compared to $5.3 million for both fiscal 1993 and 1992. The decrease in other operating expenses was due primarily to decreases in professional fees and expenses. Reorganization expenses related to the Chapter 11 filing and debt restructuring expenses were $2.4 million for the fiscal year ended September 30, 1994, which reflects professional fees incurred by the official creditors' committee, the official equity security holders' committee and the Trust. Reorganization expenses were $5.8 million for the fiscal year ended September 30, 1993, which reflects professional fees and restructuring fees charged off as a result of the monetary defaults on the Senior Notes. Reorganization expenses were $934,000 for the fiscal year ended September 30, 1992. A $2 million provision for losses was established in the current fiscal year compared to a provision of $37 million in 1993. A $32 million provision for losses was established in fiscal 1992. Continued deterioration in many real estate markets during the past years, the continuing liquidity crisis in the real estate industry and the Trust's requirement to generate cash and liquidate investments contributed in 1993 and 1992 to the establishment of large provision for losses based on the Trust's regular analysis of the portfolio. The Trustees believe the allowance for losses to be adequate at September 30, 1994. The Trustees review the investment portfolio quarterly using current estimates and assumptions to determine the adequacy of the allowance for losses. The estimates and assumptions used in the valuation process are subject to changes which may be material. Non-earning loans (including non-earning in-substance foreclosures) and non-earning properties acquired through foreclosure and held for sale were $42.5 million at September 30, 1994 compared to $58.8 million at September 30, 1993 and $76.3 million at September 30, 1992. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data are as set forth in the "Index to Financial Statements" on page 26. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 16 PART III ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following biographical information is furnished as to each of the current Trustees of the Trust.
POSITIONS NAME, AGE AND YEAR WITH THE FIRST BECAME TRUSTEE TRUST PRINCIPAL OCCUPATIONS AND OTHER DIRECTORSHIPS (1)(2) - -------------------------- ------------- ------------------------------------------------------------------------ Victor H. Schlesinger Chairman, Chairman of the Trust (February 1991-Present); President and Chief 69 years Trustee Executive Officer (1971-1989), Chairman (1980-1990), GMAC Mortgage 1970 Corporation and predecessor companies. C. W. Strong, Jr. President, President and Chief Executive Officer of the Trust. 65 years Trustee 1984 Jeffrey M. Bucher Trustee Of Counsel, Bryan Cave, Attorneys (January 1993-Present); Partner, 61 years Pepper, Hamilton & Scheetz, Attorneys (February 1990-December 1992); 1979 Partner, Lillick & McHose, Attorneys (July 1987-February 1990); Director of Dai-Ichi Kangyo Bank of California. Kent L. Colwell Trustee President of Transamerica Realty Services, Inc.; Vice President -- Real 63 years Estate Services of Transamerica Corporation. 1986 James M. Gassaway Trustee Retired; Director of Strawbridge & Clothier. 72 years 1971 John E. Krout Trustee Retired; Director of Germantown Savings Bank (1971-April 1992). 74 years 1970 Gerhard N. Rostvold Trustee Economist, Urbanomics Research Associates; Consultant to business, 75 years industry and government. 1979 - ------------------------- (1) Included are only directorships in companies registered pursuant to Section 12 or subject to the requirements of Section 15(d) of the Securities Exchange Act of 1934 and in financial institutions and insurance companies. Several of such persons also hold directorships in various charitable and non-profit organizations not shown above. (2) Mr. Schlesinger was Vice Chairman and Mr. Strong was President of the Trust on April 12, 1990 when the Trust filed its voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code.
For information required under this item with respect to executive officers of the Trust, see "Executive Officers of the Registrant" under Item 1 above. ITEM 11. TRUSTEE AND EXECUTIVE COMPENSATION. COMPENSATION OF NON-OFFICER TRUSTEES During the fiscal year ended September 30, 1994, the Trustees, other than Messrs. Strong and Schlesinger, received as compensation for their services as Trustees an annual retainer of $10,000 plus $800 for each regular, monthly Trustee meeting attended in person or conducted by telephone conference; $600 for each committee meeting attended in person; and $400 for any Trustee or 17 committee meeting, other than the regular, monthly Trustee meeting, convened by telephone conference; provided that no additional compensation was paid for attendance at any committee meeting held on the same day as any Trustee meeting. An additional $100 fee was payable per meeting to the chairman of any committee. On September 20, 1989, the Trustees adopted the Pension Plan for Trustees, effective October 1, 1989. Trustees become eligible for plan benefits upon completion of five years of service as Trustee, including years served prior to the plan's effective date. Under the plan, each eligible Trustee will be entitled to a normal retirement benefit equal to the annual retainer for Trustees at the rate in effect on the Trustee's normal retirement date or, if earlier, the Trustee's last day of board membership. For purposes of this plan, normal retirement date is the first day of the month following the Trustee's 75th birthday. Plan benefits will generally begin on the normal retirement date, but eligible former Trustees may elect to have reduced payments commence up to five years earlier. The reduction will be 10 percent for each year by which commencement precedes the normal retirement date. Plan benefits will be paid for a period equal to the number of years served as Trustee after January 1, 1980, except that payments will cease upon the death of the Trustee. No other death benefits shall become payable on behalf of any Trustee under the plan. The following table sets forth, for the fiscal years ended September 30, 1994, 1993 and 1992, the compensation paid by the Trust to its chief executive officer and its four next most highly compensated executive officers. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ----------------------------- AWARDS -------------------- PAYOUTS ANNUAL COMPENSATION (1) RESTRICTED ------- -------------------------------------------------------- STOCK LTIP ALL OTHER NAME AND SALARY BONUS OTHER ANNUAL AWARD(S) OPTIONS/ PAYOUTS COMPENSATION PRINCIPAL POSITION FISCAL YEAR ($)(2) ($) COMPENSATION ($) ($) SARS (#) ($) ($)(3) - ------------------------ ----------- ----------- ---------- ---------------- ---------- -------- ------- ------------ C.W. Strong, Jr., 1994 $175,000 -- -- -- -- -- $ 3,000 President and Chief 1993 175,000 -- -- -- -- -- 3,000 Executive Officer 1992 250,000 -- -- -- 25,000 -- 3,000 Victor H Schlesinger, 1994 $100,000 -- -- -- -- -- $ 3,000 Chairman 1993 100,000 -- -- -- -- -- 3,000 1992 27,500(4) -- -- -- 23,500 -- 1,650 James A. Dalton, 1994 $188,348 $25,000(5) -- -- -- -- $ 3,000 Executive Vice 1993 181,104 20,000 -- -- -- -- 3,000 President and Chief 1992 177,511 90,000(6) -- -- 25,000 -- 3,000 Operating Officer Daniel F. Hennessey, 1994 $129,488 $20,000(5) -- -- -- -- $ 3,000 Treasurer and Chief 1993 124,508 20,000 -- -- -- -- 3,000 Financial Officer 1992 122,038 65,000(6) -- -- 20,000 -- 3,000 Donald W. Burnes, Jr. 1994 $120,595 $30,000(5) -- -- -- -- $ 3,000 Senior Vice 1993 114,448 30,000 -- -- -- -- 3,000 President 1992 113,114 65,000(6) -- -- 15,000 -- 3,000 - ------------------------------- (1) In the fiscal year ended September 30, 1994, the Trust provided certain personal benefits to its executive officers. The amount of such benefits to each of the named individuals did not exceed the lesser of $50,000 or 10% of salary and bonus for such fiscal year. (2) Includes salary deferrals and employee contributions to the Trust's Savings Incentive Plan. (3) Includes the Trust's matching contributions under the Trust's Savings Incentive Plan. See "Savings Incentive Plan" below. (4) Represents fees received as Chairman and Trustee. (5) Does not include bonus for calendar 1994 which was paid in November 1994. The bonuses were: for Mr. Dalton $25,000; for Mr. Hennessey $20,000; and for Mr. Burnes $25,000. (6) Includes retention bonus of $75,000, $50,000 and $35,000 for Messrs. Dalton, Hennessey and Burnes, respectively.
18 The following table sets forth aggregate option exercises during the fiscal year ended September 30, 1994 and option values for the chief executive officer and the four next most highly compensated executive officers as of September 30, 1994. AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED SEPTEMBER 30, 1994 AND FY-END OPTION VALUES
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FY-END (#) FY-END ($) ------------- ------------- SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE - ---------------------------- ------------------- --------------- ------------- ------------- C.W. Strong, Jr. -- -- 34,000/-0- 0/0 Victor H. Schlesinger -- -- 29,500/-0- 0/0 James A. Dalton -- -- 74,000/-0- 0/0 Daniel F. Hennessey -- -- 57,500/-0- 0/0 Donald W. Burnes, Jr. -- -- 35,000/-0- 0/0
EMPLOYEES' RETIREMENT PLAN On September 20, 1989, the Trustees adopted an Employees' Retirement Plan effective September 30, 1989. On December 16, 1992, the Trustees amended and restated the Employees' Retirement Plan effective January 1, 1992 (as amended on July 20, 1994, and as may be further amended, the "Retirement Plan"). The Retirement Plan continues the benefits provided to employees of the Trust who were formerly employees of GMAC Realty Advisors, Inc. All other employees are eligible to participate in the Retirement Plan provided that they are at least 21 years of age and have been employed for twelve consecutive months, during which period the employee has completed at least 1,000 hours of service. Under the Retirement Plan, each eligible employee after completing five years of vesting service becomes 100% vested and entitled to a retirement pension. Benefits can be paid as a lump sum or as an annual retirement income for life equal to the greater of (a) the sum of (i) 1.3% of the highest five-year average annual base salary, multiplied by the number of years of credited service up to and including 35 thereof and (ii) 0.4% of the highest five-year average annual base salary in excess of Social Security covered compensation (as adjusted every five years), multiplied by the number of years of credited service up to and including 35 thereof or (b) the sum of (i) 1.3% of the highest five-year average annual base salary, multiplied by the number of credited service up to and including 15 thereof; (ii) 1.5% of the highest five-year average annual base salary, multiplied by the number of years of credited service from 16 to 25 years inclusive; (iii) 0.5% of the highest five-year average annual base salary, multiplied by the number of years of credited service from 26 to 35 years inclusive; and (iv) 0.4% of the highest five-year average annual base salary in excess of Social Security covered compensation (as adjusted every five years), multiplied by the number of years of credited service up to and including 25 thereof. Unreduced retirement benefits may begin to be paid at normal retirement (age 65 and five years of participation in the Retirement Plan), late retirement, or five years prior to Social Security retirement age with 20 years of service. The table below shows the estimated annual benefits payable upon retirement under the Trust's Retirement Plan. Retirement benefits shown are based upon retirement at age 65 and the payment of a straight life annuity to the employee. The annual benefit under the Retirement Plan shall not exceed the lesser of $112,221 or 100% of the participant's average compensation for three consecutive Fiscal Years (as defined in the Retirement Plan) in which such eligible employee is an active participant in the Retirement Plan. 19 PENSION PLAN TABLE ESTIMATED ANNUAL RETIREMENT BENEFIT
AVERAGE OF 5 HIGHEST ANNUAL YEARS OF SERVICE COMPENSATION --------------------------------------------------------- LEVELS 15 20 25 30 35 - --------------- --------- --------- --------- ----------- ----------- $ 125,000 $ 29,427 $ 40,486 $ 51,545 $ 58,854 $ 68,663 150,000 35,802 49,236 62,670 71,604 83,538 175,000 42,177 57,986 73,795 84,354 98,413 200,000 48,552 66,736 84,920 97,104 113,288 225,000 54,927 75,486 96,045 109,854 128,163
For the fiscal year ended September 30, 1994, the base salary for purposes of the Retirement Plan for the executive officers named in the Summary Compensation Table is set forth in the salary column of the Summary Compensation Table. Officers named in the Summary Compensation Table have been credited with years of service under the Retirement Plan as follows: Mr. Dalton, 12 years; Mr. Hennessey, 23 years; Mr. Burnes, 5 years. Mr. Schlesinger and Mr. Strong do not participate in the Retirement Plan. The benefits listed in the Pension Plan Table are not subject to reduction for Social Security or other offset amounts. SAVINGS INCENTIVE PLAN On September 20, 1989, the Trustees adopted a Savings Incentive Plan effective September 30, 1989, to provide retirement benefits for eligible employees of the Trust. On December 16, 1992, the Trustees amended and restated the Savings Incentive Plan effective January 1, 1992 (as amended, the "Savings Plan"). The Savings Plan continues the benefits provided under the GMAC Mortgage Corporation Savings Incentive Plan to employees of the Trust who were formerly employees of the Adviser. All other employees of the Trust are eligible to participate in the Savings Plan provided that they have been employed for twelve consecutive months, during which period the employee has completed at least 1,000 hours of service. Under the Savings Plan, each eligible employee may authorize payroll deductions not less than 1% nor more than 15% of the employee's earnings before bonus income, not to exceed the dollar limit permissible under the Code ($9,240 in 1994). The Trust will match each employee's contribution for the payroll period, subject to a limitation of 6% of the employee's compensation for the payroll period, with the maximum amount of contribution by the Trust in any year being $3,000. Benefits will be paid to terminating participants as soon as possible following the participant's date of termination. Participants have a 100% nonforfeitable right to their contributions to the Savings Plan and the Trust's matching contributions vest at the rate of 20% for each year of service, but will, in any event, be 100% vested at the later of age 65 or after five years of participation in the Savings Plan, or in the event of disability or death. Subject to certain limitations, hardship distributions of a participant's fully vested account balance are permitted on account of a demonstrable, immediate and heavy financial need. EMPLOYEE RETENTION PLAN The Trustees have adopted an Employee Retention Plan (the "Retention Plan"), dated October 17, 1990, as amended January 16, 1991 and March 20, 1991, designed to provide a financial incentive for key employees to successfully restructure the organization and maximize the net worth of the Trust. The Retention Plan was approved by the Bankruptcy Court by order dated February 26, 1991. 20 The Retention Plan is administered by the Compensation and Nominating Committee which determines the allocation of amounts among the participants. All full-time employees of the Trust except the Chairman and the President and Chief Executive Officer are eligible to participate in the Retention Plan. The first portion of the Retention Plan provides for a termination pay plan which will remain in effect during the period that the Class 3 Creditor Obligations (as defined in the 1991 Plan, and as amended, the Senior Notes) are outstanding. Any employee who is terminated without cause during this period shall be entitled to termination pay of not less than three and not more than 18 months salary depending on the employee's years of employment and position with the Trust. The number of months salary for Messrs. Dalton, Hennessey and Burnes are 18, 18 and 12, respectively. Medical and dental coverage will be continued during the termination pay period. An employee who is terminated for cause, voluntarily leaves, dies or becomes disabled during the plan period will not be entitled to benefits under this plan. The benefits which may be payable under this plan have been funded in a separate trust. The second portion of the Retention Plan included a retention bonus plan which provided for the aggregate payment of up to $350,000 to employees who remained in the employ of the Trust until February 27, 1992, a period of one year from the date of the confirmation of the Plan of Reorganization. A separate trust was funded for the payment of these benefits. The retention bonus was paid on February 28, 1992. The third portion of the Retention Plan provided for the grant under the Trust 1984 Share Option Plan of non-qualified stock options for up to an aggregate of 200,000 Shares of the Trust to participants. On March 29, 1991, options for 197,500 shares were granted at an exercise price of $4.15 per share which was the greater of (i) the average of the closing price of the Trust's Shares on the New York Stock Exchange for the last five days of the 30 day period after the effective date of the 1991 Plan and (ii) the fair market value of the Shares on the date of grant. Options will not vest to employees until three years after the date of grant and any employee who leaves voluntarily or is discharged for cause during the three year period will forfeit his or her rights under the option. After vesting, options can be exercised any time up to five years from the date of grant except that an employee with a vested option who leaves the employ of the Trust must exercise within a three month period after resignation. If a change in control of the Trust occurs, all options which have not previously been forfeited will vest immediately. The final portion of the Retention Plan is an incentive program which may provide total incentive payments during the period the Class 3 Creditor Obligations (Senior Notes) are outstanding of not more than $1,250,000. For calendar year 1991, the program was based on an incentive pool calculated as follows: At June 30, 1991, if the Class 3 Creditor Obligations (Senior Notes) were no greater than $380,000,000 (the maximum amount allowed under the 1991 Plan without any deferrals), $75,000 would be deposited in the pool with an added $5,000 for each full $1,000,000 that the Class 3 Creditor Obligations (Senior Notes) were reduced before that amount. There was eliminated from this calculation voluntary repayments by the Trust which reduced cash on hand below $15,000,000. As a result, $95,000 was deposited in the pool. At December 31, 1991, if the Class 3 Creditor Obligations (Senior Notes) were no greater than $340,000,000, $125,000 would be deposited in the pool with an added $5,000 for each full $1,000,000 that the Class 3 Creditor Obligations (Senior Notes) are below that amount after deducting any amounts credited at June 30, 1991. As a result, $125,000 was deposited in the pool. On September 16, 1992, the Compensation and Nominating Committee approved a continuation of the incentive program for calendar year 1993 based on a similar formula for reducing the outstanding Senior Notes. Under this incentive program, because the Senior Notes were no greater than $290,000,000 at December 31, 1992, $125,000 was deposited in the pool. The amounts paid from the pool to the named executive officers for the fiscal years ended September 30, 1994, 1993 and 1992 are included in the Summary Compensation Table. The form and amount of this program for future years will be at the discretion of the Compensation and Nominating Committee. 21 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Bucher, Colwell, Gassaway, Krout and Rostvold served as members of the Trust's Compensation and Nominating Committee during the Trust's fiscal year ended September 30, 1994. None of such individuals was, during such fiscal year, an officer or employee of the Trust, was formerly an officer of the Trust or had any relationship requiring disclosure by the Trust under Item 404 of Regulation S-K promulgated under the Securities Exchange Act of 1934. TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Under the Employee Retention Plan, Messrs. Dalton, Hennessey and Burnes are entitled to termination pay equal to 18, 18 and 12 months salary, respectively, if they are terminated without cause during the period that the Class 3 Creditor Obligations (as defined in the 1991 Plan, and as amended, the Senior Notes) are outstanding. In addition, all options granted to such individuals under the Employee Retention Plan that have not otherwise vested will vest automatically upon the occurrence of a change-in-control of the Trust. See "Employee Retention Plan." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As of December 14, 1994, to the Trust's knowledge, no person or group (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) owned beneficially 5% or more of the Common Shares of the Trust (the "Shares"). The table below sets forth the number of Shares beneficially owned: by each Trustee; by each executive officer named in the summary compensation table; and by the Trustees and officers as a group as of December 14, 1994. As of such date, no individual Trustee or officer had beneficial ownership of 1% or more of the outstanding Shares and all Trustees and officers as a group beneficially owned 3.5% of the outstanding Shares. Except as indicated by footnote, the Trustees and named executive officers have sole voting and investment power with respect to any Shares beneficially owned by them.
BENEFICIAL OWNERSHIP AT DECEMBER 14, 1994 ------------------- Victor H. Schlesinger.............................................................. 32,038(1) C. W. Strong, Jr................................................................... 29,914(2) Jeffrey M. Bucher.................................................................. 8,600(3) Kent L. Colwell.................................................................... 11,650(3)(4) James M. Gassaway.................................................................. 13,302(3) John E. Krout...................................................................... 8,612(3) Gerhard N. Rostvold................................................................ 10,648(3) James A. Dalton.................................................................... 71,880(5)(6) Daniel F. Hennessey................................................................ 50,569(7) Donald W. Burnes, Jr............................................................... 35,000(8) All Trustees and officers as a group (21 persons).................................. 397,538(9) - ------------------------- (1) 23,500 of the Shares reported as beneficially owned by Mr. Schlesinger are obtainable upon exercise of options. (2) 25,000 of the Shares reported as beneficially owned by Mr. Strong are obtainable upon exercise of options. (3) 7,500 of the Shares reported as beneficially owned by each of Messrs. Bucher, Colwell, Gassaway, Krout and Rostvold are obtainable upon exercise of options. (4) 3,500 of the Shares reported as beneficially owned by Mr. Colwell are held in a family trust of which Mr. Colwell and his wife are co-trustees.
22 (5) 65,000 of the Shares reported as beneficially owned by Mr. Dalton are obtainable upon exercise of options. (6) 450 of the Shares reported as beneficially owned by Mr. Dalton are owned by Mr. Dalton's wife and 2,054 of the Shares reported as beneficially owned by Mr. Dalton are held in a trust for the benefit of his children. Mr. Dalton and his wife are co-trustees of the trust. (7) 50,000 of the Shares reported as beneficially owned by Mr. Hennessey are obtainable upon exercise of options. (8) All of the Shares reported as beneficially owned by Mr. Burnes are obtainable upon exercise of options. (9) Includes 242,004 Shares reported as beneficially owned by Trustees and executive officers as described in the footnotes above and 112,500 Shares obtainable upon exercise of options by officers of the Trust who are not named in the foregoing table.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not applicable. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) DOCUMENTS FILED AS A PART OF THE REPORT. The following documents are filed as part of this report. 1. Financial Statements. The financial statements of the Trust are set forth in the "INDEX TO FINANCIAL STATEMENTS" on page 26. 2. Financial Statement Schedules. 3. Exhibits. (a) Exhibits are as set forth in the "INDEX TO EXHIBITS" on pages 48-49. (b) REPORTS ON FORM 8-K. On August 3, 1994, the Registrant filed a current report on Form 8-K regarding the Trust's unaudited operating results for the third quarter ended June 30, 1994 and the failure to make scheduled payments on the Senior Notes. See also Item 1, "Business -- General -- Negotiations Regarding a Restructuring." (c) EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE. Exhibits are set forth in the "INDEX TO EXHIBITS" on pages 48-49. Where so indicated by footnote in the index, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses. Copies of the exhibits are available to Shareholders upon payment of $.25 per page fee to cover the Trust's expenses in furnishing the exhibits. For copies contact: Mortgage and Realty Trust, 8380 Old York Road, Suite 300, Elkins Park, Pennsylvania 19027. (d) Financial Statement Schedules, except those indicated in the "INDEX TO FINANCIAL STATEMENTS" on page 26, have been omitted because the required information is included in the financial statements or notes thereto, or the amounts are not significant. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MORTGAGE AND REALTY TRUST Date: December 29, 1994 By: /s/ C. W. STRONG, JR. --------------------------------------------- C. W. Strong, Jr. PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each person in so signing also makes, constitutes and appoints Victor H. Schlesinger, Chairman of Mortgage and Realty Trust, and each of them, his true and lawful attorney-in-fact, in his name, place and stead to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this report. /s/ VICTOR H. SCHLESINGER - ----------------------------------------- Chairman and Trustee December 29, 1994 Victor H. Schlesinger President, Chief Executive /s/ C. W. STRONG, JR. Officer and Trustee - ----------------------------------------- (Principal Executive December 29, 1994 C. W. Strong, Jr. Officer) Treasurer, Chief Financial /s/ DANIEL F. HENNESSEY Officer (Principal - ----------------------------------------- Financial and Accounting December 29, 1994 Daniel F. Hennessey Officer) /s/ JEFFREY M. BUCHER - ----------------------------------------- Trustee December 29, 1994 Jeffrey M. Bucher /s/ KENT L. COLWELL - ----------------------------------------- Trustee December 29, 1994 Kent L. Colwell /s/ JAMES M. GASSAWAY - ----------------------------------------- Trustee December 29, 1994 James M. Gassaway /S/ JOHN E. KROUT - ----------------------------------------- Trustee December 29, 1994 John E. Krout /s/ GERHARD N. ROSTVOLD - ----------------------------------------- Trustee December 29, 1994 Gerhard N. Rostvold
25 MORTGAGE AND REALTY TRUST INDEX TO FINANCIAL STATEMENTS
PAGE --------- Report of Independent Auditors............................................................................. 27 Financial Statements Statement of Operations (Years ended September 30, 1994, 1993 and 1992).................................. 28 Balance Sheet (September 30, 1994 and 1993).............................................................. 29 Statement of Cash Flows (Years ended September 30, 1994, 1993 and 1992).................................. 30 Statement of Shareholders' Equity (Years ended September 30, 1994, 1993 and 1992)........................ 31 Notes to the Financial Statements........................................................................ 32 Financial Statement Schedules Schedule XI -- Real Estate and Accumulated Depreciation and Amortization (September 30, 1994).......... 43 Schedule XII -- Mortgage Loans on Real Estate (September 30, 1994)..................................... 46
26 REPORT OF INDEPENDENT AUDITORS Trustees and Shareholders Mortgage and Realty Trust We have audited the accompanying balance sheets of Mortgage and Realty Trust at September 30, 1994 and 1993, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1994. Our audits also included the financial statement schedules referenced at Item 14(a). These financial statements and schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mortgage and Realty Trust at September 30, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material aspects the information set forth therein. The accompanying financial statements and schedules have been prepared assuming that Mortgage and Realty Trust will continue as a going concern. As more fully described in Note 1, the Trust was not able to comply with certain financial covenants related to the Restructured Joint Plan of Reorganization dated July 15, 1992. In addition, the Trust was not able to generate sufficient cash flow from normal operations and could not further liquidate mortgage loans and real estate investments in order to meet scheduled amortization on its Senior Notes. These uncertainties raise substantial doubt about the Trust's ability to continue as a going concern. The financial statements and schedules do not include any adjustments to reflect the possible future effects on the classification, realization or amounts of assets or liabilities that may result from the outcome of these uncertainties. ERNST & YOUNG LLP Philadelphia, Pennsylvania November 17, 1994 27 STATEMENT OF OPERATIONS YEARS ENDED SEPTEMBER 30
1994 1993 1992 --------------- --------------- --------------- Income: Interest and fee income on mortgage loans................... $ 14,725,000 $ 19,027,000 $ 26,261,000 Income of rental properties: Rental income............................................. 18,495,000 17,368,000 13,733,000 Operating expense reimbursement........................... 1,705,000 1,601,000 1,265,000 Interest on short-term investments.......................... 1,238,000 237,000 537,000 Other....................................................... 114,000 109,000 213,000 --------------- --------------- --------------- 36,277,000 38,342,000 42,009,000 --------------- --------------- --------------- Expenses: Interest.................................................... 33,002,000 28,510,000 28,956,000 Expenses of rental properties: Depreciation and amortization............................. 5,839,000 5,500,000 4,470,000 Operating................................................. 9,827,000 10,199,000 7,808,000 Other operating expenses.................................... 4,839,000 5,258,000 5,313,000 Provision for losses on mortgage loans and related investments................................................ 2,000,000 37,000,000 32,000,000 --------------- --------------- --------------- 55,507,000 86,467,000 78,547,000 --------------- --------------- --------------- Loss before reorganization expenses........................... (19,230,000) (48,125,000) (36,538,000) Reorganization expenses....................................... (2,360,000) (5,844,000) (934,000) --------------- --------------- --------------- Net loss...................................................... $ (21,590,000) $ (53,969,000) $ (37,472,000) --------------- --------------- --------------- --------------- --------------- --------------- Per Share: Net loss.................................................... $(1.92) $(4.87) $(3.38) --------------- --------------- --------------- --------------- --------------- --------------- Weighted average number of common shares outstanding........ 11,226,000 11,080,000 11,076,000
See accompanying notes. 28 BALANCE SHEET YEARS ENDED SEPTEMBER 30
1994 1993 ---------------- ---------------- ASSETS: Mortgage loans and investments: Construction loans.......................................................... $ -- $ 5,203,000 Standing loans.............................................................. 61,851,000 76,871,000 Long-term amortizing loans.................................................. 2,908,000 4,731,000 Participating loans and investments......................................... 4,563,000 12,180,000 Non-earning mortgage loans.................................................. -- 5,208,000 ---------------- ---------------- 69,322,000 104,193,000 Notes receivable.............................................................. 760,000 400,000 In-substance foreclosures: Earning..................................................................... 62,097,000 69,707,000 Non-earning................................................................. 10,198,000 17,462,000 Real estate: Investments in real estate equities......................................... 56,857,000 57,213,000 Properties acquired through foreclosure and held for sale: Earning................................................................... 68,437,000 52,586,000 Non-earning............................................................... 32,282,000 36,134,000 Investment in partnerships.................................................. 9,524,000 9,831,000 ---------------- ---------------- 309,477,000 347,526,000 Less allowance for losses............................................... (13,430,000) (11,808,000) ---------------- ---------------- 296,047,000 335,718,000 Cash and cash equivalents..................................................... 60,332,000 11,451,000 Interest receivable and other assets.......................................... 7,865,000 6,705,000 ---------------- ---------------- $ 364,244,000 $ 353,874,000 ---------------- ---------------- ---------------- ---------------- LIABILITIES: Senior Secured Notes.......................................................... $ 290,000,000 $ 290,000,000 Loan on equity investment..................................................... 17,593,000 17,572,000 Accounts payable and accrued expenses......................................... 4,050,000 4,267,000 Interest payable.............................................................. 32,568,000 412,000 ---------------- ---------------- 344,211,000 312,251,000 ---------------- ---------------- SHAREHOLDERS' EQUITY: Preferred shares, $1 par value: 3,500,000 shares authorized, none issued...... -- -- Common shares, $1 par value: 20,000,000 shares authorized, 11,226,000 shares issued and outstanding....................................................... 11,226,000 11,226,000 Additional paid-in capital.................................................... 182,375,000 182,375,000 Accumulated deficit........................................................... (173,568,000) (151,978,000) ---------------- ---------------- Total shareholders' equity.............................................. 20,033,000 41,623,000 ---------------- ---------------- $ 364,244,000 $ 353,874,000 ---------------- ---------------- ---------------- ----------------
See accompanying notes. 29 STATEMENT OF CASH FLOWS YEARS ENDED SEPTEMBER 30
1994 1993 1992 --------------- --------------- -------------- Cash flows from operating activities: Net loss..................................................... $ (21,590,000) $ (53,969,000) $ (37,472,000) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization on real estate............... 5,839,000 5,500,000 4,470,000 Provision for losses....................................... 2,000,000 37,000,000 32,000,000 Increase (decrease) in payables and accrued expenses....... (217,000) 106,000 (3,529,000) Increase in interest payable............................... 32,156,000 412,000 -- Decrease (increase) in receivables and other assets........ (1,160,000) 2,669,000 (641,000) Net change in interest reserves, deferred income........... (582,000) (934,000) (426,000) Recoveries of charge offs to allowance for losses.......... 1,019,000 -- -- Other...................................................... (967,000) -- 366,000 --------------- --------------- -------------- Total adjustments............................................ 38,088,000 44,753,000 32,240,000 --------------- --------------- -------------- Net cash provided by (used in) operating activities............ 16,498,000 (9,216,000) (5,232,000) --------------- --------------- -------------- Cash flows from investing activities: Investments in real estate: Properties acquired through foreclosure.................... (5,269,000) (4,600,000) (4,148,000) In-substance foreclosures.................................. (1,337,000) (1,135,000) (2,203,000) Real estate equities....................................... (1,847,000) (2,505,000) (3,227,000) Advances on mortgage loans................................. -- (602,000) (2,624,000) Partnerships............................................... -- (2,078,000) -- Principal repayments on mortgage loans....................... 25,555,000 24,604,000 50,674,000 Repayments on notes receivable............................... 168,000 -- -- Sale of foreclosed property.................................. 6,360,000 16,170,000 16,982,000 Repayment of in-substance foreclosure.................................... 8,753,000 360,000 4,309,000 Sale of equity investment.................................... -- -- 5,194,000 --------------- --------------- -------------- Net cash provided by investing activities...................... 32,383,000 30,214,000 64,957,000 --------------- --------------- -------------- Cash flows from financing activities: Payment of Senior Notes...................................... -- (22,000,000) (62,000,000) --------------- --------------- -------------- Net cash used in financing activities.......................... -- (22,000,000) (62,000,000) --------------- --------------- -------------- Net increase (decrease) in cash and cash equivalents........... 48,881,000 (1,002,000) (2,275,000) Cash and cash equivalents at beginning of year................. 11,451,000 12,453,000 14,728,000 --------------- --------------- -------------- Cash and cash equivalents at end of year....................... $ 60,332,000 $ 11,451,000 $ 12,453,000 --------------- --------------- -------------- --------------- --------------- -------------- Supplemental schedule of non-cash investing and financing activities: Transfer of real estate to mortgage loans.................... $ 750,000 $ 348,000 $ 940,000 Transfer of mortgage loans to real estate, in-substance foreclosure and notes receivable............................ $ 10,321,000 $ 105,863,000 $ 56,554,000 Charge-offs against allowance for losses..................... $ 378,000 $ 44,545,000 $ 27,354,000 Transfer of investment in partnership to investment in real estate equities............................................. $ -- $ -- $ 7,241,000 Transfer of mortgage loans and in-substance foreclosures to investment in partnerships.................................. $ -- $ 5,605,000 $ -- Transfer of in-substance foreclosures to real estate......... $ 13,109,000 $ -- $ --
See accompanying notes. 30 STATEMENT OF SHAREHOLDERS' EQUITY
COMMON SHARES ADDITIONAL TOTAL ----------------------------- PAID-IN ACCUMULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY ------------- -------------- ---------------- ---------------- ---------------- Balance at September 30, 1991....................... 11,076,000 $ 11,076,000 $ 182,525,000 $ (60,537,000) $ 133,064,000 Net loss.................... (37,472,000) (37,472,000) ------------- -------------- ---------------- ---------------- ---------------- Balance at September 30, 1992....................... 11,076,000 11,076,000 182,525,000 (98,009,000) 95,592,000 Shares issued -- Litigation Settlement................. 150,000 150,000 (150,000) -- Net loss.................... (53,969,000) (53,969,000) ------------- -------------- ---------------- ---------------- ---------------- Balance at September 30, 1993....................... 11,226,000 11,226,000 182,375,000 (151,978,000) 41,623,000 Net loss.................... (21,590,000) (21,590,000) ------------- -------------- ---------------- ---------------- ---------------- Balance at September 30,1994.................... 11,226,000 $ 11,226,000 $ 182,375,000 $ (173,568,000) $ 20,033,000 ------------- -------------- ---------------- ---------------- ---------------- ------------- -------------- ---------------- ---------------- ----------------
See accompanying notes. 31 NOTES TO THE FINANCIAL STATEMENTS 1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION See "Item 1. Business -- General" pages 1 and 2 for information concerning the Trust's previous chapter 11 petition on April 12, 1990 and related plan of reorganization (1991 Plan). See "Item 1. Business -- General -- 1992 Restructuring" for information concerning the restructuring of the Senior Notes that resulted from the previous chapter 11 petition. See "Item 1. Business -- General -- Current Debt Service Requirements and Defaults and Forecast Shortfall In Operating Cash Flow" for information concerning the various defaults under the 1992 restructured Senior Notes. See "Item 1. Business -- General -- 1993-1994 Negotiations With the Official Creditors Committee" for developments regarding the proposed restructuring. On November 17, 1994, the Trust announced that it had reached an agreement in principle with a substantial number of holders of its Senior Notes on the terms of a restructuring of the Senior Notes. Pursuant to the agreement in principle, holders of the Senior Notes in the aggregate principal amount of $290 million plus accrued interest of $41.7 million through December 31, 1994 will receive under a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code, $110 million of new senior secured notes due 2002, approximately $50 million in cash and 97% of the restructured equity of the Trust (or substantially all the restructured equity if holders of the Trust's outstanding common shares do not vote to accept the prepackaged plan). If holders of the outstanding common shares vote to accept the prepackaged plan, such holders will retain 3% of the equity of the restructured Trust. The agreement in principle anticipates that the new senior secured notes will mature in 2002 and bear interest at the rate of 11 1/8% per annum. It is also anticipated that holders of unsecured claims will receive cash in the allowed amount of their claims. It is contemplated that the Trust will prepare a "shelf" registration statement for the new securities issued pursuant to the prepackaged plan. The agreement to pursue the restructuring proposal is subject to a number of conditions and the Trust intends to effect the restructuring through a prepackaged chapter 11 bankruptcy. At this time there can be no assurance that the conditions to consummation of the proposed restructuring will be satisfied. Other details of the agreement, including the additional conditions to commencement and consummation of the restructuring, have not been finalized pending the filing of proxy solicitation materials with the SEC and distribution of a disclosure statement for the solicitation of votes for the prepackaged plan to holders of the Trust's outstanding securities. The advisors to the Trust and the various holders of Senior Notes are negotiating additional terms of the new debt securities to be received by the Senior Note holders under the prepackaged plan. The financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) applicable to a company on a "going concern" basis, which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. These financial statements include adjustments and reclassifications that have been made to reflect indebtedness as extended under the 1991 Plan and the Senior Note Indenture. These financial statements do not include any adjustments that would be required should the Trust be unable to continue as a going concern. The conditions noted above raise substantial doubt about the Trust's ability to continue as a going concern. These financial statements also do not include any adjustments that could be required as a result of the November 17, 1994 agreement in principle with certain holders of Senior Notes and related proposed restructuring and prepackaged chapter 11 bankruptcy, including adjustments required by The American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," for fresh start accounting. 32 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION (CONTINUED) The Trust anticipates that any adjustments that would be occasioned in the restructuring process by its financial distress, by any inability of the Trust to continue as a going concern or by any inability of the Trust to achieve a consensual restructuring would be material and adverse. The following unaudited Pro Forma Balance Sheet is presented as if (1) Mortgage and Realty Trust had emerged from bankruptcy on September 30, 1994 with a reorganization plan identical to the one proposed, and (2) fresh start accounting had been adopted as of September 30, 1994. This unaudited Pro Forma Balance Sheet should be read in conjunction with the financial statements of Mortgage and Realty Trust and the related notes thereto included elsewhere herein. In management's opinion, all adjustments necessary to reflect the effects of the proposed reorganization and "fresh start accounting" have been included. This unaudited Pro Forma Balance Sheet is not necessarily indicative of what the actual financial position would have been at September 30, 1994, nor does it purport to represent the future financial position of the Company. PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1994 (UNAUDITED)
PRO FORMA ADJUSTMENTS ------------------------------------------------------ HISTORICAL PROPOSED FRESH PRO FORMA 9/30/94 REORGANIZATION START 9/30/94 ---------- -------------- --------- --------- (IN THOUSANDS) ASSETS Cash & marketable securities.......... $ 60,332 $ (50,000)(A) $ 8,979 (1,353)(B) Loans & owned real estate net......... 296,047 (67,047)(E) 229,000 Interest receivable................... 4,638 (2,810)(F) 1,828 Other assets.......................... 3,227 (1,955)(F) 1,272 ---------- -------------- --------- --------- Total assets...................... $ 364,244 $ (51,353) $ (71,812) $ 241,079 ---------- -------------- --------- --------- ---------- -------------- --------- --------- LIABILITIES Senior secured notes due 1995......... $ 290,000 $(290,000)(C) $ 0 Senior secured notes due 2002......... 0 110,000(C) 110,000 Loan on REO -- Imperial Bank.......... 17,593 17,593 Interest payable...................... 32,568 (32,568)(C) 0 Accounts payable and other............ 4,050 (1,353)(B) (50)(F) 2,647 ---------- -------------- --------- --------- Total liabilities................... 344,211 (213,921) (50) 130,240 ---------- -------------- --------- --------- SHAREHOLDER'S EQUITY Common stock at par................... 11,226 11,226 Additional paid in capital............ 182,375 162,568(D) (245,330)(G) 99,613 Retained earnings (deficit)........... (173,568) 173,568(G) 0 ---------- -------------- --------- --------- Total shareholders equity........... 20,033 162,568 (71,762) 110,839 ---------- -------------- --------- --------- Total liabilities & equity.......... $ 364,244 $ (51,353) $ (71,812) $ 241,079 ---------- -------------- --------- --------- ---------- -------------- --------- ---------
See Accompanying Notes 33 1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION (CONTINUED) ADJUSTMENTS TO REFLECT PROPOSED REORGANIZATION (A) Reflects the $50.0 million minimum payment to creditors being made at implementation of the proposed plan, provided that such minimum payment may be increased based upon the amount of cash held by the Trust in excess of its short-term obligations following confirmation of the proposed plan. Note: Cash and marketable securities includes $1,375 of restricted cash related to the Trust's termination pay plan and $1,600 relating to borrowers' deposits. (B) Reflects cash payment to unsecured creditors totalling $1,353. (C) Reflects the cancellation of the Senior Secured notes due 1995 in the face amount of $290.0 and the related interest payable on these notes of $32.6 million and the recording of the new Senior Notes due 2002 in the face amount of $110.0 million. (D) Reflects the conversion of amounts previously owed under the Senior Secured notes due 1995 converted to a 97% interest in the common shares of the reorganized Trust as follows: Face amount of Senior Notes due 1995................................... $ 290,000 Interest payable at 9/30/94............................................ 32,568 --------- Total amount payable to creditors at 9/30/94........................... 322,568 Less: New Senior Notes due 2002........................................ (110,000) Less: Cash payment to creditors........................................ (50,000) --------- Amount previously due creditors converted to equity.................... $ 162,568 --------- ---------
ADJUSTMENTS TO REFLECT FRESH START ACCOUNTING (E) Reflects adjustment made to carrying value of loans and owned real estate to adjust to estimated reorganization values. (F) Reflects adjustment made to carrying values of accounts receivable/other assets and accounts payable to adjust to estimated reorganization values of $3.1 million and $4.0 million, respectively. (G) Reflects the adjustment of the retained earnings/deficit to zero as a result of the restructure and the adjustment of additional paid in capital as follows: Adjust deficit to reset to zero........................................ $(173,568) Adjustment to carrying value of invested assets........................ (67,047) Adjustment to carrying value of receivables............................ (4,765) Adjustment to carrying value of payables............................... 50 --------- $(245,330) --------- ---------
2. SIGNIFICANT ACCOUNTING POLICIES INCOME TAXES The Trust is a real estate investment trust that has elected to be taxed under Sections 856-860 of the Internal Revenue Code of 1986, as amended. Accordingly, no provision has been made for income taxes in the financial statements. For the fiscal years ended September 30, 1994, 1993 and 1992, there were significant differences between taxable net loss and net loss as reported in the financial statements. The differences were primarily temporary differences related to the recognition of bad debt deductions and accounting for reorganization costs. For financial accounting purposes, these items are expensed currently, while for tax purposes some portion of these items may be deferred to future periods. 34 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Trust incurred net operating losses of $38 million, $31 million and $12 million for tax purposes in fiscal 1993, 1992 and 1991, respectively. The Trust estimates a net operating loss for tax purposes of approximately $35 million in fiscal 1994. Each of these net operating losses will be available for fifteen years as a loss carryforward to future years' taxable income. If during the course of the proposed restructuring, Cancellation of Indebtedness taxable income results, the net operating losses available for use in future years will be reduced by the amount of such Cancellation of Indebtedness income. The Trust's goal is to preserve its net operating losses, but the transfer of more than 50% of the ownership of the Trust to its creditors in a reorganization (as was provided in the August 1993 agreement in principle and as is likely in any alternate restructuring) will limit the future per annum use of its net operating losses (after the aforementioned reduction for Cancellation of Indebtedness income) under Internal Revenue Code Section 382. INTEREST INCOME Interest income on each loan is recorded as earned. Interest income is not recognized if, in the opinion of the Trustees, collection is doubtful. The Trust generally considers loans as delinquent if payment of interest and/or principal, as required by the terms of the note, is more than 60 days past due. Accrual of interest income is generally terminated and foreclosure proceedings are started if payment is more than 60 days past due. LOAN FEE INCOME Loan fees are recorded as income using the "interest method." Accordingly, loan fees are deferred when received and are recorded as income over the term of the loan in relation to outstanding loan balances. ALLOWANCE FOR LOSSES The allowance for losses on mortgage loans and related investments is determined in accordance with The American Institute of Certified Public Accountants Statement of Position on Accounting Practices of Real Estate Investment Trusts 75-2, as amended. This statement requires adjustment of the carrying value of mortgage loans to the lower of their carrying value or estimated net realizable value. Estimated net realizable value is the estimated selling price of a property offered for sale in the open market allowing a reasonable time to find a buyer, reduced by the estimated cost to complete and hold the property (including the estimated cost of capital), net of estimated cash income. The cost of capital was computed at 10.5% at September 30, 1994 and 9.0% at September 30, 1993. Additional provisions for losses on mortgage loans and related investments may be necessary if the deterioration in real estate markets continues, or there is a significant increase in the Trust's cost of capital. See also Note 1, "Basis of Financial Statement Presentation and Plan of Reorganization." Further adjustments may also be necessary as a result of the restructuring negotiations. The Trust anticipates that any adjustments that would be occasioned in the restructuring process by its financial distress, by any inability of the Trust to continue as a going concern or by any inability of the Trust to achieve a consensual restructuring would be material and adverse. PROPERTIES ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE Properties acquired through foreclosure and held for sale are recorded at the lower of cost or fair value at acquisition, which becomes the cost basis for accounting purposes. The fair value of the asset acquired, in accordance with Financial Accounting Standards Board Statement 15, is the amount that the Trust could reasonably expect to receive in a current sale between a willing buyer and a willing seller. Such properties are thereafter accounted for in the same manner as any similar asset acquired for investment as to depreciation and gain or loss upon sale. Subsequent to foreclosure, the properties are carried at the lower of cost or fair value less estimated costs to sell, as set forth in The American Institute of Certified Public Accountants' Statement of Position 92-3, "Accounting for Foreclosed Assets" ("SOP 92-3"). 35 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IN-SUBSTANCE FORECLOSURE A loan is considered an in-substance foreclosure if: (1) the debtor has little or no equity considering the fair value of the collateral, (2) proceeds for repayment can be expected to come only from operation or sale of the collateral, and (3) the debtor has either formally or effectively abandoned control of the collateral. Loans meeting the criteria for in-substance foreclosure are reclassified and recorded at the lower of cost or fair value of the collateral, which establishes a new cost basis in the same manner as a legal foreclosure. Properties acquired through foreclosure and held for sale and in-substance foreclosures are reclassified from non-earning to earning status if they produce and maintain for a minimum of two consecutive quarters an annualized return of 5% or greater cash flow yield. NET LOSS PER SHARE Net loss per share for fiscal years ended 1994, 1993 and 1992 is computed using the weighted average common shares outstanding during each period. Fully diluted net loss per share is not disclosed because such information is not meaningful. DEPRECIATION AND AMORTIZATION Depreciation and amortization are computed on the straight-line method over an estimated useful life of 40 years for buildings and three to five years for other property and lease commissions. CASH AND CASH EQUIVALENTS Cash and cash equivalents include short-term investments (high grade commercial paper carried at cost of $58.4 million at September 30, 1994) with maturities ranging from 3 to 45 days. Included in cash and cash equivalents is $1.4 million of restricted cash which represents the funding of the employee retention plan (see Note 9) and $1.6 million related to borrowers' deposits. See "Item 1. Business -- General -- Current Debt Service Requirements and Defaults and Forecast Shortfall In Operating Cash Flow" for additional information regarding the establishment of new operating accounts for the Trust, the enforcement of the Indenture Trustee's security interest in the old deposit accounts of the Trust and the Trust's obligation quarterly to pay the excess of available cash (as defined in the Indenture) over $10 million to Senior Note holders. 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE The following table summarizes the Trust's mortgage loan portfolio:
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993 ------------------------- ------------------------- NUMBER OF CARRYING NUMBER OF CARRYING TYPE OF UNDERLYING SECURITY INVESTMENTS AMOUNT INVESTMENTS AMOUNT - ------------------------------- ----------- ---------- ----------- ---------- ($ AMOUNTS IN THOUSANDS) Apartments.................... 1 $ 254 3 $ 5,391 Residential/Condominium*...... 9 1,334 10 1,841 Office Buildings.............. 2 1,699 1 1,135 Industrial Buildings.......... 7 30,328 10 44,086 Research & Development Buildings.................... 3 16,371 5 25,942 Retail Buildings.............. 4 16,276 6 22,738 Hotels/Motels................. 1 3,060 1 3,060 -- -- ---------- ---------- Total..................... 27 $ 69,322 36 $ 104,193 -- -- -- -- ---------- ---------- ---------- ---------- - ------------------------- * Includes 80 mortgage end loans on 9 investments at September 30, 1994 and 107 mortgage end loans on 10 investments at September 30, 1993.
The Trust's mortgage loan portfolio consists of loans located principally in California, 49%, and Pennsylvania, 22%. 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (CONTINUED) At September 30, 1994, the Trust had undisbursed commitments of $615,000, all of which represents additional advances on partially funded mortgage loans. As of September 30, 1994, there were no earning loans delinquent (more than 60 days past due) as to principal and/or interest. At September 30, 1994 and 1993, loans totalling $24,836,000 and $33,403,000 respectively, were extended beyond their original contractual maturity dates. Loan terms are extended in the normal course of business for various reasons, such as delays in construction, slower leasing than originally anticipated or delay in obtaining permanent financing. No interest rate modifications were made on mortgage loans during fiscal 1993. During fiscal 1994, two loans totalling $13,939,000 had rate reductions due to financial difficulties of the borrower. At September 30, 1994 and 1993, mortgage loans outstanding consisted of fixed rate loans of $29,428,000 and $21,268,000, floating rate loans of $35,331,000 and $70,745,000 and participating loans of $4,563,000 and $12,180,000, respectively. Non-earning loans (including non-earning in-substance foreclosures) and non-earning properties acquired through foreclosure and held for sale were $42,480,000 at September 30, 1994 compared to $58,804,000 at September 30, 1993. The following table summarizes the Trust's investment in in-substance foreclosures:
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993 ----------------------- ----------------------- NUMBER OF CARRYING NUMBER OF CARRYING TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT - ------------------------------- ----------- -------- ----------- -------- ($ AMOUNTS IN THOUSANDS) EARNING Office Buildings.............. 2 $12,840 2 $12,831 Industrial Buildings.......... -- -- 1 4,901 Retail Buildings.............. 3 28,452 3 28,238 Apartments.................... 1 6,695 1 6,689 Research & Development Buildings.................... 2 14,110 3 17,048 -- -- -------- -------- Total Earning............... 8 62,097 10 69,707 -- -- -------- -------- NON-EARNING Office Buildings.............. -- -- 1 7,433 Industrial Buildings.......... 2 10,198 3 7,576 Retail Buildings.............. -- -- 1 2,453 Apartments.................... -- -- -- -- Research & Development Buildings.................... -- -- -- -- Hotel......................... -- -- -- -- -- -- -------- -------- Total Non-Earning........... 2 10,198 5 17,462 -- -- -------- -------- Total....................... 10 $72,295 15 $87,169 -- -- -- -- -------- -------- -------- --------
The following table summarizes the Trust's investment in real estate equities, net of accumulated depreciation of $10,023,000 at September 30, 1994 and $7,800,000 at September 30, 1993:
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993 ----------------------- ----------------------- NUMBER OF CARRYING NUMBER OF CARRYING TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT - ------------------------------- ----------- -------- ----------- -------- ($ AMOUNTS IN THOUSANDS) Office Buildings.............. 4 $26,264 4 $26,504 Industrial Buildings.......... 1 6,510 1 6,626 Retail Buildings.............. 1 24,083 1 24,083 - - -------- -------- Total..................... 6 $56,857 6 $57,213 - - - - -------- -------- -------- --------
37 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (CONTINUED) The following table summarizes the Trust's investment in properties acquired through foreclosure and held for sale, net of accumulated depreciation of $8,329,000 at September 30, 1994 and $6,143,000 at September 30, 1993:
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993 ----------------------- ----------------------- NUMBER OF CARRYING NUMBER OF CARRYING TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT - ------------------------------- ----------- -------- ----------- -------- ($ AMOUNTS IN THOUSANDS) EARNING Apartments.................... 3 $ 21,012 4 $18,631 Office Buildings.............. 4 13,942 5 11,283 Industrial Buildings.......... 5 19,913 5 18,399 Retail Buildings.............. 1 7,585 1 1,394 Research & Development Buildings.................... 2 5,985 1 2,879 -- -- -------- -------- Total Earning............... 15 68,437 16 52,586 -- -- -------- -------- NON-EARNING Office Buildings.............. 5 16,449 3 7,563 Industrial Buildings.......... 4 10,794 5 15,796 Retail Buildings.............. 2 5,039 3 12,775 -- -- -------- -------- Total Non-Earning........... 11 32,282 11 36,134 -- -- -------- -------- Total..................... 26 $100,719 27 $88,720 -- -- -- -- -------- -------- -------- --------
The following table summarizes the Trust's investment in partnerships, net of accumulated depreciation of $313,628 at September 30, 1994 and $70,763 at September 30, 1993:
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993 ------------------------------ ------------------------------ NUMBER OF CARRYING NUMBER OF CARRYING TYPE OF PROPERTY INVESTMENTS AMOUNT INVESTMENTS AMOUNT - ------------------------------------------------------ ----------------- ----------- ----------------- ----------- ($ AMOUNTS IN THOUSANDS) Industrial Buildings................................. 2 $ 9,524 2 $ 9,831 - - - - ----------- ----------- ----------- -----------
4. ALLOWANCE FOR LOSSES The changes in the allowance for losses for the years ended September 30, 1994, 1993 and 1992 were as follows:
1994 1993 1992 ------- ------- ------- ($ AMOUNTS IN THOUSANDS) Balance at beginning of year...................... $11,808 $19,353 $14,707 Provisions charged to expense..................... 2,000 37,000 32,000 ------- ------- ------- 13,808 56,353 46,707 Less charges against allowance, net of recoveries....................................... 378 44,545 27,354 ------- ------- ------- Balance at end of year............................ $13,430 $11,808 $19,353 ------- ------- ------- ------- ------- -------
Approximately $6,276,000, $6,394,000 and $4,488,000 of the allowance at September 30, 1994, 1993 and 1992, respectively, are applicable to properties acquired through foreclosure and held for sale. 38 5. SENIOR NOTES SENIOR SECURED NOTES The lack of liquidity in many of the commercial real estate markets continued during the fiscal year ended September 30, 1994. Although the Trust was able to meet the required principal payment at December 31, 1992, reducing the principal balance of the Senior Notes to $290 million, it did not have sufficient funds to meet the $20 million required principal payment due June 30, 1993 or the $33.8 million required principal payment due December 31, 1993 or the $30 million required principal payment due June 30, 1994 (taking into account permitted deferrals). The Trust also did not make the $6.6 million, the $6.4 million, the $7.2 million, and the $8.7 million interest payments due December 31, 1993, March 31, 1994, June 30, 1994 and September 30, 1994, respectively. The average borrowing rates for fiscal year ended September 30, 1994 and 1993, respectively, were 10.73% and 9.23%. At September 30, 1994, the outstanding 12.12% interest rate on the Senior Notes was composed of interest at 11.50% on $200 million of Senior Notes (including default interest at 1%) and 13.50% on $90 million of deferred amounts of Senior Notes (including default interest at 1%). The entire unamortized cost of restructuring of the Senior Notes was charged off during fiscal 1993 as a result of the monetary default. The Trust expensed $3.4 million in fiscal 1993, of which $2.4 million related to the acceleration of costs due to the June 1993 monetary default. Prior to the default, these costs were being amortized using the interest method over the term of the debt. LOAN ON EQUITY INVESTMENT In November 1991, the Trust acquired full ownership of a retail center in which it had a partnership interest. The Trust has a construction borrowing commitment of $18.7 million of which $17.6 million was outstanding at September 30, 1994. The contractual interest rate on this loan is 9 1/4% (Prime +1 1/2%, floor of 9%), and the loan matured in May 1994 but was extended until December 1994. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Financial Accounting Standards Board Statement No. 107 Disclosure of Fair Value of Financial Statements ("SFAS" 107) requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Trust. The carrying value of cash and cash equivalents approximates their fair value because of the liquidity and short-term maturities of these instruments. The fair value of mortgage loans is estimated by discounting cash flows at what is considered a market interest rate for loans with similar terms to borrowers of similar credit quality. The measurement of the fair value of the Senior Notes at September 30, 1994 is not practical in the context of the proposed restructuring. The loan on equity investment is a variable rate loan that reprices frequently, thus fair value is based on the carrying amount of the loan. 39 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair values of the Trust's financial instruments at September 30, 1994 are as follows:
CARRYING AMOUNT FAIR VALUE ------------ ---------- (AMOUNTS IN THOUSANDS) FINANCIAL ASSETS: Cash and cash equivalents................................................... $ 60,332 $ 60,332 Mortgage loans and notes receivable (net of allowance for possible losses).................................................................... 70,240 69,825 FINANCIAL LIABILITIES: Loan on equity investment................................................... (17,593) (17,593) Off-Balance Sheet Financial Instruments: Unfunded loan commitments................................................. -- (615)
7. SHARE OPTION PLAN On August 14, 1994, the 1984 Share Option Plan terminated. As of September 30, 1994, options to purchase 426,000 Common Shares were outstanding under the 1984 Share Option Plan. The exercise price per share varies from $2.50 to $14.50. Options granted, other than those granted in fiscal 1991, expire five years from the date of grant and may be exercised at any time six months after the date of grant, subject to the limitation that the aggregate fair market value (determined as of the time the Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any participant during any calendar year shall not exceed $100,000. Options granted during fiscal 1991, pursuant to the Employee Retention Plan described in Note 8, expire five years from the date of grant but do not vest until three years from the date of grant. During the fiscal year ended September 30, 1994, no options were granted. Options to purchase 26,500 Common Shares at prices from $2.50 to $14.50 terminated during the fiscal year ended September 30, 1994. In addition to cash, options may be exercised by exchanging the Trust's Common Shares valued at the market price on the date of exercise of the options. During the fiscal year ended September 30, 1994, no options were exercised. 8. PENSION PLANS EMPLOYEES On September 20, 1989, the Trustees adopted an Employees' Retirement Plan effective September 30, 1989. On December 16, 1992, the Trustees amended and restated the Employees' Retirement Plan effective January 1, 1992 to conform to amended regulations and further amended the plan on July 20, 1994. The Trust maintains this non-contributing, defined benefit pension plan for all eligible employees. Benefits under the plan are generally based on years of service and average annual base salary rate. Pension costs are accrued and funded annually from entry date in the plan to projected retirement date and include service costs for benefits earned during the period and interest costs on the projected benefit obligation less the return on plan assets. Pension expense was $60,000 for each of the years ended September 30, 1994 and 1993 and $136,000 for the year ended September 30, 1992. The 40 8. PENSION PLANS (CONTINUED) actual return on plan assets was $53,327 for the year ended September 30, 1994, $53,465 for the year ended September 30, 1993 and $72,492 for the year ended September 30, 1992. Plan assets are currently invested in various mutual funds and bonds. The funding status of the pension plan is:
9/30/94 9/30/93 ------------- ----------- Actuarial present value of benefit obligations: Vested benefit obligation................................................. $ 776,000 $ 677,000 Accumulated benefit....................................................... 801,000 694,000 Projected benefit obligation.............................................. 1,008,000 993,000 Plan assets at market value............................................... 1,104,000 998,000 Key economic assumptions used in these determinations were: Discount rate............................................................. 8.0% 8.0% Rate of increase in compensation levels................................... 3.0% 3.0% Expected long-term rate of return......................................... 9.0% 9.0%
The Trust also maintains a 401(k) profit and sharing plan and trust. Employer contributions are limited to 6% of participant's compensation, with a maximum per year of $3,000 per participant. Profit sharing expense was $61,000, $65,000 and $58,000 for years ended September 30, 1994, 1993 and 1992, respectively. TRUSTEES Effective October 1, 1989, the Trust established a pension plan for Trustees. All Trustees on or after the effective date (including Trustees who are employees of the Trust) are eligible to receive the basic normal retirement benefit under the plan upon completion of five years of credited board service. Benefits under the plan are based on the annual retainer in effect at the time the Trustee retires or otherwise terminates service. Plan benefits will be paid for a period equal to the number of years served as Trustee after January 1, 1980, except that payments will cease upon the death of the Trustee. The benefit provided by the plan is a contractual obligation on behalf of the Trust and is payable out of assets of the Trust that are subject to the claims of creditors of the Trust. It is not intended that the plan be funded. Accrued pension expense was $260,000 for the year ended September 30, 1994 and $60,000 for each of the years ended September 30, 1993 and 1992. The total accumulated benefit obligation at September 30, 1994 was $450,000. 9. EMPLOYEE RETENTION PLAN The Trust established an Employee Retention Plan, to be administered by the Compensation and Nominating Committee (the "Committee"), in order to assure the continuity and performance of employees of the Trust. The Plan contains four categories of benefits: an incentive program, stock options, termination pay and a retention bonus. The Committee established an incentive program for calendar year 1991. The incentive pool was calculated based on the reduction of the Trust's outstanding debt (the Senior Notes). On January 3, 1992, the principal balance of the Senior Notes was reduced to $329 million resulting in an incentive bonus pool of $160,000. On September 16, 1992, the Committee approved a continuation of the incentive program for 1992 based on a similar formula for reducing the principal balance of the Senior Notes. At December 31, 1992, the principal balance of the Senior Notes was reduced to $290 million resulting in an incentive bonus pool of $125,000. During 1994 and 1993, the Committee approved the payment of discretionary bonuses totalling $123,000 and $128,500, respectively, for certain officers of the Trust. 41 9. EMPLOYEE RETENTION PLAN (CONTINUED) On March 29, 1991, the Committee awarded stock options for the purchase of 197,500 Common Shares at an option price of $4.15. The options had a three-year vesting period from the date of grant and vested on March 29, 1994. A termination pay plan has been established to cover termination of employment without cause during the period that the Senior Notes, as defined, are outstanding. Employees will be entitled to compensation ranging from a minimum of twelve weeks to a maximum of eighteen months pay. In addition, certain health benefits will continue to be paid by the Trust over a period of time equal to the period used in calculating severance pay. The Trust estimates that the maximum cost of the termination pay plan would be approximately $1.4 million and the cost is charged to expense at date of termination (as defined in the termination pay plan). The retention bonus, which totalled $350,000, was paid on February 28, 1992 to certain employees who remained with the Trust one year after the Effective Date of the 1991 Plan (February 27, 1991). 10. ISSUANCE OF SHARES Effective April 1, 1992, the Trust terminated its Dividend Reinvestment and Share Purchase Plan. The Trust is authorized to issue up to 3,500,000 Preferred Shares on terms to be established by the Trustees. No preferred shares have been issued to date. The Trust contributed 150,000 Common Shares (1.4% of outstanding shares) as part of the settlement of the consolidated class actions and the Class 5 claims remaining in the chapter 11 proceeding. The settlement and contribution of shares occurred on September 17, 1993. 11. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The quarterly results of operations for fiscal 1994 and 1993 are summarized as follows:
QUARTER ENDED ------------------------------------------------ DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- --------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL 1994 Total income................ $ 8,846 $ 8,420 $ 9,516 $ 9,495 Interest expense............ 7,799 7,663 8,360 9,180 Provision for losses........ -- -- -- 2,000 Reorganization expense...... 676 741 591 352 Net loss.................... (4,656) (5,152) (4,745) (7,037) Net loss per share.......... $ (0.41) $ (0.46) $ (0.43) $ (0.62) FISCAL 1993 Total income................ $ 9,577 $ 10,291 $ 9,643 $ 8,831 Interest expense............ 6,839 6,851 6,919 7,901 Provision for losses........ 3,000 5,000 14,000 15,000 Reorganization expense...... 245 482 950 4,167 Net loss.................... (5,497) (7,667) (17,478) (23,327) Net loss per share.......... $ (0.50) $ (0.69) $ (1.58) $ (2.10)
42 MORTGAGE AND REALTY TRUST SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION SEPTEMBER 30, 1994
INITIAL COST TO TRUST COSTS GROSS AMOUNT CARRIED AT END OF PERIOD ------------------------- CAPITALIZED -------------------------------------------- BUILDINGS & SUBSEQUENT TO BUILDINGS & CLASSIFICATION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL - ----------------------------- ------------ ----------- ------------ ------------- ----------- ------------ ----------------- INVESTMENTS IN REAL ESTATE EQUITIES Office Building: Lower Providence, PA.... $ -- $ -- $ 9,723,000 $ 963,000 $ -- $10,686,000 $10,686,000 Anaheim, CA............. -- 2,145,000 6,810,000 1,724,000 2,145,000 8,534,000 10,679,000 Boston, MA.............. -- 500,000 2,033,000 704,000 500,000 2,737,000 3,237,000 Portland, OR............ -- 1,500,000 6,197,000 943,000 1,500,000 7,140,000 8,640,000 Industrial Center: Whittier, CA............ -- 1,500,000 5,023,000 1,585,000 1,500,000 6,608,000 8,108,000 Retail Building: Fremont, CA............. 17,593,000 6,528,000 15,161,000 3,841,000 6,528,000 19,002,000 25,530,000 ------------ ----------- ------------ ------------- ----------- ------------ ----------------- $17,593,000 $12,173,000 $44,947,000 $ 9,760,000 $12,173,000 $54,707,000 $66,880,000(a)(b) ------------ ----------- ------------ ------------- ----------- ------------ ----------------- ------------ ----------- ------------ ------------- ----------- ------------ ----------------- LIFE ON WHICH DEPRECIATION ACCUMULATED IN LATEST DEPRECIATION INCOME AND DATE STATEMENT IS CLASSIFICATION AMORTIZATION ACQUIRED COMPARED - ----------------------------- ------------ -------- ------------- INVESTMENTS IN REAL ESTATE EQUITIES Office Building: Lower Providence, PA.... $ 2,431,000 1987 40 YR. Anaheim, CA............. 2,031,000 1988 40 YR. Boston, MA.............. 852,000 1990 40 YR. Portland, OR............ 1,663,000 1989 40 YR. Industrial Center: Whittier, CA............ 1,598,000 1987 40 YR. Retail Building: Fremont, CA............. 1,448,000 1992 40 YR. ------------ $10,023,000 ------------ ------------
43 MORTGAGE AND REALTY TRUST SCHEDULE XI (CONTINUED) REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION SEPTEMBER 30, 1994 NOTES: (a) Cost for federal income tax purposes $65,031,000. (b) The changes in gross carrying amounts during the year ended September 30, 1994 are summarized as follows: Balance at September 30, 1993.............................. $65,012,000 Additions during year: Improvements............................................. $ 1,847,000 Loan advance by construction lender...................... 21,000 1,868,000 ----------- ----------- Balance at September 30, 1994............................ $66,880,000 ----------- ----------- The changes in gross carrying amounts during the year ended September 30, 1993 are summarized as follows: Balance at September 30, 1992.............................. $46,400,000 Additions during year: Reclassification from real estate equities held for sale and other assets........................................ $16,427,000 Improvements............................................. 2,505,000 Loan advance by construction lender...................... 2,057,000 20,989,000 ----------- Deductions during year: Charge off against allowance for losses.................. 2,377,000 ----------- Balance at September 30, 1993.............................. $65,012,000 ----------- ----------- The changes in gross carrying amounts during the year ended September 30, 1992 are summarized as follows: Balance at September 30, 1991.............................. $24,863,000 Additions during year: Improvements............................................. $ 1,400,000 Transfer of investment in partnership.................... 7,241,000 Acquisition of partnership interest...................... 14,448,000 Loan advance by construction lender...................... 2,473,000 25,562,000 ----------- Deductions during year: Charge off against allowance for losses.................. 4,025,000 ----------- Balance at September 30, 1992.............................. $46,400,000 ----------- ----------- The change in accumulated depreciation and amortization during the year ended September 30, 1994 is summarized as follows: Balance at September 30, 1993.............................. $ 7,799,000 Additions during year: Charge to income......................................... 2,224,000 ----------- Balance at September 30, 1994.............................. $10,023,000 ----------- -----------
44 MORTGAGE AND REALTY TRUST SCHEDULE XI (CONTINUED) REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION SEPTEMBER 30, 1994 The change in accumulated depreciation and amortization during the year ended September 30, 1993 is summarized as follows: Balance at September 30, 1992.............................. $ 3,132,000 Additions during year: Reclassification from real estate equities held for sale and other assets........................................ 2,553,000 Charge to income......................................... 2,114,000 ----------- Balance at September 30, 1993.............................. $ 7,799,000 ----------- ----------- The change in accumulated depreciation and amortization during the year ended September 30, 1992 is summarized as follows: Balance at September 30, 1991.............................. $ 1,789,000 Additions during year: Charge to income......................................... 1,343,000 ----------- Balance at September 30, 1991.............................. $ 3,132,000 ----------- -----------
45 MORTGAGE AND REALTY TRUST SCHEDULE XII MORTGAGE LOANS ON REAL ESTATE SEPTEMBER 30, 1994
PRINCIPAL AMOUNT OF LOANS SUBJECT TO DELINQUENT NUMBER OF INTEREST CARRYING AMOUNT PRINCIPAL OR TYPE OF LOANS LOANS RATE FINAL MATURITY DATE OF MORTGAGES INTEREST - ---------------------------------- ------------- ------------- ------------------------- ---------------- ----------------- Standing Loans: Industrial buildings: Tucson, AZ................... 1 8.00% March 1999 $ 4,384,000 $ -- Uwchlan Twp., PA............. 1 9.75% December 1994 16,608,000 -- Carson, CA................... 1 9.50% February 1995 4,029,000 -- Others....................... 2 9.00%-10.00% February 1995-July 1997 2,536,000 -- Retail buildings: Citrus Heights, CA........... 1 9.25% February 1996 3,957,000 -- El Toro, CA.................. 1 9.25% January 1995 8,864,000 -- Philadelphia, PA............. 1 10.75% December 1994 3,250,000 -- Research & development buildings: Santa Anne, CA............... 1 8.00% December 1999 11,929,000 -- San Dumas, CA................ 1 10.75% March 1995 2,484,000 -- Office buildings............... 1 7.25% June 1999 750,000 -- Hotel: Sparks, NV................... 1 10.00% October 1996 3,060,000 -- ---------------- 61,851,000 -- ---------------- Long-Term Amortizing Loans: Office buildings............... 1 9.75% April 1999 949,000 -- Apartments..................... 1 9.00% July 2000 254,000 -- Residential/Condominiums (a)... 80 6.20%-9.50% July 1995-June 2009 1,334,000 -- Retail building................ 1 8.875% November 1999 205,000 -- Industrial buildings........... 1 9.00% April 1999 166,000 -- ---------------- ----- 2,908,000 -- ---------------- ----- Participating Loans and Investments: Industrial buildings: Worcester, MA................ 1 11.00% May 2002 2,605,000 -- Research & development buildings: Bristol, PA.................. 1 9.00% November 1995 1,958,000 -- ---------------- ----- 4,563,000 -- ---------------- ----- Total Mortgage Loans and Investments..................... $ 69,322,000(b)(c) $ -- ---------------- ----- ---------------- -----
46 MORTGAGE AND REALTY TRUST SCHEDULE XII (CONTINUED) MORTGAGE LOANS ON REAL ESTATE SEPTEMBER 30, 1994 NOTES: (a) Consists of 80 mortgage end loans on 9 projects. (b) The aggregate cost for federal income tax purposes is $69,480,000. (c) The change in carrying value of mortgage loans during the year ended September 30, 1994 were as follows: Balance at September 30, 1993.......................................... $ 104,193,000 Advances on mortgage loans............................................. -- Transfer of real estate to mortgage loans.............................. 750,000 Net change in interest reserves, deferred income....................... 480,000 ------------- 105,423,000 Collections of principal............................................... 25,555,000 Transfer to real estate................................................ 10,321,000 Chargeoff against allowance for losses................................. 225,000 ------------- $ 69,322,000 ------------- ------------- The change in carrying value of mortgage loans during the year ended September 30, 1993 were as follows: Balance at September 30, 1992.......................................... $ 237,428,000 Advances on mortgage loans............................................. 602,000 Transfer of real estate to mortgage loans.............................. 348,000 Net change in interest reserves, deferred income....................... 1,323,000 ------------- 239,701,000 Collections of principal............................................... 24,604,000 Transfer to real estate................................................ 110,218,000 Chargeoff against allowance for losses................................. 686,000 ------------- $ 104,193,000 ------------- ------------- The change in carrying value of mortgage loans during the year ended September 30, 1992 were as follows: Balance at September 30, 1991.......................................... $ 344,632,000 Advances on mortgage loans............................................. 2,624,000 Transfer of real estate to mortgage loans.............................. 940,000 Net change in interest reserves, deferred income....................... 426,000 ------------- 348,622,000 Collections of principal............................................... 50,674,000 Transfer to real estate................................................ 56,554,000 Chargeoff against allowance for losses................................. 3,566,000 Other.................................................................. 400,000 ------------- $ 237,428,000 ------------- -------------
47 MORTGAGE AND REALTY TRUST INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ------------------------------------------------------------------ 3.1 Declaration of Trust as amended through February 17, 1993 (1) (Exhibit 3). 3.2 By-Laws, as amended through June 20, 1984 (2) (Exhibit 3.3). 4.1 Form of Certificate for Common Shares (3) (Exhibit 1A). 4.2(a) Joint Plan of Reorganization Proposed by Debtor, Creditors' Committee and Equity Security Holders Committee (4) (Exhibit 10.11). 4.2(b) Modification to Joint Plan of Reorganization Proposed by Debtor, Creditors' Committee and Equity Security Holders Committee (5) (Exhibit 2). 4.2(c) Amendment No. 1 and Consent to Plan of Reorganization dated as of September 30, 1991 (6) (Exhibit 4.4(c)). 4.2(d) Amendment No. 2 to Plan of Reorganization, dated as of July 15, 1992 (7) (Exhibit 4.2(d)). 4.3 Indenture dated as of July 15, 1992 between Mortgage and Realty Trust and Wilmington Trust Company, as trustee, governing the registrant's Senior Secured Uncertificated Notes due 1995 (7) (Exhibit 4.3). 10.1 1984 Share Option Plan (8) (Exhibit 19.1). 10.2 Form of Incentive Stock Option Agreement under the 1984 Share Option Plan (9) (Exhibit 10.9). 10.3 Form of Non-Qualified Stock Option Agreement under the 1984 Share Option Plan (2) (Exhibit 10.19). 10.4 Amended and Restated Saving Incentive Plan effective January 1, 1992 (7) (Exhibit 10.7). 10.5 Amended and Restated Employees' Retirement Plan effective January 1, 1992 (7) (Exhibit 10.8). 10.6 Pension Plan for Trustees dated October 1, 1989 (10) (Exhibit 10.13). 10.7 Employee' Retention Plan dated October 17, 1990 as amended January 16, 1991 and March 10, 1991 (11) (Exhibit 19.1). 10.8* Resolutions of Amendment to Amended and Restated Employees' Retirement Plan. 11* Schedule of Net Income Per Share -- Assuming Full Dilution for the years ended September 30, 1994, 1993 and 1992 20.1 Press Release (12) (Exhibit 20.1). 20.2 Term Sheet (12) (Exhibit 20.2). 21* Subsidiaries. 23* Consent of Ernst & Young LLP dated December 27, 1994. - ------------------------- (1) Filed on May 13, 1993 as an exhibit to the Quarterly Report on Form 10-Q (No. 1-6613) and incorporated herein by reference. (2) Filed on December 6, 1984 as an exhibit to the Annual Report on Form 10-K (No. 1-6613) and incorporated herein by reference. (3) Filed on May 20, 1981 as an exhibit to Amendment No. 1 to the Registration Statement on Form 8-A (No. 1-6613) and incorporated herein by reference. (4) Filed on December 28, 1990 as an exhibit to the Annual Report on Form 10-K (No. 1-6613) and incorporated herein by reference.
48 (5) Filed on March 14, 1991 as an exhibit to the Current Report on Form 8-K (No. 1-6613) and incorporated herein by reference. (6) Filed on December 27, 1991 as an exhibit to the Annual Report on Form 10-K (No. 1-6613) and incorporated herein by reference. (7) Filed on December 22, 1992 as an exhibit to the Annual Report on Form 10-K (No. 1-6613) and incorporated herein by reference. (8) Filed on August 13, 1987 as an exhibit to the Quarterly Report on Form 10-Q (No. 1-6613) and incorporated herein by reference. (9) Filed on December 29, 1987 as an exhibit to the Annual Report on Form 10-K (No. 1-6613) and incorporated herein by reference. (10) Filed on December 21, 1989 as an exhibit to the Annual Report on Form 10-K (No. 1-6613) and incorporated herein by reference. (11) Filed on May 14, 1991 as an exhibit to the Quarterly Report on Form 10-Q (No. 1-6613) and incorporated herein by reference. (12) Filed on November 28, 1994 as an exhibit to the Current Report on Form 8-K (No. 1-6613) and incorporated herein by reference. * Exhibit filed with this Form 10-K.
49 EXHIBIT 10.8 SECRETARY'S CERTIFICATION The undersigned Secretary of Mortgage and Realty Trust (the "Trust"), a real estate investment trust duly organized under the laws of the State of Maryland, hereby certifies that the following is a true and correct copy of the preambles and resolutions duly adopted by the Board of Trustees of the Trust on July 20, 1994, and that such resolutions have not been modified or rescinded and are still in full force and effect as of the date hereof: WHEREAS, the Trust has heretofore adopted and maintained, and continues to maintain, a certain Plan and Trust qualified under Sections 401(a) and 501(a) of the Internal Revenue Code known as the "Employees' Retirement Plan for Mortgage and Realty Trust" (the "Plan"); and WHEREAS, in the opinion of the Board of Trustees, it is in the best interest of the Trust to amend the Plan so as to permit distributions following termination of employment and to permit distribution of an employee's vested benefit in lump sum form; NOW THEREFORE, BE IT RESOLVED, that Item E16 of the Adoption Agreement to the Employees' Retirement Plan for Mortgage and Realty Trust dated December 16, 1992 is hereby amended by eliminating E16 c. thereof and selecting instead E16 d. reading "Distributions may be made at the Participant's election as soon as practicable after the Anniversary Date following termination of employment"; and it is further RESOLVED, that Item E17 of the aforesaid Adoption Agreement is hereby amended by eliminating E17 a. thereof and selecting instead E17 c. reading "Distributions under the Plan may be made in annuities and . . . IN LUMP SUMS OR INSTALLMENTS"; and it is further RESOLVED, that the aforesaid amendments shall be effective as of January 1, 1994; and it is further RESOLVED, that the appropriate officers of the Trust are hereby authorized and directed to take any and all actions, to sign such documents and to make such filings with any State or Federal agency as may be necessary to effectuate the foregoing resolutions. /s/ CLAIRE M. ADAMS -------------------------------------- Claire M. Adams, Secretary DATED: July 20, 1994 [SEAL] EXHIBIT 11 MORTGAGE AND REALTY TRUST SCHEDULE OF NET INCOME PER SHARE -- ASSUMING FULL DILUTION FOR THE YEAR ENDED SEPTEMBER 30,
1994 1993 1992 --------------- --------------- --------------- BASIS: Net loss...................................................... $ (21,590,000) $ (53,969,000) $ (37,472,000) Average common shares outstanding............................. 11,226,000 11,080,000 11,076,000 20% limitation on assumed repurchase.......................... 2,245,000 2,216,000 2,215,000 Market price at the end of the period......................... $.375 $.375 $1.125 Options outstanding........................................... 426,000 452,500 584,500 COMPUTATION: Proceeds: Options..................................................... 426,000 452,500 584,500 Average exercise price...................................... X $5.37 X $5.36 X $8.15 --------------- --------------- --------------- $ 2,288,000 $ 2,425,000 $ 4,764,000 --------------- --------------- --------------- --------------- --------------- --------------- Adjustment of proceeds: Purchase of outstanding common shares at market............. $ 842,000 $ 831,000 $ 2,492,000 Retirement of debt.......................................... 1,446,000 1,594,000 2,272,000 --------------- --------------- --------------- $ 2,288,000 $ 2,425,000 $ 4,764,000 --------------- --------------- --------------- --------------- --------------- --------------- Adjustment of net loss: Net loss before gain on sales of real estate................ $ (21,590,000) $ (53,969,000) $ (37,472,000) Interest reduction.......................................... 155,000 135,000 176,000 --------------- --------------- --------------- Adjusted net loss......................................... $ (21,435,000) $ (53,834,000) $ (37,296,000) --------------- --------------- --------------- --------------- --------------- --------------- Adjustment of shares outstanding: Average shares outstanding.................................. 11,226,000 11,080,000 11,076,000 Net shares repurchased...................................... (1,819,000) (1,764,000) (1,631,000) --------------- --------------- --------------- Adjusted shares outstanding (basis for computation of net income per share -- assuming full dilution).............. 9,407,000 9,316,000 9,445,000 --------------- --------------- --------------- --------------- --------------- --------------- Fully diluted earnings per share: Net loss.................................................... $(2.28) $(5.78) $(3.95) --------------- --------------- --------------- --------------- --------------- ---------------
- ------------------------ NOTE -- Primary earnings per share is based on the average number of shares outstanding. EXHIBIT 21 MORTGAGE AND REALTY TRUST SUBSIDIARIES AS OF SEPTEMBER 30, 1994
PERCENTAGE OF STATE OF NAME OWNERSHIP ORGANIZATION - - ------------------------------------------------- ---------------------- ------------------- MRT West, Inc. (corporation) 100% California Paseo Padre Associates 85% California (limited partnership) (Limited partner interest) 15% (General partner interest through MRT West) 150 Rittenhouse Circle, Inc. (corporation) 100% Maryland MRT Santa Monica, Inc. (corporation) 100% California
EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated November 17, 1994 with respect to the financial statements and schedules of Mortgage and Realty Trust included in this Annual Report (Form 10-K) for the year ended September 30, 1994. ERNST & YOUNG LLP Philadelphia, Pennsylvania December 27, 1994 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to __________ Commission File Number 1-6613 MORTGAGE AND REALTY TRUST ------------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 23-1862664 ------------------------------- -------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification) incorporation or organization) 8380 Old York Road, Suite 300 Elkins Park, Pennsylvania 19027-1590 - - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 881-1525 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ----- ----- Number of Common Shares Outstanding at March 31, 1995: 11,226,215 MORTGAGE AND REALTY TRUST INDEX OF FINANCIAL INFORMATION PART I 1. Unaudited Financial Statements including the following: Balance Sheet at March 31, 1995 and September 30, 1994 Statement of Operations for the periods ended March 31, 1995 and 1994 Statement of Cash Flows for the six months ended March 31, 1995 and 1994 Statement of Shareholders' Equity for the six months ended March 31, 1995 Notes to the Financial Statements 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II 3. Defaults Upon Senior Securities 6. Exhibits and Reports on Form 8-K 1 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements: - -------------------------------------------------------------------------------- BALANCE SHEET - --------------------------------------------------------------------------------
March 31, September 30, 1995 1994 ------------ ------------- ASSETS: Mortgage loans and investments: Standing loans $ 54,272,000 $ 61,851,000 Long-term amortizing loans 2,694,000 2,908,000 Participating loans and investments 1,960,000 4,563,000 Non-earning 25,000 - ------------ ------------ 58,951,000 69,322,000 ------------ ------------ Notes receivable 642,000 760,000 In-substance foreclosures: Earning 30,328,000 62,097,000 Non-earning 18,018,000 10,198,000 Real estate: Investment in real estate equities, net 56,940,000 56,857,000 Properties acquired through foreclosure and held for sale, net: Earning 72,642,000 68,437,000 Non-earning 34,417,000 32,282,000 Investment in partnerships, net 26,511,000 9,524,000 ------------ ------------ 298,449,000 309,477,000 Less allowance for losses (11,031,000) (13,430,000) ------------ ------------ 287,418,000 296,047,000 Cash and cash equivalents 73,140,000 60,332,000 Interest receivable and other assets 6,390,000 7,865,000 ------------ ------------ $366,948,000 $364,244,000 ============ ============ LIABILITIES: Senior secured notes $290,000,000 $290,000,000 Loan on equity investment 17,593,000 17,593,000 Accounts payable and accrued expenses 3,715,000 4,050,000 Interest payable 51,324,000 32,568,000 ------------ ------------ 362,632,000 344,211,000 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 3) SHAREHOLDERS' EQUITY: Preferred shares, $1 par value: 3,500,000 shares authorized, none issued - - Common shares, $1 par value: 20,000,000 shares authorized, 11,226,000 shares issued and outstanding 11,226,000 11,226,000 Additional paid-in capital 182,375,000 182,375,000 Accumulated deficit (189,285,000) (173,568,000) ------------ ------------ Total shareholders' equity 4,316,000 20,033,000 ------------ ------------ $366,948,000 $364,244,000 ============ ============
See accompanying notes. 2 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Periods Ended March 31, (Unaudited) - --------------------------------------------------------------------------------
Quarter Ended Six Months Ended -------------------------- -------------------------- 3/31/95 3/31/94 3/31/95 3/31/94 ------------ ----------- ------------ ----------- Income: Interest and fee income on mortgage loans $ 2,303,000 $ 3,661,000 $ 5,181,000 $ 7,666,000 Income on rental properties: Rental income 5,825,000 4,167,000 11,517,000 8,469,000 Operating expense reimbursement 590,000 418,000 1,167,000 849,000 Interest on short-term investments 1,042,000 140,000 1,864,000 234,000 Other 14,000 34,000 47,000 48,000 ------------ ----------- ------------ ----------- 9,774,000 8,420,000 19,776,000 17,266,000 ------------ ----------- ------------ ----------- EXPENSES: Interest 10,273,000 7,663,000 19,832,000 15,462,000 Expenses of rental properties: Depreciation and amortization 1,782,000 1,426,000 3,486,000 2,833,000 Operating 2,802,000 2,360,000 5,472,000 4,734,000 Other operating expenses 1,045,000 1,382,000 2,198,000 2,628,000 Provision for losses on mortgage loans and related investments 3,000,000 - 3,000,000 - Reorganization expenses 1,135,000 741,000 1,505,000 1,417,000 ------------ ----------- ------------ ----------- 20,037,000 13,572,000 35,493,000 27,074,000 ------------ ----------- ------------ ----------- Net loss $(10,263,000) $(5,152,000) $(15,717,000) $(9,808,000) ============ =========== ============ =========== PER SHARE: Net loss $(.91) $(.46) $(1.40) $(.87) ===== ===== ====== ===== Weighted average number of common shares outstanding 11,226,000 11,226,000 11,226,000 11,226,000
See accompanying notes. 3 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) - -------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS Six Months Ended March 31, (Unaudited) - --------------------------------------------------------------------------------
1995 1994 ----------- ------------ Cash flows from operating activities: Net loss $(15,717,000) $(9,808,000) ------------ ----------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization on real estate 3,486,000 2,833,000 Decrease in payables and accrued expenses (335,000) (134,000) Increase in interest payable 18,756,000 15,512,000 Decrease (increase) in receivables and other assets 1,475,000 (399,000) Net change in interest reserves, deferred income (349,000) (455,000) Provision for losses 3,000,000 - Recoveries of charge offs to allowance for losses 116,000 69,000 ------------ ----------- Total adjustments 26,149,000 17,426,000 ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 10,432,000 7,618,000 ------------ ----------- Cash flows from investing activities: Investments in real estate: Properties acquired through foreclosure (6,189,000) (2,103,000) In-substance foreclosures (97,000) (1,030,000) Real estate equities (1,349,000) (738,000) Partnerships (1,849,000) - Principal repayments on mortgage loans 835,000 11,564,000 Repayments on notes receivable 118,000 100,000 Sale of foreclosed property 3,350,000 6,665,000 Repayment on in-substance foreclosure 7,557,000 2,338,000 ------------ ----------- NET CASH PROVIDED BY INVESTING ACTIVITIES 2,376,000 16,796,000 ------------ ----------- Net increase in cash and cash equivalents 12,808,000 24,414,000 Cash and cash equivalents at beginning of period 60,332,000 11,451,000 ------------ ----------- Cash and cash equivalents at end of period $ 73,140,000 $35,865,000 ============ =========== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTMENT AND FINANCING ACTIVITIES: Charge offs against allowance for losses $ 5,515,000 $ 758,000 ============ =========== Transfer of in-substance foreclosures to real estate and investment in partnerships $ 23,740,000 $ 5,556,000 ============ =========== Transfer of in-substance foreclosures to mortgage loans $ 105,000 $ - ============ =========== Transfer of mortgage loans to real estate and in- substance foreclosures $ 9,762,000 $ 400,000 ============ ===========
See accompanying notes. 4 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) - -------------------------------------------------------------------------------- STATEMENT OF SHAREHOLDERS' EQUITY For the Six Months Ended March 31, 1995 (Unaudited) - --------------------------------------------------------------------------------
Additional Total Common Shares Paid-In Accumulated Shareholders' Shares Amount Capital Deficit Equity ------------------------------------------------------------------- Balance, beginning of period 11,226,000 $11,226,000 $182,375,000 $(173,568,000) $20,033,000 Net loss (15,717,000) (15,717,000) ---------- ----------- ------------ ------------- ----------- Balance, end of period 11,226,000 $11,226,000 $182,375,000 $(189,285,000) $ 4,316,000 ========== =========== ============ ============= ===========
See accompanying notes. 5 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION - On November 17, 1994, the Trust announced that it had reached an agreement in principle with a substantial number of holders of its Senior Notes on the terms of a restructuring of the Senior Notes. Pursuant to the agreement in principle, holders of the Senior Notes in the aggregate principal amount of $290 million plus accrued interest of $51.3 million through March 31, 1995 will receive under a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code, $110 million of new senior secured notes due 2002, approximately $50 million in cash and 97% of the restructured equity of the Trust (or substantially all the restructured equity if holders of the Trust's outstanding common shares do not vote to accept the prepackaged plan). If holders of the outstanding common shares vote to accept the prepackaged plan, such holders will retain 3% of the equity of the restructured Trust. The agreement in principle anticipates that the new senior secured notes will mature in 2002 and bear interest at the rate of 11-1/8% per annum. It is also anticipated that holders of unsecured claims will receive cash in the allowed amount of their claims. It is contemplated that the Trust will prepare a "shelf" registration statement for the new securities issued pursuant to the prepackaged plan. In April 1995, the Trust and certain holders of Senior Notes executed an agreement of understanding, pursuant to which such noteholders agreed to support the proposed restructuring. On April 11, 1995, pursuant to such agreement, the Trust advanced $25 million towards the $50 million minimum payment required to implement the proposed restructuring. The agreement to pursue the restructuring proposal is subject to a number of conditions and the Trust intends to effect the restructuring through a prepackaged chapter 11 bankruptcy. At this time there can be no assurance that the conditions to consummation of the proposed restructuring will be satisfied. On March 30, 1995, the Trust filed preliminary solicitation materials with the SEC regarding the proposed restructuring and prepackaged chapter 11 bankruptcy. Details of the proposed restructuring and prepackaged bankruptcy including the conditions to commencement and consummation of the restructuring and terms of the new debt securities to be received by the Senior Note holders under the prepackaged plan have not been finalized pending the filing of definitive solicitation materials with the SEC and distribution of a disclosure statement for the solicitation of votes for the prepackaged plan to holders of the Trust's outstanding securities. The financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) applicable to a company on a "going concern" basis, which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. These financial statements include adjustments and reclassifications that have been made to reflect indebtedness as extended under the 1991 Plan and the Senior Note Indenture. These financial statements do not include any adjustments 6 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION (Continued) that would be required should the Trust be unable to continue as a going concern. The conditions noted above raise substantial doubt about the Trust's ability to continue as a going concern. These financial statements also do not include any adjustments that could be required as a result of the November 17, 1994 agreement in principle with certain holders of Senior Notes and related proposed restructuring and prepackaged chapter 11 bankruptcy, including adjustments required by The American Institute of Certified Public Accountants Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," for fresh start accounting. The Trust anticipates that any adjustments that would be occasioned in the restructuring process by its financial distress, by any inability of the Trust to continue as a going concern or by any inability of the Trust to achieve a consensual restructuring would be material and adverse. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months period ended March 31, 1995 are not necessarily indicative of the results that may be expected for the year ended September 30, 1995. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES INCOME TAXES - The Trust is a real estate investment trust that has elected to be taxed under Sections 856-860 of the Internal Revenue Code of 1986, as amended. Accordingly, no provision has been made for income taxes in the financial statements. For the fiscal year ended September 30, 1994 and the six months ended March 31, 1995, there were significant differences between taxable net loss and net loss as reported in the financial statements. The differences were primarily temporary differences related to the recognition of bad debt deductions and accounting for reorganization costs. For financial accounting purposes, these items are expensed currently, while for tax purposes some portion of these items may be deferred to future periods. 7 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) The Trust incurred net operating losses of $38 million, $31 million and $12 million for tax purposes in fiscal 1993, 1992 and 1991, respectively. The Trust estimates a net operating loss for tax purposes of approximately $35 million for fiscal 1994. Each of these net operating losses will be available for fifteen years as a loss carryforward to future years' taxable income. If during the course of the proposed restructuring, Cancellation of Indebtedness taxable income results, the net operating losses available for use in future years will be reduced by the amount of such Cancellation of Indebtedness income. The Trust intends to preserve its net operating losses, but the transfer of more than 50% of the ownership of the Trust to its creditors in a reorganization (as was provided in the November 1994 agreement in principle and as is likely in any alternate restructuring) will limit the future per annum use of its net operating losses (after the aforementioned reduction for Cancellation of Indebtedness income) under Internal Revenue Code Section 382. INTEREST INCOME - Interest income on each loan is recorded as earned. Interest income is not recognized if, in the opinion of the Trustees, collection is doubtful. The Trust generally considers loans as delinquent if payment of interest and/or principal, as required by the terms of the note, is more than 60 days past due. Accrual of interest income is generally terminated and foreclosure proceedings are started if payment is more than 60 days past due. RENTAL INCOME - Rental income is recognized on a straight-line basis over the applicable term of the lease. LOAN FEE INCOME - Loan fees are recorded as income using the "interest method". Accordingly, loan fees are deferred when received and are recorded as income over the term of the loan in relation to outstanding loan balances. ALLOWANCE FOR LOSSES - The allowance for losses on mortgage loans and related investments is determined in accordance with The American Institute of Certified Public Accountants Statement of Position on Accounting Practices of Real Estate Investment Trusts 75-2, as amended. This statement requires adjustment of the carrying value of mortgage loans to the lower of their carrying value or estimated net realizable value. Estimated net realizable value is the estimated selling price of a property offered for sale in the open market allowing a reasonable time to find a buyer, reduced by the estimated cost to complete and hold the property (including the estimated cost of capital), net of estimated cash income. At March 31, 1995, no assets were valued using the cost of capital method. Additional provisions for losses on mortgage loans and related investments may be necessary if the deterioration in real estate markets continues, or there is a significant increase in the Trust's cost of capital. See also Note 1, "Basis of Financial Statement Presentation and Plan of Reorganization". Further adjustments may also be necessary as a result of the restructuring negotiations. The 8 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) Trust anticipates that any adjustments that would be occasioned in the restructuring process by its financial distress, by any inability of the Trust to continue as a going concern or by any inability of the Trust to achieve a consensual restructuring would be material and adverse. CONCENTRATION OF CREDIT RISKS - The Trust's mortgage loan portfolio is heavily concentrated in California (49%) and Pennsylvania (23%). The mortgage loans are secured by the underlying real estate. The real estate is subject to risks arising in connection with the underlying real estate, such as defaults or non-renewal of the tenant leases, increased operating costs, environmental problems and availability of financing. PROPERTIES ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE - Properties acquired through foreclosure and held for sale are recorded at the lower of cost or fair value at acquisition, which becomes the cost basis for accounting purposes. The fair value of the asset acquired, in accordance with Financial Accounting Standards Board Statement 15, is the amount that the Trust could reasonably expect to receive in a current sale between a willing buyer and a willing seller. Such properties are thereafter accounted for in the same manner as any similar asset acquired for investment as to depreciation and gain or loss upon sale. Subsequent to foreclosure, the properties are carried at the lower of cost or fair value less estimated costs to sell, as set forth in The American Institute of Certified Public Accountants' Statement of Position 92-3, "Accounting for Foreclosed Assets" ("SOP 92-3"). IN-SUBSTANCE FORECLOSURE - A loan is considered an in-substance fore- closure if: (1) the debtor has little or no equity considering the fair value of the collateral, (2) proceeds for repayment can be expected to come only from operation or sale of the collateral, and (3) the debtor has either formally or effectively abandoned control of the collateral. Loans meeting the criteria for in-substance foreclosure are reclassified and recorded at the lower of cost or fair value of the collateral, which establishes a new cost basis in the same manner as a legal foreclosure. Properties acquired through foreclosure and held for sale and in- substance foreclosures are reclassified from non-earning to earning status if they produce and maintain for a minimum of two consecutive quarters an annualized return of 5% or greater cash flow yield. NET LOSS PER SHARE - Net loss per share is computed using the weighted average common shares outstanding during each period. Fully diluted net loss per share is not disclosed because such information is not meaningful. DEPRECIATION AND AMORTIZATION - Depreciation and amortization are computed on the straight-line method over an estimated useful life of 40 years for buildings and three to five years for other property and lease commissions. Investments in real estate equities and properties acquired through foreclosure and held for sale and investments in partnerships are shown on the balance sheet, net of accumulated depreciation. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include short- term investments (high grade commercial paper carried at cost of $71.6 million at March 31, 1995) with original maturities ranging from 3 to 28 days. 9 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) Included in cash and cash equivalents is $1.3 million of restricted cash which represents the funding of the employee retention plan (see Note 8) and $1.1 million related to borrowers' deposits. NOTE 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE The following table summarizes the Trust's mortgage loan portfolio:
March 31, 1995 September 30, 1994 ---------------------- ---------------------- Number of Carrying Number of Carrying Type of Underlying Security Investments Amount Investments Amount - - --------------------------- ----------- -------- ----------- -------- ($ Amounts in Thousands) Apartments 1 $ 235 1 $ 254 Residential/Condominium* 8 1,218 9 1,334 Office Buildings 3 18,181 2 1,699 Industrial Buildings 8 11,203 7 30,328 Research & Development 1 12,043 3 16,371 Retail Buildings 3 13,011 4 16,276 Hotel/Motels 1 3,060 1 3,060 -- ------- -- ------- Total 25 $58,951 27 $69,322 == ======= == ======= _____________ * Includes 79 mortgage end loans on 8 investments at March 31, 1995 and 80 mortgage end loans on 9 investments at September 30, 1994.
The Trust's mortgage loan portfolio consists of loans located principally in California, 49% and Pennsylvania, 23%. At March 31, 1995, the Trust had undisbursed commitments of $690,000, all of which represents additional advances on partially funded mortgage loans. As of March 31, 1995, there was one earning loan totalling $16,608,000 that was delinquent (more than 60 days past due) as to principal. At March 31, 1995 and 1994, loans totalling $18,438,000 and $31,019,000, respectively, were extended beyond their original contractual maturity dates. Loan terms are extended in the normal course of business for various reasons, such as delays in construction, slower leasing than originally anticipated or delay in obtaining permanent financing. No interest rate modifications were made on mortgage loans for the quarter ended March 31, 1995. 10 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (Continued) The following table summarizes the Trust's investment in in-substance foreclosures:
March 31, 1995 September 30, 1994 ---------------------- ---------------------- Number of Carrying Number of Carrying Type of Property Investments Amount Investments Amount - - ---------------- ----------- -------- ----------- -------- ($ Amounts in Thousands) EARNING: Office Buildings 1 $ 4,654 2 $12,840 Retail Buildings 2 13,800 3 28,452 Apartments - - 1 6,695 Research & Development Bldgs. - - 2 14,110 Industrial Buildings 2 11,874 - - -- ------- -- ------- Total Earning 5 30,328 8 62,097 -- ------- -- ------- NON-EARNING: Industrial Buildings 4 18,018 2 10,198 -- ------- -- ------- Total Non-Earning 4 18,018 2 10,198 -- ------- -- ------- Total 9 $48,346 10 $72,295 == ======= == =======
The following table summarizes the Trust's investment in real estate equities, net of accumulated depreciation of $11,294,000 at March 31, 1995 and $10,023,000 at September 30, 1994:
March 31, 1995 September 30, 1994 ---------------------- ---------------------- Number of Carrying Number of Carrying Type of Property Investments Amount Investments Amount - - ---------------- ----------- -------- ----------- -------- ($ Amounts in Thousands) Office Buildings 4 $26,576 4 $26,264 Industrial Buildings 1 6,434 1 6,510 Retail Buildings 1 23,930 1 24,083 -- ------- -- ------- Total 6 $56,940 6 $56,857 == ======= == =======
11 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 3. MORTGAGE LOANS AND INVESTMENT IN REAL ESTATE (Continued) The following table summarizes the Trust's investment in properties acquired through foreclosure and held for sale, net of accumulated depreciation of $10,180,000 at March 31, 1995 and $8,329,000 at September 30, 1994:
March 31, 1995 September 30, 1994 ---------------------- ---------------------- Number of Carrying Number of Carrying Type of Property Investments Amount Investments Amount - - ---------------- ----------- -------- ----------- -------- ($ Amounts in Thousands) EARNING Apartments 3 $ 20,924 3 $ 21,012 Office Buildings 3 14,772 4 13,942 Industrial Buildings 6 23,280 5 19,913 Retail Buildings 1 7,651 1 7,585 Research & Development Bldgs. 2 6,015 2 5,985 -- -------- -- -------- Total Earning 15 72,642 15 68,437 -- -------- -- -------- NON-EARNING Office Buildings 4 12,754 5 16,449 Industrial Buildings 5 14,116 4 10,794 Retail Buildings 1 7,547 2 5,039 -- -------- -- -------- Total Non-Earning 10 34,417 11 32,282 -- -------- -- -------- Total 25 $107,059 26 $100,719 == ======== == ========
The following table summarized the Trust's investment in partnerships, net of accumulated depreciation of $618,120 at March 31, 1995 and $313,628 at September 30, 1994:
March 31, 1995 September 30, 1994 ---------------------- ---------------------- Number of Carrying Number of Carrying Type of Property Investments Amount Investments Amount - - ---------------- ----------- -------- ----------- -------- ($ Amounts in Thousands) Industrial Buildings 2 $ 9,403 2 $ 9,524 Retail Buildings 2 17,108 - - -- ------- -- ------- Total 4 $26,511 2 $ 9,524 == ======= == =======
12 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 4. ALLOWANCE FOR LOSSES The changes in the allowance for losses for the six months ended March 31, 1995 and 1994 were as follows:
3/31/95 3/31/94 -------- -------- (Amounts in Thousands) Balance at beginning of period $13,430 $11,808 Provisions charged to expense 3,000 - ------- ------- 16,430 11,808 Less charges against allowance, net of recoveries 5,399 758 ------- ------- Balance at end of period $11,031 $11,050 ======= =======
Approximately $7,205,000 and $6,524,000 of the allowance at March 31, 1995 and 1994, respectively, are applicable to properties acquired through foreclosure and held for sale. NOTE 5. SENIOR NOTES SENIOR SECURED NOTES - The lack of liquidity in many of the commercial real estate markets continued during the past year. Although the Trust was able to meet the required principal payment at December 31, 1992, reducing the principal balance of the Senior Notes to $290 million, it did not have sufficient funds to meet the $20 million required principal payment due June 30, 1993 or the $33.8 million required principal payment due December 31, 1993 or the $30 million required principal payment due June 30, 1994 or the $18.8 million required principal payment due December 31, 1994 (taking into account permitted deferrals). The Trust also did not make the $6.6 million, the $6.4 million, the $7.2 million, the $8.7 million, the $9.1 million and the $9.6 million interest payments due December 31, 1993, March 31, 1994, June 30, 1994, September 30, 1994, December 31, 1994, and March 31, 1995, respectively. The average borrowing rates for the six months ended March 31, 1995 and 1994, respectively, were 12.97% and 10.01%. At March 31, 1995, the outstanding 13.62% interest rate on the Senior Notes was composed of interest at 13.00% on $200 million of Senior Notes (including default interest at 1%) and 15.00% on $90 million of deferred amounts of Senior Notes (including default interest at 1%). LOAN ON EQUITY INVESTMENT - In November 1991, the Trust acquired full ownership of a retail center in which it had a partnership interest. The Trust has a fully funded construction borrowing commitment of $17.6 million outstanding at March 31, 1995. The contractual interest rate on this loan is 11% (Prime + 2%, floor of 8.5%), and the loan matures on July 3, 1995. The Trust can further extend the loan to April 22, 1996, but will be required to make a $3.6 million payment in order to receive the additional extension. 13 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Financial Accounting Standards Board Statement No. 107 Disclosure of Fair Value of Financial Statements ("SFAS" 107) requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Trust. The carrying value of cash and cash equivalents approximates that fair value because of the liquidity and short-term maturities of these instruments. The fair value of mortgage loans is estimated by discounting cash flows at what is considered a market interest rate for loans with similar terms to borrowers of similar credit quality. The measurement of the fair value of the Senior Notes at March 31, 1995 is not practical in the context of the proposed restructuring. The loan on equity investment is a variable rate loan that reprices frequently, thus fair value is based on the carrying amount of the loan. The estimated fair values of the Trust's financial instruments at March 31, 1995 are as follows:
Carrying Fair Amount Value -------- -------- (Amounts in Thousands) FINANCIAL ASSETS: Cash and cash equivalents $73,140 $73,140 Mortgage loans and notes receivable (net of allowance for possible losses) 59,744 59,744 FINANCIAL LIABILITIES: Loan on equity investment (17,593) (17,593) Off-Balance Sheet Financial Instruments: Unfunded loan commitments - (690)
14 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 7. SHARE OPTION PLAN On August 14, 1994, the 1984 Share Option Plan terminated. As of March 31, 1995, options to purchase 348,500 Common Shares were outstanding under the 1984 Share Option Plan. The exercise price per share varies from $2.50 to $4.15. Options granted, other than those granted in fiscal 1991, expire five years from the date of grant and may be exercised at any time six months after the date of grant, subject to the limitation that the aggregate fair market value (determined as of the time the Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any participant during any calendar year shall not exceed $100,000. Options granted during fiscal 1991, pursuant to the Employee Retention Plan described in Note 8, expire five years from the date of grant but do not vest until three years from the date of grant. Options to purchase 77,500 Common Shares at a price of $14.50 terminated during the six months ended March 31, 1995. In addition to cash, Options may be exercised by exchanging the Trust's Common Shares valued at the market price on the date of exercise of the Options. During the six months ended March 31, 1995, no Options were exercised. NOTE 8. EMPLOYEE RETENTION PLAN The Trust established an Employee Retention Plan, to be administered by the Compensation and Nominating Committee (the "Committee"), in order to assure the continuity and performance of employees of the Trust. The Plan contains four categories of benefits: an incentive program, stock options, termination pay and a retention bonus. The Committee established an incentive program for calendar year 1991. The incentive pool was calculated based on the reduction of the Trust's outstanding debt (the Senior Notes). During the six month periods ended March 31, 1995 and 1994, the Committee approved the payment of discretionary bonuses totalling $128,500 and $123,000, respectively, for certain officers and employees of the Trust. On March 29, 1991, the Committee awarded stock options for the purchase of 197,500 Common Shares at an option price of $4.15. The options had a three-year vesting period from the date of grant and vested on March 29, 1994. A termination pay plan has been established to cover termination of employment without cause during the period that the Senior Notes, as defined, are outstanding. Employees will be entitled to compensation ranging from a minimum of twelve weeks to a maximum of eighteen months pay. In addition, certain health benefits will continue to be paid by the Trust over a period of time equal to the period used in calculating severance pay. The Trust estimates that the maximum cost of the termination pay plan would be approximately $1.3 million and the cost is charged to expense at date of termination (as defined in the termination pay plan). The retention bonus, which totalled $350,000, was paid on February 28, 1992 to certain employees who remained with the Trust one year after the Effective Date of the 1991 Plan (February 27, 1991). 15 MORTGAGE AND REALTY TRUST FORM 10Q Item 1. Financial Statements (Continued) NOTES TO THE FINANCIAL STATEMENTS NOTE 9. ISSUANCE OF SHARES Effective April 1, 1992, the Trust terminated its Dividend Reinvestment and Share Purchase Plan. The Trust is authorized to issue up to 3,500,000 Preferred Shares on terms to be established by the Trustees. No preferred shares have been issued to date. The Trust contributed 150,000 Common Shares (1.4% of outstanding shares) as part of the settlement of the consolidated class actions and the Class 5 claims remaining in the chapter 11 proceeding. The settlement and contribution of shares occurred on September 17, 1993. 16 MORTGAGE AND REALTY TRUST FORM 10Q Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES - A Plan of Reorganization under Chapter 11 of the Bankruptcy Code was confirmed at a hearing held in the Bankruptcy Court in Los Angeles, California, on February 21, 1991, and an order was entered February 27, 1991, confirming the Plan. As a result of the liquidity problems in the commercial real estate markets, the Trust was not able to meet the required amortization at June 30, 1992 and the debt was restructured in July 1992 with the unanimous consent of the creditors. The debt is now governed by an indenture dated as of July 15, 1992. At December 31, 1992, debt outstanding was reduced to $290 million, the maximum debt level permitted under the Plan on that date. For the six months ended March 31, 1995, cash provided by operating activities increased the cash balance by approximately $10.4 million. This was due primarily to an increase in interest payable due to no payment of interest on the Secured Notes since September 30, 1993. Cash provided by investing activities increased the cash balance by approximately $2.4 million. This was due to higher repayments, net of advances, on: (1) mortgage loans of $835,000, and (2) in-substance foreclosures of $7.5 million. Offsetting these increases were advances, net of repayments, on: (1) properties acquired through foreclosure of $2.8 million, (2) real estate equities of $1.3 million and (3) investment in partnerships of $1.8 million. Due to the lack of liquidity that has existed in the real estate marketplace, the Trust has not been able to meet payment and other obligations on its outstanding debt. Under the financial covenants of the Indenture governing the Senior Notes, the Trust was required to maintain a ratio of outstanding securities to its capital base (as defined in the Indenture) of 515% at March 31, 1993. In addition, under the Indenture the Trust was required to maintain a ratio of outstanding securities to its capital base of 438% at June 30, 1993 and September 30, 1993, 358% at December 31, 1993 and March 31, 1994, and 313% at June 30, 1994 and September 30, 1994, and 209% at December 31, 1994 and March 31, 1995, and a ratio of earning assets (as defined in the Indenture) to outstanding securities of 113% at June 30, 1993 and September 30, 1993, 116% at December 31, 1993 and March 31, 1994, 117% at June 30, 1994 and September 30, 1994 and 120% at December 31, 1994 and March 31, 1995. The Trust failed to meet each of these ratios, constituting events of default under the Indenture. However, on May 26, 1993, the Trust received from the holders of more than 66-2/3% in principal amount of Senior Notes a waiver relating to the March 31 default. Outstanding Securities refers to all $290 million of securities governed by and registered under the Indenture dated July 15, 1992 for the Senior Secured Uncertificated Notes due 1995. Capital Base means the amount equal to the Company's Shareholders' Equity less 50% of the non-earning assets. Non-Earning Assets means the aggregate of non-earning loans (as defined in the Indenture) and non-earning properties (properties that do not produce and maintain an annualized return of 5% or greater cash flow yield). Earning Assets means an amount equal to between the aggregate amount of invested assets and aggregate amount of non-earning assets. Management has held discussions with the representatives of the creditors to explore various alternatives for restructuring the outstanding debt obligations. The Trust's present intention is to reach a consensual restructuring agreement to be effected through a prepackaged chapter 11 bankruptcy. In April 1995, the Trust and certain holders of Senior Notes executed an agreement of understanding, pursuant to which such noteholders agreed to support the proposed restructuring. On April 11, 1995, pursuant to such agreement, the Trust advanced $25 million towards the $50 million minimum payment required to implement the proposed restructuring. See Note 1, "Basis 17 MORTGAGE AND REALTY TRUST FORM 10Q Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) of Financial Information and Plan of Reorganization". If such an agreement cannot be reached with the Trust's debt holders, the Trust will have to consider other alternatives, including the filing of a voluntary bankruptcy petition under chapter 11 of the Bankruptcy Code. Although the holders of more than 66-2/3% of the Trust's debt securities had agreed with the Trust to temporarily forebear further creditor action on the defaults for a defined standstill period, such standstill period expired on December 3, 1993. The Company believes that no further extension of the standstill will be granted. The Trust intends, therefore, to continue to operate its business and seek Senior Note holder consent on an ad hoc basis as such consent is required. Although the Trust believes that such consents, if requested, would be in the best interest of the Trust, its shareholders and the Senior Note holders, there can be no assurance that the Trust will obtain sufficient consents as they are required. Currently, the Trust is in default under the Indenture and has continued to suspend payments on the Senior Notes. Consequently, there can be no assurance that the Indenture Trustee and the Collateral Agents will not take remedial or enforcement action, including acceleration of the Senior Notes and foreclosure. If it becomes impossible for the Trust to continue operations under such circumstances, it may be necessary for Mortgage and Realty Trust to explore other alternatives, including seeking relief under chapter 11 of the Bankruptcy Code. At March 31, 1995, the Trust had cash and cash equivalents of $71.6 million. Included in cash and cash equivalents are $1.3 million of restricted cash which represents the funding of the employee retention plan and $1.1 million related to borrowers' deposits. The Trust's unfunded loan commitments totalled $690,000 at March 31, 1995. RESULTS OF OPERATIONS-SIX MONTHS ENDED MARCH 31, 1995 VS. SIX MONTHS ENDED MARCH 31, 1994 - Net loss for the six months ended March 31, 1995 was $(15,717,000) or $(1.40) per share compared to a net loss of $(9,808,000) or $(.87) per share for the six months ended March 31, 1994. The six months ended March 31, 1995 included a provision for losses of $3,000,000 or $.27 per share compared to no provision for the six months ended March 31, 1994. The Trust's spread (interest income on mortgage loans plus net operating income from real estate owned less interest expense) decreased from $(3,212,000) for the six months ended March 31, 1994 to $(7,439,000) for the six months ended March 31, 1995. Offsetting these decreases was an increase in interest income on short- term investments which was $1,864,000 for the six months ended March 31, 1995 compared to $234,000 for the six months ended March 31, 1994. Interest and fee income on mortgage loans decreased $2,485,000 to $5,181,000 for the six months ended March 31, 1995 from $7,666,000 for the six months ended March 31, 1994. The decrease was due primarily to a reduction in earning mortgage loans (including earning in-substance foreclosures) which totalled $89.2 million at March 31, 1995 compared to $149.9 million at March 31, 1994. During the six months ended March 31, 1995, there were two mortgage loans totalling $15.4 million that were transferred into investment in Partnerships. In addition, advances of $1.8 million on investment in partnerships were made during the period. During the six months ended March 31, 1995, no advances were made on mortgage loans. Prepayment on mortgage loans of approximately $6 million were received during the six months ended March 31, 1994. There were no prepayments on mortgage loans received during the six months ended March 31, 1995. The average interest rate on mortgage loans for the six months ended March 31, 1995 was 7.90% compared to 7.58% for the six months ended March 31, 1994. 18 MORTGAGE AND REALTY TRUST FORM 10Q Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Rental income increased $3,048,000 to $11,517,000 in the six months ended March 31, 1995 from $8,469,000 for the six months ended March 31, 1994. In addition to rental income, the Trust received reimbursement of certain operating expenses totalling $1,167,000 and $849,000 for the six months ended March 31, 1995 and 1994, respectively. Operating expenses and depreciation and amortization on rental properties increased $1,391,000 to $8,958,000 for the six months ended March 31, 1995 from $7,567,000 for the six months ended March 31, 1994, primarily from continued growth in real estate equities and properties acquired through foreclosure and held for sale. Interest on short-term investments increased due to the continuing accumulation of available cash. Available cash increased due to no payment of principal and interest on the Secured Notes since September 30, 1993. Interest expense increased $4,370,000 to $19,832,000 in the current period from $15,462,000 for the six months ended March 31 1994. This was due primarily to an increase in the average borrowing rate from 10.01% for the six months ended March 31, 1994 to 12.97% for the six months ended March 31, 1995. Other operating expenses decreased $430,000 to $2,198,000 for the six months ended March 31, 1995 from $2,628,000 for the six months ended March 31, 1994. The decrease was due to decreases in professional fees and expenses, insurance costs, Trustees expenses and tax (other than income). Reorganization expenses related to the Chapter 11 filing and debt restructuring expenses were $1,505,000 for the six months ended March 31, 1995 compared to $1,417,000 for the six months ended March 31, 1994. These expenses reflect professional fees incurred by the representatives of the creditors, shareholders and the Trust. RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1995 VS. QUARTER ENDED DECEMBER 31, 1994 - Net loss for the quarter ended March 31, 1995 was $(10,263,000) or $(.91) per share compared to $(5,454,000) or $(.49) per share for the quarter ended December 31, 1994. The quarter ended March 31, 1995 included a provisions for losses of $3,000,000 or $.27 per share compared to no provision for the quarter ended December 31, 1994. Interest and fee income on mortgage loans decreased $575,000 to $2,303,000 for the quarter ended March 31, 1995 from $2,878,000 for the quarter ended December 31, 1994. The decrease was due to a reduction in earning mortgage loans (including earning in-substance foreclosures) because of: (1) the repayment of approximately $6.6 million on earning in-substance foreclosures; (2) the transfer of approximately $8.3 million of earning in-substance foreclosures to properties acquired through foreclosure and held for sale; and (3) the reclassification of approximately $8.7 million from earning to non-earning in- substance foreclosures. Rental income increased $133,000 to $5,825,000 in the quarter ended March 31, 1995 from $5,692,000 for the quarter ended December 31, 1994. In addition to rental income, the Trust received reimbursement of certain operating expenses totalling $590,000 and $577,000 for the quarters ended March 31, 1995 and December 31, 1994, respectively. Operating expenses and depreciation and amortization on rental properties increased $210,000 to $4,584,000 for the quarter ended March 31, 1995 from $4,374,000 for the quarter ended December 31, 1994, primarily from continued growth in real estate equities and properties acquired through foreclosure and held for sale. Interest on short-term investments increased due to continuing accumulation of available cash. 19 MORTGAGE AND REALTY TRUST FORM 10Q Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest expense increased $714,000 to $10,273,000 in the current quarter from $9,559,000 for the quarter ended December 31, 1994. This was due primarily to an increase in the average borrowing rate from 12.50% for the quarter ended December 31, 1994 to 13.45% for the quarter ended March 31, 1995. Reorganization expenses related to the Chapter 11 filing and debt restructuring expenses were $1,135,000 for the quarter ended March 31, 1995 compared to $370,000 for the quarter ended December 31, 1994. These expenses reflect professional fees incurred by the representatives of the creditors, shareholders and the Trust. RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1995 VS. QUARTER ENDED MARCH 31, 1994 - Net loss for the quarter ended March 31, 1995 was $(10,263,000) or $(.91) per share compared to $(5,152,000) or $(.46) per share for the quarter ended March 31, 1994. The quarter ended March 31, 1995 included a provision for losses of $3,000,000 or $.27 per share compared to no provision for the quarter ended March 31, 1994. Interest and fee income on mortgage loans decreased $1,358,000 to $2,303,000 for the quarter ended March 31, 1995 compared to $3,661,000 for the quarter ended March 31, 1994. The decrease was due primarily to a reduction in earning mortgage loans (including earning in-substance foreclosures) which totalled $149.9 million at March 31, 1994 compared to $89.3 million at March 31, 1995. Rental income increased $1,658,000 to $5,825,000 in the quarter March 31, 1995 from $4,167,000 for the quarter ended March 31, 1994. In addition to rental income, the Trust received reimbursement of certain operating expenses totalling $590,000 and $418,000 for the quarters ended March 31, 1995 and 1994, respectively. Operating expenses and depreciation and amortization on rental properties increased $798,000 to $4,584,000 for the quarter ended March 31, 1995 from $3,786,000 for the quarter ended March 31, 1994, primarily from continued growth in real estate equities and properties acquired through foreclosure and held for sale. Interest on short-term investments increased due to the continuing accumulation of available cash. Interest expense increased $2,610,000 to $10,273,000 for the current quarter compared to $7,663,000 for the quarter ended March 31, 1994. This increase was due primarily to an increase in the average borrowing rate from 10.15% for the quarter ended March 31, 1994 to 13.45% for the quarter ended March 31, 1995. Reorganization expenses related to the Chapter 11 filing and debt restructuring expenses were $1,135,000 for the quarter ended March 31, 1995 compared to $741,000 for the quarter ended March 31, 1994. These expenses reflect professional fees incurred by the representatives of the creditors, shareholders and the Trust. NON-EARNING LOANS AND INVESTMENTS - At March 31, 1995, the Trust's non- earning loans, non-earning in-substance foreclosures and non-earning properties acquired through foreclosure and held for sale were $52,460,000, representing 17.58% of invested assets compared to $47,008,000 (15.25%) at December 31, 1994 and $44,909,000 (13.71%) at March 31, 1994. 20 MORTGAGE AND REALTY TRUST FORM 10Q PART II Item 3. DEFAULTS UPON SENIOR SECURITIES The Trust did not make a $9.6 million interest payment due March 31, 1995 on the Senior Notes. In addition, based on financial results at March 31, 1995 the Trust was in violation of certain financial covenants in the Indenture relating to the ratio of outstanding securities to the Trust's capital base and the ratio of earning assets to outstanding securities. Outstanding Securities refers to all Securities governed by and registered under the Indenture dated July 15, 1992 for the Senior Secured Uncertificated Notes due 1995. Capital Base means the amount equal to the Company's Shareholders' Equity less 50% of the non-earning assets. Non-Earning Assets means the aggregate of non-earning loans (as defined in the Indenture) and non-earning properties (properties that do not produce and maintain an annualized return of 5% or greater cash flow yield). Earning Assets means an amount equal to between the aggregate amount of invested assets and aggregate amount of non-earning assets. Under the financial covenants of the Indenture, the Trust was required to maintain a ratio of outstanding indenture securities to its capital base (as defined in the Indenture) of 209% at March 31, 1995 and a ratio of earning assets to outstanding securities of 120% at March 31, 1995. Failure to satisfy these covenants constitute additional events of default under the Indenture. In addition, at December 31, 1994, the Trust's non-performing assets (as defined in the Indenture) exceeded the limits prescribed in the Indenture. In addition to constituting an event of default, the Trust is obligated under the Indenture to pay to the holders of Senior Notes a penalty equal to 1.5% of the excess of non-performing assets, or a payment of approximately $183,000. The are also outstanding certain other events of default under the Indenture. Notwithstanding the uncured events of default, neither the Indenture Trustee nor any holders of the Senior Notes have accelerated the Senior Notes. On July 2, 1993 holders of approximately 81% of the Senior Notes agreed, subject to certain conditions, not to accelerate the Senior Notes or take any other remedial or enforcement action during a defined standstill period (the "Standstill Period") initially expiring July 31, 1993. The Standstill Period was extended by holders of more than 66-2/3% of the Senior Notes on August 3, August 20, September 23, October 5 and November 23, 1993. However, the Standstill Period expired on December 3, 1993. At the present time, it appears unlikely that any further extensions of the Standstill Period will be granted. Subsequent to the expiration of the Standstill Period, on or about December 8, 1993 the Indenture Trustee (and the Collateral Agents) notified the Trust's bank of the Indenture Trustee's security interest in the Trust's deposit accounts and instructed the bank to freeze the Trust's cash until otherwise instructed by the Indenture Trustee. Since that date, the Trust has operated on an ad hoc basis with the Indenture Trustee in administering its cash, with all cash use subject to review and approval by the Indenture Trustee. On or about February 3, 1994, the Trust and the Indenture Trustee and Collateral Agents reached further understanding regarding the Trust's use of cash and administration of its assets in the absence of a continued or extended Standstill 21 MORTGAGE AND REALTY TRUST FORM 10Q PART II Item 3. DEFAULTS UPON SENIOR SECURITIES (Continued) Period. Pursuant to the understanding, which is terminable at will by the Indenture Trustee or Collateral Agents, the Trust will continue to use its cash on an ad hoc basis, subject to Indenture Trustee or Collateral Agent approval, and the Trust will administer its assets as if no default had occurred and was continuing. There can be no assurance that the Indenture Trustee will not terminate the understanding or take further remedial or enforcement action with respect to the Trust's bank accounts or other properties, including acceleration of the Senior Notes and foreclosure. Such action, or failure of the Indenture Trustee and the Collateral Agents to consent to necessary use of cash or releases of collateral in the conduct of the Trust's business, would have a material adverse effect on the Trust's operations and could cause the Trust to seek relief under Chapter 11 of the United States Bankruptcy Code. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS Exhibits are as set forth in the "INDEX TO EXHIBITS" on page 24. (B) REPORTS ON FORM 8-K None 22 MORTGAGE AND REALTY TRUST FORM 10Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MORTGAGE AND REALTY TRUST By /s/ Victor H. Schlesinger ------------------------------- Victor H. Schlesinger Chairman By /s/ Daniel F. Hennessey ------------------------------- Daniel F. Hennessey Treasurer Principal Financial Officer DATE: May 12, 1995 23 MORTGAGE AND REALTY TRUST FORM 10Q INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - - ------- ----------- 11* Schedule of Net Income (Loss) Per Share - Assuming Full Dilution - - ------------------ * Exhibit filed with this Form 10-Q. 24 Exhibit 11 MORTGAGE AND REALTY TRUST SCHEDULE OF NET INCOME (LOSS) PER SHARE - ASSUMING FULL DILUTION FOR THE PERIODS ENDED MARCH 31, 1995
Quarter Six Months Ended Ended ------------ ------------- BASIS: Net (loss) $(10,263,000) $(15,717,000) Average common shares outstanding 11,226,000 11,226,000 20% limitation on assumed repurchase 2,245,000 2,245,000 Market price at the end of the period $.25 $.25 Options outstanding 348,500 348,500 COMPUTATION: Proceeds: Options 348,500 348,500 Average exercise price X $3.35 X $3.35 ----------- ----------- $ 1,167,000 $ 1,167,000 =========== =========== Adjustment of proceeds: Purchase of outstanding common shares at market value $ 561,000 $ 561,000 Retirement of debt 606,000 606,000 ----------- ----------- $ 1,167,000 $ 1,167,000 =========== =========== Adjustment of net income (loss): Net (loss) before gain on sales of real estate $(10,263,000) $(15,717,000) Interest reduction 20,000 40,000 ------------ ------------ Adjusted net income (loss) $(10,243,000) $(15,677,000) ============ ============ Adjustment of shares outstanding: Average shares outstanding 11,226,000 11,226,000 Net shares repurchased (1,897,000) (1,897,000) ----------- ----------- Adjusted shares outstanding (basis for computation of net income per share - assuming full dilution) 9,329,000 9,329,000 =========== =========== Fully diluted earnings per share: Net (loss) $(1.10) $(1.68) ====== ======
NOTE - Primary earnings per share is based on the average number of shares outstanding during the period. Exhibit 11 MORTGAGE AND REALTY TRUST SCHEDULE OF NET INCOME (LOSS) PER SHARE - ASSUMING FULL DILUTION FOR THE PERIODS ENDED MARCH 31, 1994
Quarter Six Months Ended Ended ------------ ------------ BASIS: Net (loss) $(5,152,000) $(9,808,000) Average common shares outstanding 11,226,000 11,226,000 20% limitation on assumed repurchase 2,245,000 2,245,000 Market price at the end of the period $.50 $.50 Options outstanding 426,000 426,000 COMPUTATION: Proceeds: Options 426,000 426,000 Average exercise price X $5.37 X $5.37 ----------- ----------- $ 2,288,000 $ 2,288,000 =========== =========== Adjustment of proceeds: Purchase of outstanding common shares at market value $ 1,123,000 $ 1,123,000 Retirement of debt 1,165,000 1,165,000 ----------- ----------- $ 2,288,000 $ 2,288,000 =========== =========== Adjustment of net income (loss): Net (loss) before gain on sales of real estate $(5,152,000) $(9,808,000) Interest reduction 29,000 58,000 ----------- ----------- Adjusted net income (loss) $(5,123,000) $(9,750,000) =========== =========== Adjustment of shares outstanding: Average shares outstanding 11,226,000 11,226,000 Net shares repurchased (1,819,000) (1,819,000) ----------- ----------- Adjusted shares outstanding (basis for computation of net income per share - assuming full dilution) 9,407,000 9,407,000 =========== =========== Fully diluted earnings per share: Net (loss) $(.54) $(1.04) ===== ======
NOTE - Primary earnings per share is based on the average number of shares outstanding during the period. IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN COMMENCED AS OF THE DATE OF THIS DOCUMENT. MORTGAGE AND REALTY TRUST MASTER BALLOT FOR ACCEPTING OR REJECTING THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST CLASS 5: COMMON SHARES THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00 MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1995, UNLESS EXTENDED. This Master Ballot is submitted to you to solicit and obtain the vote of the beneficial owners of the securities described below to accept or reject the Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement and Proxy Statement, dated July 12, 1995 (the "Proxy"). The Prepackaged Plan would be filed in connection with a case to be commenced in the future by the Trust under chapter 11 of the Bankruptcy Code. At this time, the Trust has not commenced a chapter 11 case. If sufficient votes are received accepting the Prepackaged Plan, it is the Trust's present intention to commence a chapter 11 case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as promptly as practicable. PLEASE READ THE VOTING INFORMATION AND INSTRUCTIONS ON THE REVERSE SIDE BEFORE COMPLETING THIS MASTER BALLOT. [X] Please mark your votes as this example ITEM 1. Tabulation of Beneficial Class 5 Voting. The undersigned certifies that __________ beneficial owners of __________ in number of shares of Common Shares, par value $1.00 per share (the "Common Shares"), have delivered ballots to the undersigned voting Class 5 equity interests to ACCEPT the Prepackaged Plan. The undersigned certifies that _________ beneficial owners of _________ in number of Common Shares have delivered ballots to the undersigned voting Class 5 equity interests to REJECT the Prepackaged Plan. ITEM 2. Releases. The undersigned certifies that __________ beneficial owners of __________ in number of Common Shares have delivered ballots to the undersigned voting Class 5 equity interests to NOT CONSENT to the mutual release (the "Release") provided in Section 5.13 of the Prepackaged Plan. The undersigned certifies that _________ beneficial owners of __________ in number of Common Shares have delivered ballots to the undersigned voting Class 5 equity interests to CONSENT to the Release provided in Section 5.13 of the Prepackaged Plan. ITEM 3. Class 5 Beneficial Owner Information. The undersigned certifies that listed below (or attached hereto) is a true and accurate schedule of the beneficial owners of Common Shares, that have delivered ballots to the undersigned voting Class 5 equity interests to accept or reject the Prepackaged Plan and to consent or not consent to the Release. (Please complete the following table or attach the information requested by this Item 3 in the following format:) YOUR CUSTOMER ACCOUNT NUMBER(S) NUMBER OF TO ACCEPT THE TO REJECT THE TO CONSENT TO NOT CONSENT FOR EACH BENEFICIAL OWNER COMMON SHARES PREPACKAGED PLAN PREPACKAGED PLAN TO THE RELEASE TO THE RELEASE ------------------------------- ------------- ---------------- ---------------- -------------- -------------- 1. ------------------------------ ------------- ---------------- ---------------- -------------- -------------- 2. ------------------------------ ------------- ---------------- ---------------- -------------- -------------- 3. ------------------------------ ------------- ---------------- ---------------- -------------- -------------- 4. ------------------------------ ------------- ---------------- ---------------- -------------- -------------- 5. ------------------------------ ------------- ---------------- ---------------- -------------- -------------- 6. ------------------------------ ------------- ---------------- ---------------- -------------- -------------- 7. ------------------------------ ------------- ---------------- ---------------- -------------- -------------- 8. ------------------------------ ------------- ---------------- ---------------- -------------- -------------- 9. ------------------------------ ------------- ---------------- ---------------- -------------- -------------- 10. ------------------------------ ------------- ---------------- ---------------- -------------- --------------
ITEM 4. The undersigned certifies that the undersigned is an agent of the registered owner with full power and authority to execute this document in its own name or through a position held at a securities depository of the Common Shares set forth in Item 1. The undersigned further certifies that none of the Common Share accounts identified in Item 3 above have previously been voted by any other Master Ballot, except to the extent provided in Item 5 of the Voting Information and Instructions attached hereto, submitted by the undersigned. The undersigned also acknowledges the terms and conditions set forth in the Proxy. Return this Master Ballot by August 17, 1995 by mail to Mortgage and Realty Trust at 8380 Old York Road, Suite 300, Elkins Park, PA 19027, Attention: Daniel F. Hennessey. PRINT OR TYPE NAME ______________ IF BY AUTHORIZED AGENT, NAME AND TITLE ___________________________ DATED _____ SIGNATURE _______________________ ADDRESS (STREET) _________________________________________________ NAME OF BROKER, BANK OR OTHER NOMINEE ________________________ CITY, STATE, ZIP CODE ____________________________________________
VOTING INFORMATION AND INSTRUCTIONS FOR COMPLETING THE MASTER BALLOT 1. THE MASTER BALLOT IS TO BE USED BY BROKERAGE FIRMS, BANKS OR PROXY INTERMEDIARIES FOR SUMMARIZING VOTES CAST BY BENEFICIAL OWNERS OF THE SECURITIES IN CLASS 5 TO ACCEPT OR REJECT THE PREPACKAGED PLAN. 2. MASTER BALLOTS MUST BE RECEIVED BY THE TRUST, AT THE ADDRESS INDICATED ABOVE ON THIS MASTER BALLOT BY MIDNIGHT, NEW YORK TIME, ON AUGUST 17, 1995 (THE "EXPIRATION DATE"). MASTER BALLOTS NOT RECEIVED BY THE EXPIRATION DATE WILL NOT BE COUNTED. 3. THE MASTER BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY PURPOSE OTHER THAN TO TRANSMIT VOTES TO ACCEPT OR REJECT THE PREPACKAGED PLAN. HOLDERS SHOULD NOT SURRENDER CERTIFICATES REPRESENTING THEIR SECURITIES AT THIS TIME, AND THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH CERTIFICATES TRANSMITTED TOGETHER WITH A MASTER BALLOT. SURRENDER OF SECURITIES FOR EXCHANGE PURSUANT TO THE PREPACKAGED PLAN MAY BE MADE ONLY PURSUANT TO A LETTER OF TRANSMITTAL WHICH WILL BE FURNISHED TO YOU BY THE TRUST (OR ITS AGENT) AFTER CONFIRMATION OF THE PREPACKAGED PLAN BY THE BANKRUPTCY COURT. 4. WITH RESPECT TO ANY INDIVIDUAL BALLOTS RETURNED TO YOU BY THE BENEFICIAL OWNER, YOU MUST EITHER (A) FORWARD SUCH BALLOTS DIRECTLY TO THE TRUST INDICATING THE APPROPRIATE AUTHORITY TO VOTE ON EACH SUCH BALLOT SUBMITTED OR (B) COMPLETE A MASTER BALLOT SUMMARIZING THE VOTING WITH RESPECT TO SUCH INDIVIDUAL BALLOTS, RETURN THE MASTER BALLOT TO THE TRUST, AND RETAIN ALL SUCH INDIVIDUAL BALLOTS FOR INSPECTION BY THE BANKRUPTCY COURT UNTIL 90 DAYS AFTER CONFIRMATION OF THE PREPACKAGED PLAN. 5. MULTIPLE MASTER BALLOTS MAY BE COMPLETED AND DELIVERED TO THE TRUST. VOTES REFLECTED BY MULTIPLE MASTER BALLOTS WILL BE COUNTED EXCEPT TO THE EXTENT THAT THEY ARE DUPLICATIVE OF OTHER MASTER BALLOTS. IF TWO OR MORE MASTER BALLOTS ARE INCONSISTENT IN WHOLE OR IN PART, THE LATEST MASTER BALLOT RECEIVED PRIOR TO THE EXPIRATION DATE WILL, TO THE EXTENT OF SUCH INCONSISTENCY, SUPERSEDE AND REVOKE ANY PRIOR MASTER BALLOT. IF MORE THAN ONE MASTER BALLOT IS SUBMITTED AND THE LATER MASTER BALLOTS(S) SUPPLEMENT RATHER THAN SUPERSEDE EARLIER MASTER BALLOT(S), PLEASE MARK THE SUBSEQUENT MASTER BALLOT(S) WITH THE WORDS "ADDITIONAL VOTE" OR SUCH OTHER LANGUAGE AS YOU CUSTOMARILY USE TO INDICATE AN ADDITIONAL VOTE THAT IS NOT MEANT TO REVOKE AN EARLIER VOTE. 6. ITEM 3 OF THE MASTER BALLOT REQUESTS THAT YOU PROVIDE INFORMATION IN THE INDICATED FORMAT FOR EACH INDIVIDUAL BENEFICIAL OWNER ON WHOSE BEHALF YOU ARE EXECUTING THE MASTER BALLOT. TO IDENTIFY SUCH BENEFICIAL OWNERS WITHOUT DISCLOSING THEIR NAMES, PLEASE USE THE CUSTOMER ACCOUNT NUMBER ASSIGNED BY YOU TO EACH SUCH BENEFICIAL OWNER. IN THE EVENT THAT A SINGLE CUSTOMER HAS MORE THAN ONE ACCOUNT WITH THE IDENTICAL REGISTRATION, THAT CUSTOMER SHOULD BE LISTED NO MORE THAN ONCE IN ITEM 3. IN COMPLETING ITEM 3, THE TOTAL NUMBER OF SHARES OF ALL ACCOUNTS VOTED WITH RESPECT TO A SINGLE CUSTOMER SHOULD BE LISTED IN A SINGLE LINE ENTRY, SO THAT EACH LINE WILL REPRESENT A DIFFERENT BENEFICIAL OWNER. 7. EACH BENEFICIAL OWNER MUST VOTE ITS ENTIRE CLAIM OR EQUITY INTEREST WITHIN A SINGLE CLASS UNDER THE PREPACKAGED PLAN TO EITHER ACCEPT OR REJECT THE PREPACKAGED PLAN. A BENEFICIAL OWNER MAY NOT SPLIT ITS VOTE WITHIN A CLASS AND, ACCORDINGLY, AN INDIVIDUAL BALLOT (OR MULTIPLE INDIVIDUAL BALLOTS WITH RESPECT TO MULTIPLE CLAIMS OR EQUITY INTERESTS WITHIN A SINGLE CLASS) RECEIVED FROM A BENEFICIAL OWNER THAT PARTIALLY REJECTS AND PARTIALLY ACCEPTS THE PREPACKAGED PLAN SHOULD NOT BE COUNTED. FURTHERMORE, FOR PURPOSES OF COMPUTING THE VOTE ON A MASTER BALLOT, EACH VOTING BENEFICIAL OWNER SHOULD BE DEEMED TO HAVE VOTED THE FULL AMOUNT OF ITS HOLDINGS ACCORDING TO YOUR RECORDS AS OF THE CLOSE OF BUSINESS ON JULY 7, 1995 (THE "VOTING RECORD DATE"). 8. NO FEES OR COMMISSIONS OR OTHER REMUNERATION WILL BE PAYABLE TO ANY BROKER, DEALER OR OTHER PERSON IN CONNECTION WITH THE SOLICITATION BY THE TRUST PURSUANT TO THE PREPACKAGED PLAN. THE TRUST WILL, HOWEVER, UPON WRITTEN REQUEST, REIMBURSE YOU FOR CUSTOMARY MAILING AND HANDLING EXPENSES INCURRED BY YOU IN FORWARDING INDIVIDUAL BALLOTS AND ACCOMPANYING SOLICITATION PACKAGES TO YOUR CLIENTS. NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON AS THE AGENT OF THE TRUST, OR AUTHORIZE YOU OR ANY PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO THE PREPACKAGED PLAN, EXCEPT FOR THE STATEMENTS CONTAINED IN THE DOCUMENTS ENCLOSED HEREWITH. IF YOU HAVE ANY QUESTIONS REGARDING THIS MASTER BALLOT OR THE VOTING PROCEDURES, OR IF YOU NEED ADDITIONAL COPIES OF THE MASTER BALLOT, INDIVIDUAL BALLOTS OR SOLICITATION PACKAGES, INCLUDING THE PREPACKAGED PLAN AND THE PROXY, PLEASE CALL DANIEL F. HENNESSEY, TREASURER OF THE TRUST, AT (215) 881- 1525. MORTGAGE AND REALTY TRUST SOLICITATION OF PREPACKAGED PLAN ACCEPTANCE RECORD DATE: JULY 7, 1995 EXPIRATION DATE: AUGUST 17, 1995 To: Securities Dealers, Brokers, Commercial Banks, Trust Companies and Other Nominees Mortgage and Realty Trust (the "Trust") is soliciting acceptances (the "Solicitation") to its prepackaged plan of reorganization (the "Prepackaged Plan") as set forth in the enclosed Disclosure Statement and Proxy Statement (the "Proxy") from Holders of Senior Secured Uncertificated Notes due 1995, Common Shares, Other Secured Claims and Unsecured Claims. Capitalized terms used herein but not defined have the meanings assigned to them in the Proxy Statement. For the Prepackaged Plan to be confirmed without utilizing the "cramdown" provisions of Chapter 11 of the Bankruptcy Code as to a class of Claims or Interest entitled to vote on the Prepackaged Plan, it is necessary for the Trust to receive acceptances from (i) holders of Claims constituting at least two-thirds in dollar amount and more than one-half in number of the allowed Claims in each impaired class voting on the Prepackaged Plan and (ii) holders of at least two-thirds in amount of outstanding Common Shares in such class voting on the Prepackaged Plan. Enclosed are copies of the following documents: 1. The Proxy. 2. A form of letter ("To Our Clients") to be sent to your clients for whose account you hold Common Shares registered in your name or the name of your nominee, with instructions regarding voting on the Prepackaged Plan. 3. Ballots and Ballot instructions for accepting or rejecting the Prepackaged Plan to be sent to your clients for whose account you hold Common Shares registered in your name or the name of your nominee. 4. Master Ballots and Master Ballot Instructions to be used only by you to calculate and report the total number of votes either accepting or rejecting the Prepackaged Plan with respect to Common Shares owned by beneficial owners for whom you serve as nominee and from whom you have received a completed and executed Ballot. 5. A pre-addressed postage pre-paid business reply envelope to be used only by your firm to return Master Ballot(s) to the Trust. TO VOTE ON THE PREPACKAGED PLAN. To vote on the Prepackaged Plan pursuant to the Solicitation, you must first deliver a Proxy, the appropriate Ballot(s) and instructions thereto, a self-addressed postage pre-paid business reply envelope, and a "To Our Clients" letter to each of your clients for whose account you hold Common Shares. You should affix a label stating, or otherwise appropriately indicate at the space provided on each Ballot, the number of Common Shares held by such beneficial owner(s) in his, her or its account as of the close of business on July 7, 1995 (the "Voting Record Date"). To vote using the Master Ballot, please: (i) retain the returned, completed Ballots in your files, (ii) provide appropriate information for each of the Items on the Master Ballot, in accordance with the instructions thereto, (iii) sign and date the Master Ballot, (iv) if you are completing the Master Ballot on behalf of another entity, indicate your relationship with such entity and the capacity in which you are signing and (v) provide your name and mailing address. If the Master Ballot request for account identification number(s) for individual beneficial owners is applicable, you may identify such beneficial owners without disclosing their names by using the customer account number assigned by you to each such beneficial owner or a sequential number assigned by you to each such beneficial owner, provided that you retain a list of the number(s) assigned to each such beneficial owner. Retain in your files all completed Ballots received which are reflected in the Master Ballot. Except as provided in the Proxy, the Trust will not pay any fees or commissions to any broker or dealer or other person for soliciting acceptances to the Prepackaged Plan. You will, however, be reimbursed for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to your clients. Failure to follow the above instructions in a timely manner may result in your or your client's vote being deemed invalid. NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON AS THE AGENT OF THE TRUST OR AUTHORIZE YOU OR ANY PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO THE PREPACKAGED PLAN, EXCEPT FOR THE STATEMENTS CONTAINED IN THE DOCUMENTS ENCLOSED HEREIN. If you need additional copies of the above materials, or if you have questions regarding the Ballots, Master Ballots or Voting Procedures, please call Daniel F. Hennessey at the Trust at (215) 881-1525. MORTGAGE AND REALTY TRUST SOLICITATION OF PREPACKAGED PLAN ACCEPTANCES To Our Clients: Enclosed for your consideration are a Disclosure Statement and Proxy Statement dated July 12, 1995 (the "Proxy") and other documents relating to the restructuring of Mortgage and Realty Trust (the "Trust"). Capitalized terms used herein but not defined herein shall have the meanings assigned to them in the Proxy. The Trust is soliciting acceptances of its prepackaged plan of reorganization (the "Prepackaged Plan") from holders of Senior Secured Uncertificated Notes due 1995, Common Shares, Other Secured Claims and Unsecured Claims. For the Prepackaged Plan to be confirmed (without utilizing "cramdown" provisions of Chapter 11 of the Bankruptcy Code as to a class of Claims or Interests entitles to vote on the Prepackaged Plan), it must be accepted by the (i) the holders of Claims constituting at least two-thirds in dollar amount and more than one-half in number of the allowed Claims in each impaired class voting on the Prepackaged Plan and (ii) holders of at least two-thirds in amount of outstanding Common Shares in such class voting on the Prepackaged Plan. In addition to the Proxy, enclosed are a Ballot and the instructions thereto (the "Ballot") for voting to accept or to reject the Prepackaged Plan. To Vote on the Prepackaged Plan: Review the Proxy, complete the Ballot in accordance with the instructions thereto and return the completed Ballot to us for processing. If neither the "Accepts" nor "Rejects" box on the Ballot is checked and the Ballot is not signed on the appropriate line(s), the Ballot will not be counted as having been cast. Please be sure to return your ballot(s) to us to allow time for our handling prior to the Expiration Date indicated in the box below. THE SOLICITATION WILL EXPIRE AT MIDNIGHT, NEW YORK TIME, ON AUGUST 17, 1995 (THE "EXPIRATION DATE"), UNLESS THE TRUST, IN ITS SOLE DISCRETION, EXTENDS OR WAIVES THE PERIOD. We request that you give this matter your immediate attention to ensure that you have a full opportunity to consider and respond to the Solicitation. Except as provided in the Proxy, the Trust will not pay any fees or commissions to any broker or dealer or other person for soliciting acceptances to the Prepackaged Plan. YOUR IMMEDIATE ATTENTION IS REQUESTED IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN COMMENCED AS OF THE DATE OF THIS DOCUMENT. MORTGAGE AND REALTY TRUST BALLOT FOR ACCEPTING OR REJECTING THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST CLASS 2: SENIOR SECURED UNCERTIFICATED NOTES DUE 1995 THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00 MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1995, UNLESS EXTENDED. This Ballot is submitted to you to solicit your vote to accept or reject the Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement and Proxy Statement, dated July 12, 1995 (the "Proxy"). The Prepackaged Plan would be filed in connection with a case to be commenced in the future by the Trust under chapter 11 of the Bankruptcy Code. At this time, the Trust has not commenced a chapter 11 case. If sufficient votes are received accepting the Prepackaged Plan, it is the Trust's present intention to commence a chapter 11 case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as promptly as practicable. THIS BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY OTHER PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN. HOLDERS SHOULD NOT SURRENDER ANY DOCUMENTS REPRESENTING SECURITIES AT THIS TIME, THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH DOCUMENTS. PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE COMPLETING THIS BALLOT. IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR COUNTED AS HAVING BEEN CAST. PLEASE COMPLETE ITEMS 1-4. [X] Please mark your votes as this example ITEM 1. The undersigned, a Holder of a Class 2 Claim as defined in the Prepackaged Plan, is the beneficial owner of Senior Secured Uncertificated Notes due 1995, in the unpaid principal amount of: $__________ (enter amount). ITEM 2. Vote. The undersigned votes all To Accept the To Reject the Class 2 Claims referenced in Prepackaged Plan Prepackaged Plan Item 1 (check one box): [_] [_] ITEM 3. Release. Please indicate whether you elect to opt out of the mutual release provided in Section 5.13 of the Prepackaged Plan by checking the box below. [_] The undersigned DOES NOT CONSENT to the mutual release provided in Section 5.13 of the Prepackaged Plan. ITEM 4. Accredited Investor. Please certify that you are an "accredited investor" with the meaning of Rule 501 under the Securities Act of 1933, as amended, by checking the box: [_] ITEM 5. By signing this Ballot, the undersigned certifies that the undersigned is the beneficial owner(s) of the Senior Secured Uncertificated Notes due 1995 voted on this Ballot and/or has full power and authority to vote to accept or reject the Prepackaged Plan. The undersigned also acknowledges receipt of the Proxy and other applicable Solicitation Materials as well as all terms and conditions set forth therein. The signature(s) below should conform to the name(s) shown on the document(s) representing the claims being voted. Where claims are held in the names of more than one person, all such owners should sign below. SIGNATURE ___________________________________________________ DATED ______ SIGNATURE OF CO-OWNER, IF APPLICABLE ________________________ IF BY AUTHORIZED AGENT, NAME AND TITLE ______________________ VOTING INFORMATION AND INSTRUCTIONS FOR COMPLETING THE BALLOT 1. FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE ITEMS 1-4, SIGN AND RETURN THE BALLOT TO THE TRUST, AT THE ADDRESS SET FORTH ON THE ENCLOSED PRE-ADDRESSED POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE. YOU WILL FIND THE AMOUNT OF YOUR HOLDINGS AS OF THE CLOSE OF BUSINESS ON THE VOTING RECORD DATE INDICATED ON THE ADDRESS LABEL AFFIXED TO THE FRONT OF THE BALLOT. THAT TOTAL SHOULD BE ENTERED IN ITEM 1. IF FOR ANY REASON YOU DID NOT RECEIVE A PRE-ADDRESSED POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE OR IF THE AMOUNT OF YOUR HOLDINGS INDICATED ON THE AFOREMENTIONED LABEL IS UNCLEAR, PLEASE CONTACT DANIEL F. HENNESSEY AT THE TELEPHONE NUMBER BELOW. BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON AUGUST 17, 1995 (THE "EXPIRATION DATE"). IF A BALLOT IS RECEIVED AFTER THE EXPIRATION DATE, IT WILL NOT BE COUNTED. 2. IF YOU HOLD CLAIMS OR EQUITY INTERESTS IN MORE THAN ONE CLASS UNDER THE PREPACKAGED PLAN (I.E., COMMON SHARES AND NOTES), YOU SHOULD RECEIVE ONE BALLOT, CODED BY CLASS NUMBER AND ONE SET OF SOLICITATION MATERIALS FOR EACH SUCH CLASS OF CLAIMS OR EQUITY INTERESTS. EACH BALLOT YOU RECEIVE VOTES ONLY YOUR CLAIMS OR EQUITY INTERESTS. PLEASE COMPLETE AND RETURN EACH BALLOT YOU RECEIVE. YOU MUST VOTE ALL OF YOUR CLAIMS OR EQUITY INTERESTS WITHIN A SINGLE CLASS UNDER THE PREPACKAGED PLAN TO EITHER ACCEPT OR REJECT THE PREPACKAGED PLAN. ACCORDINGLY, A BALLOT THAT PARTIALLY REJECTS AND PARTIALLY ACCEPTS THE PREPACKAGED PLAN WILL NOT BE COUNTED. 3. THE BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY OTHER PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN. HOLDERS SHOULD NOT SURRENDER ANY DOCUMENTS REPRESENTING THEIR SECURITIES AT THIS TIME, AND THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH DOCUMENTS TRANSMITTED TOGETHER WITH A BALLOT. SURRENDER OF DOCUMENTS FOR EXCHANGE PURSUANT TO THE PREPACKAGED PLAN MAY BE MADE ONLY PURSUANT TO A LETTER OF TRANSMITTAL, WHICH WILL BE FURNISHED TO YOU BY THE TRUST (OR ITS AGENT) AFTER CONFIRMATION OF THE PREPACKAGED PLAN BY THE BANKRUPTCY COURT. 4. THE BALLOT IS FOR VOTING PURPOSES ONLY AND DOES NOT CONSTITUTE AND SHALL NOT BE DEEMED A PROOF OF CLAIM OR INTEREST OR AN ASSERTION OF A CLAIM OR INTEREST. PLEASE RETURN YOUR BALLOT PROMPTLY! IF YOU HAVE ANY QUESTIONS REGARDING THIS BALLOT OR THE VOTING PROCEDURES, PLEASE CALL: MORTGAGE AND REALTY TRUST (215) 881-1525 IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN COMMENCED AS OF THE DATE OF THIS DOCUMENT. MORTGAGE AND REALTY TRUST BALLOT FOR ACCEPTING OR REJECTING THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST CLASS 3: OTHER SECURED CLAIMS THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00 MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1995, UNLESS EXTENDED. This Ballot is submitted to you to solicit your vote to accept or reject the Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement and Proxy Statement, dated July 12, 1995 (the "Proxy"). The Prepackaged Plan would be filed in connection with a case to be commenced in the future by the Trust under chapter 11 of the Bankruptcy Code. At this time, the Trust has not commenced a chapter 11 case. If sufficient votes are received accepting the Prepackaged Plan, it is the Trust's present intention to commence a chapter 11 case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as promptly as practicable. PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE COMPLETING THIS BALLOT. IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR COUNTED AS HAVING BEEN CAST. PLEASE COMPLETE ITEMS 1-3. [X] Please mark your votes as this example ITEM 1. The undersigned, a Holder of a Class 3 Claim as defined in the Prepackaged Plan, is the owner of Other Secured Claims, in the amount of: $__________ (enter amount). ITEM 2. Vote. The undersigned votes all To Accept the To Reject the Class 3 Claims referenced in Prepackaged Plan Prepackaged Plan Item 1 (check one box): [_] [_] ITEM 3. Release. Please indicate whether you elect to opt out of the mutual release provided in Section 5.13 of the Prepackaged Plan by checking the box below. [_] The undersigned DOES NOT CONSENT to the mutual release provided in Section 5.13 of the Prepackaged Plan. ITEM 4. By signing this Ballot, the undersigned certifies that the undersigned is the owner(s) of the Other Secured Claims voted on this Ballot and/or has full power and authority to vote to accept or reject the Prepackaged Plan. The undersigned also acknowledges receipt of the Proxy and other applicable Solicitation Materials as well as all terms and conditions set forth therein. The signature(s) below should conform to the name(s) shown on the document(s) representing the claims being voted. Where claims are held in the names of more than one person, all such owners should sign below. SIGNATURE ___________________________________________________ DATED ______ SIGNATURE OF CO-OWNER, IF APPLICABLE ________________________ IF BY AUTHORIZED AGENT, NAME AND TITLE ______________________ VOTING INFORMATION AND INSTRUCTIONS FOR COMPLETING THE BALLOT 1. FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE ITEMS 1-3, SIGN AND RETURN THE BALLOT TO THE TRUST, AT THE ADDRESS SET FORTH ON THE ENCLOSED PRE-ADDRESSED POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE. IF FOR ANY REASON YOU DID NOT RECEIVE A PRE-ADDRESSED POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE OR IF THE AMOUNT OF YOUR HOLDINGS INDICATED ON THE AFOREMENTIONED LABEL IS UNCLEAR, PLEASE CONTACT DANIEL F. HENNESSEY AT THE TELEPHONE NUMBER BELOW. BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON AUGUST 17, 1995 (THE "EXPIRATION DATE"). IF A BALLOT IS RECEIVED AFTER THE EXPIRATION DATE, IT WILL NOT BE COUNTED. 2. IF YOU HOLD CLAIMS OR EQUITY INTERESTS IN MORE THAN ONE CLASS UNDER THE PREPACKAGED PLAN (I.E., COMMON SHARES AND NOTES), YOU SHOULD RECEIVE ONE BALLOT, CODED BY CLASS NUMBER AND ONE SET OF SOLICITATION MATERIALS FOR EACH SUCH CLASS OF CLAIMS OR EQUITY INTERESTS. EACH BALLOT YOU RECEIVE VOTES ONLY YOUR CLAIMS OR EQUITY INTERESTS. PLEASE COMPLETE AND RETURN EACH BALLOT YOU RECEIVE. YOU MUST VOTE ALL OF YOUR CLAIMS OR EQUITY INTERESTS WITHIN A SINGLE CLASS UNDER THE PREPACKAGED PLAN TO EITHER ACCEPT OR REJECT THE PREPACKAGED PLAN. ACCORDINGLY, A BALLOT THAT PARTIALLY REJECTS AND PARTIALLY ACCEPTS THE PREPACKAGED PLAN WILL NOT BE COUNTED. 3. THE BALLOT IS FOR VOTING PURPOSES ONLY AND DOES NOT CONSTITUTE AND SHALL NOT BE DEEMED A PROOF OF CLAIM OR INTEREST OR AN ASSERTION OF A CLAIM OR INTEREST. PLEASE RETURN YOUR BALLOT PROMPTLY! IF YOU HAVE ANY QUESTIONS REGARDING THIS BALLOT OR THE VOTING PROCEDURES, PLEASE CALL: MORTGAGE AND REALTY TRUST (215) 881-1525 IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN COMMENCED AS OF THE DATE OF THIS DOCUMENT. MORTGAGE AND REALTY TRUST BALLOT FOR ACCEPTING OR REJECTING THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST CLASS 4: UNSECURED CLAIMS THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00 MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1995, UNLESS EXTENDED. This Ballot is submitted to you to solicit your vote to accept or reject the Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement and Proxy Statement, dated July 12, 1995 (the "Proxy"). The Prepackaged Plan would be filed in connection with a case to be commenced in the future by the Trust under chapter 11 of the Bankruptcy Code. At this time, the Trust has not commenced a chapter 11 case. If sufficient votes are received accepting the Prepackaged Plan, it is the Trust's present intention to commence a chapter 11 case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as promptly as practicable. PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE COMPLETING THIS BALLOT. IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR COUNTED AS HAVING BEEN CAST. PLEASE COMPLETE ITEMS 1-3. [X] Please mark your votes as this example ITEM 1. The undersigned, a Holder of a Class 4 Claim as defined in the Prepackaged Plan, is the owner of Unsecured Claims, in the amount of: $________ (enter amount). ITEM 2. Vote. The undersigned votes To Accept the To Reject the all Class 4 Claims referenced Prepackaged Plan Prepackaged Plan in Item 1 (check one box): [_] [_] ITEM 3. Release. Please indicate whether you elect to opt out of the mutual release provided in Section 5.13 of the Prepackaged Plan by checking the box below. [_] The undersigned DOES NOT CONSENT to the mutual release provided in Section 5.13 of the Prepackaged Plan. ITEM 4. By signing this Ballot, the undersigned certifies that the undersigned is the owner(s) of the Unsecured Claims voted on this Ballot and/or has full power and authority to vote to accept or reject the Prepackaged Plan. The undersigned also acknowledges receipt of the Proxy and other applicable Solicitation Materials as well as all terms and conditions set forth therein. The signature(s) below should conform to the name(s) shown on the document(s) representing the claims being voted. Where claims are held in the names of more than one person, all such owners should sign below. SIGNATURE ___________________________________________________ DATED ______ SIGNATURE OF CO-OWNER, IF APPLICABLE ________________________ IF BY AUTHORIZED AGENT, NAME AND TITLE ______________________ VOTING INFORMATION AND INSTRUCTIONS FOR COMPLETING THE BALLOT 1. FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE ITEMS 1-3, SIGN AND RETURN THE BALLOT TO THE TRUST, AT THE ADDRESS SET FORTH ON THE ENCLOSED PRE-ADDRESSED POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE. IF FOR ANY REASON YOU DID NOT RECEIVE A PRE-ADDRESSED POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE OR IF THE AMOUNT OF YOUR HOLDINGS INDICATED ON THE AFOREMENTIONED LABEL IS UNCLEAR, PLEASE CONTACT DANIEL F. HENNESSEY AT THE TELEPHONE NUMBER BELOW. BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON AUGUST 17, 1995 (THE "EXPIRATION DATE"). IF A BALLOT IS RECEIVED AFTER THE EXPIRATION DATE, IT WILL NOT BE COUNTED. 2. IF YOU HOLD CLAIMS OR EQUITY INTERESTS IN MORE THAN ONE CLASS UNDER THE PREPACKAGED PLAN (I.E., COMMON SHARES AND NOTES), YOU SHOULD RECEIVE ONE BALLOT, CODED BY CLASS NUMBER AND ONE SET OF SOLICITATION MATERIALS FOR EACH SUCH CLASS OF CLAIMS OR EQUITY INTERESTS. EACH BALLOT YOU RECEIVE VOTES ONLY YOUR CLAIMS OR EQUITY INTERESTS. PLEASE COMPLETE AND RETURN EACH BALLOT YOU RECEIVE. YOU MUST VOTE ALL OF YOUR CLAIMS OR EQUITY INTERESTS WITHIN A SINGLE CLASS UNDER THE PREPACKAGED PLAN TO EITHER ACCEPT OR REJECT THE PREPACKAGED PLAN. ACCORDINGLY, A BALLOT THAT PARTIALLY REJECTS AND PARTIALLY ACCEPTS THE PREPACKAGED PLAN WILL NOT BE COUNTED. 3. THE BALLOT IS FOR VOTING PURPOSES ONLY AND DOES NOT CONSTITUTE AND SHALL NOT BE DEEMED A PROOF OF CLAIM OR INTEREST OR AN ASSERTION OF A CLAIM OR INTEREST. PLEASE RETURN YOUR BALLOT PROMPTLY! IF YOU HAVE ANY QUESTIONS REGARDING THIS BALLOT OR THE VOTING PROCEDURES, PLEASE CALL: MORTGAGE AND REALTY TRUST (215) 881-1525 IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN COMMENCED AS OF THE DATE OF THIS DOCUMENT. MORTGAGE AND REALTY TRUST BALLOT FOR ACCEPTING OR REJECTING THE PREPACKAGED PLAN OF REORGANIZATION OF MORTGAGE AND REALTY TRUST CLASS 5: COMMON STOCK THE EXPIRATION DATE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 12:00 MIDNIGHT, NEW YORK CITY TIME, ON AUGUST 17, 1995, UNLESS EXTENDED. This Ballot is submitted to you to solicit your vote to accept or reject the Prepackaged Plan of Reorganization (the "Prepackaged Plan") of Mortgage and Realty Trust (the "Trust") referred to in the accompanying Disclosure Statement and Proxy Statement, dated July 12, 1995 (the "Proxy"). The Prepackaged Plan would be filed in connection with a case to be commenced in the future by the Trust under chapter 11 of the Bankruptcy Code. At this time, the Trust has not commenced a chapter 11 case. If sufficient votes are received accepting the Prepackaged Plan, it is the Trust's present intention to commence a chapter 11 case and seek to have the Prepackaged Plan confirmed by the Bankruptcy Court as promptly as practicable. THIS BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY OTHER PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN. HOLDERS SHOULD NOT SURRENDER CERTIFICATES REPRESENTING SECURITIES AT THIS TIME, THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH CERTIFICATES. PLEASE READ THE ATTACHED VOTING INFORMATION AND INSTRUCTIONS BEFORE COMPLETING THIS BALLOT. IF NEITHER THE "ACCEPTS" NOR "REJECTS" BOX IS CHECKED AND THIS BALLOT IS NOT SIGNED ON THE APPROPRIATE LINES BELOW, THE BALLOT WILL NOT BE VALID OR COUNTED AS HAVING BEEN CAST. PLEASE COMPLETE ITEMS 1-3. [X] Please mark your votes as this example ITEM 1. The undersigned, a Holder of a Class 5 Interest as defined in the Prepackaged Plan, is the beneficial owner of Common Shares, par value $1.00 per share, in the amount of:____________ (enter number of shares). ITEM 2. Vote. The undersigned votes all To Accept the To Reject the Class 5 Interests referenced Prepackaged Plan Prepackaged Plan in Item 1 (check one box): [_] [_] ITEM 3. Release. Please indicate whether you elect to opt out of the mutual release provided in Section 5.13 of the Prepackaged Plan by checking the box below. [_] The undersigned DOES NOT CONSENT to the mutual release provided in Section 5.13 of the Prepackaged Plan. ITEM 4. By signing this Ballot, the undersigned certifies that the undersigned is the beneficial owner(s) of the Common Shares voted on this Ballot and/or has full power and authority to vote to accept or reject the Prepackaged Plan. The undersigned also acknowledges receipt of the Proxy and other applicable Solicitation Materials as well as all terms and conditions set forth therein. The signature(s) below should conform to the name(s) shown on the certificate- (s) representing the Common Shares being voted. Where Common Shares are regis- tered in the names of more than one person, all such beneficial owners should sign below. SIGNATURE ___________________________________________________ DATED ______ SIGNATURE OF CO-OWNER, IF APPLICABLE ________________________ IF BY AUTHORIZED AGENT, NAME AND TITLE ______________________ VOTING INFORMATION AND INSTRUCTIONS FOR COMPLETING THE BALLOT 1. FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE, SIGN AND RETURN THE BALLOT AS FOLLOWS: (A) IF YOUR COMMON SHARES ARE HELD THROUGH A BROKER, BANK, OR OTHER NOMINEE: TO HAVE YOUR VOTE COUNT YOU MUST COMPLETE ITEMS 1-3 AND RETURN THIS BALLOT TO SUCH BROKER, BANK OR NOMINEE. YOU MUST RETURN THE BALLOT TO SUCH ENTITY, EARLY ENOUGH FOR YOUR VOTE TO BE PROCESSED AND FORWARDED TO AND RECEIVED BY THE SOLICITATION AGENT PRIOR TO THE EXPIRATION DATE. THE BROKER, BANK OR OTHER NOMINEE SHOULD INDICATE ON THE BALLOT THE NUMBER OF SHARES HELD IN YOUR ACCOUNT AS OF THE CLOSE OF BUSINESS ON JULY 7, 1995, (THE "RECORD DATE".) PLEASE LOCATE THAT DATA AND USE THAT TOTAL NUMBER WHEN COMPLETING ITEM 1. IF THAT DATA HAS NOT BEEN PROVIDED, PLEASE CONTACT THE INSTITUTION(S) AT WHICH YOUR ACCOUNT(S) ARE HELD AND REQUEST THE SAME. (B) IF YOUR COMMON SHARES ARE REGISTERED IN YOUR OWN NAME: FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE ITEMS 1-3 AND RETURN THIS BALLOT TO THE TRUST, AT THE ADDRESS SET FORTH ON THE ENCLOSED PRE-ADDRESSED POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE. YOU WILL FIND THE NUMBER OF SHARES YOU HELD AS OF THE CLOSE OF BUSINESS ON THE VOTING RECORD DATE INDICATED ON THE ADDRESS LABEL AFFIXED TO THE FRONT OF THE BALLOT. THAT TOTAL SHOULD BE ENTERED IN ITEM 1. IF FOR ANY REASON YOU DID NOT RECEIVE A PRE-ADDRESSED POSTAGE PRE-PAID BUSINESS REPLY ENVELOPE OR IF THE AMOUNT OF YOUR HOLDINGS INDICATED ON THE AFOREMENTIONED LABEL IS UNCLEAR, PLEASE CONTACT DANIEL F. HENNESSEY AT THE TELEPHONE NUMBER BELOW. BALLOTS MUST BE RECEIVED BY 12:00 MIDNIGHT, NEW YORK CITY TIME ON AUGUST 17, 1995 (THE "EXPIRATION DATE"). IF A BALLOT IS RECEIVED AFTER THE EXPIRATION DATE, IT WILL NOT BE COUNTED. 2. IF YOU HOLD CLAIMS OR EQUITY INTERESTS IN MORE THAN ONE CLASS UNDER THE PREPACKAGED PLAN (I.E., COMMON SHARES AND NOTES), YOU SHOULD RECEIVE ONE BALLOT, CODED BY CLASS NUMBER AND ONE SET OF SOLICITATION MATERIALS FOR EACH SUCH CLASS OF CLAIMS OR EQUITY INTERESTS. EACH BALLOT YOU RECEIVE VOTES ONLY YOUR CLAIMS OR EQUITY INTERESTS. PLEASE COMPLETE AND RETURN EACH BALLOT YOU RECEIVE. YOU MUST VOTE ALL OF YOUR CLAIMS OR EQUITY INTERESTS WITHIN A SINGLE CLASS UNDER THE PREPACKAGED PLAN TO EITHER ACCEPT OR REJECT THE PREPACKAGED PLAN. ACCORDINGLY, A BALLOT THAT PARTIALLY REJECTS AND PARTIALLY ACCEPTS THE PREPACKAGED PLAN WILL NOT BE COUNTED. 3. THE BALLOT IS NOT A LETTER OF TRANSMITTAL AND MAY NOT BE USED FOR ANY OTHER PURPOSE OTHER THAN TO VOTE TO ACCEPT OR REJECT THE PREPACKAGED PLAN. HOLDERS SHOULD NOT SURRENDER ANY DOCUMENTS REPRESENTING THEIR SECURITIES AT THIS TIME, AND THE TRUST WILL NOT ACCEPT DELIVERY OF ANY SUCH DOCUMENTS TRANSMITTED TOGETHER WITH A BALLOT. SURRENDER OF DOCUMENTS FOR EXCHANGE PURSUANT TO THE PREPACKAGED PLAN MAY BE MADE ONLY PURSUANT TO A LETTER OF TRANSMITTAL, WHICH WILL BE FURNISHED TO YOU BY THE TRUST (OR ITS AGENT) AFTER CONFIRMATION OF THE PREPACKAGED PLAN BY THE BANKRUPTCY COURT. 4. THE BALLOT IS FOR VOTING PURPOSES ONLY AND DOES NOT CONSTITUTE AND SHALL NOT BE DEEMED A PROOF OF CLAIM OR INTEREST OR AN ASSERTION OF A CLAIM OR INTEREST. PLEASE RETURN YOUR BALLOT PROMPTLY! IF YOU HAVE ANY QUESTIONS REGARDING THIS BALLOT OR THE VOTING PROCEDURES, PLEASE CALL: MORTGAGE AND REALTY TRUST (215) 881-1525 -----END PRIVACY-ENHANCED MESSAGE-----