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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 1-10150
------------------------
STARWOOD FINANCIAL INC.(*)
(Exact name of registrant as specified in its charter)
MARYLAND 95-6881527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1114 AVENUE OF THE AMERICAS 10036
27TH FLOOR (Zip Code)
NEW YORK, NY 10036
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 930-9400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Exchange on which registered:
-------------------- -------------------------------------
common stock,
$0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of November 12, 1999, there were 85,919,372 shares of common stock of
Starwood Financial Inc., $0.01 par value per share (the "Common Stock")
outstanding.
* On November 4, 1999, the registrant completed a transaction in which its
name was changed from Starwood Financial Trust to Starwood Financial Inc., it
issued Common Stock in exchange for the Class A and Class B Shares then
outstanding, and the registrant listed its Common Stock on the New York Stock
Exchange.
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STARWOOD FINANCIAL INC.
INDEX TO FORM 10-Q
PAGE
----
PART I. CONSOLIDATED FINANCIAL INFORMATION.......................... 3
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 1999 AND
DECEMBER 31, 1998........................................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS--FOR THE THREE- AND
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998...... 4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS'
EQUITY--FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1999...................................................... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS--FOR THE THREE- AND
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998...... 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 23
AND RESULTS OF OPERATIONS...................................
PART II. OTHER INFORMATION........................................... 33
ITEM 1. LEGAL PROCEEDINGS........................................... 33
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................... 33
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 33
ITEM 5. OTHER INFORMATION........................................... 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 33
SIGNATURES.................................................. 35
2
PART I--CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARWOOD FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
Loans and other investments, net............................ $1,870,485 $1,823,761
Real estate subject to operating leases, net................ 185,845 189,942
Cash and cash equivalents................................... 13,907 10,110
Restricted cash............................................. 3,498 5,699
Marketable securities....................................... 4,597 5,406
Accrued interest and rent receivable........................ 14,006 13,122
Deferred expenses and other assets.......................... 15,583 11,054
Investment in Starwood Operating............................ 457 522
---------- ----------
Total assets............................................ $2,108,378 $2,059,616
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities.... $ 7,628 $ 10,536
Dividends payable........................................... -- 22,633
Debt obligations............................................ 1,095,388 1,055,719
---------- ----------
Total liabilities....................................... 1,103,016 1,088,888
---------- ----------
Commitments and contingencies............................... -- --
Shareholders' equity:
Series A Preferred Shares, $0.01 par value, liquidation
value $50.00 per share, 4,400,000 shares authorized
4,400,000 and 4,400,000 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively.... 44 44
Class A Shares, $1.00 par value, 70,000,000 shares
authorized, 52,470,951 and 52,407,718 shares issued and
outstanding at September 30, 1999 and December 31, 1998,
respectively.............................................. 52,471 52,408
Class B Shares, $0.01 par value, 35,000,000 shares
authorized, 26,235,475 and 26,203,859 shares issued and
outstanding at September 30, 1999 and December 31, 1998,
respectively.............................................. 262 262
Warrants and options........................................ 18,976 19,131
Accumulated other comprehensive income (losses)............. (206) (23)
Additional paid in capital.................................. 902,569 901,365
Retained earnings (deficit)................................. 31,246 (2,459)
---------- ----------
Total shareholders' equity.............................. 1,005,362 970,728
---------- ----------
Total liabilities and shareholders' equity.............. $2,108,378 $2,059,616
========== ==========
The accompanying notes are an integral part of the financial statements.
3
STARWOOD FINANCIAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
REVENUE:
Interest income........................... $52,911 $36,398 $154,837 $68,910
Operating lease income.................... 4,276 4,350 11,726 8,624
Other income.............................. 3,448 1,329 8,751 2,213
------- ------- -------- -------
Total revenue........................... 60,635 42,077 175,314 79,747
------- ------- -------- -------
COSTS AND EXPENSES:
Interest expense.......................... 21,099 14,978 61,348 25,472
Operating lease depreciation.............. 1,365 1,374 4,095 2,943
General and administrative................ 717 964 2,386 1,777
Advisory fees............................. 4,933 2,826 14,614 4,817
Provision for possible credit losses...... 1,250 1,000 3,500 1,750
Stock option compensation expense......... -- -- -- 5,985
------- ------- -------- -------
Total costs and expenses................ 29,364 21,142 85,943 42,744
------- ------- -------- -------
Net income before minority interest......... 31,271 20,935 89,371 37,003
Minority interest........................... -- -- -- (54)
------- ------- -------- -------
Net income.................................. $31,271 $20,935 $ 89,371 $36,949
Net income allocable to preferred shares.... (5,308) -- (15,923) --
------- ------- -------- -------
Net income allocable to common
shareholders.............................. $25,963 $20,935 $ 73,448 $36,949
======= ======= ======== =======
Net income allocable to Class A Shares...... $25,703 $20,726 $ 72,714 $36,580
======= ======= ======== =======
Basic earnings per Class A Share(1)......... $ 0.49 $ 0.40 $ 1.39 $ 0.96
======= ======= ======== =======
Diluted earnings per Class A Share(1)....... $ 0.47 $ 0.38 $ 1.31 $ 0.94
======= ======= ======== =======
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(1) As adjusted for one-for-six reverse stock split effective June 19, 1998
The accompanying notes are an integral part of the financial statements.
4
STARWOOD FINANCIAL INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
COMMON SHARES, ACCUMULATED
SERIES A AT PAR WARRANTS OTHER ADDITIONAL RETAINED
PREFERRED ------------------- AND COMPREHENSIVE PAID-IN EARNINGS
SHARES CLASS A CLASS B OPTIONS INCOME (LOSSES) CAPITAL (DEFICIT) TOTAL
--------- -------- -------- --------- --------------- ---------- --------- ----------
Balance at December 31,
1998...................... $44 $52,408 $262 $19,131 $ (23) $901,365 $ (2,459) $ 970,728
Exercise of options......... -- 63 -- (155) -- 1,039 -- 947
Change in accumulated other
comprehensive income
(losses).................. -- -- -- -- (183) -- -- (183)
Dividends
declared--preferred....... -- -- -- -- -- 165 (10,615) (10,450)
Dividends
declared--common.......... -- -- -- -- -- -- (45,051) (45,051)
Net income for the period... -- -- -- -- -- -- 89,371 89,371
--- ------- ---- ------- ----- -------- -------- ----------
Balance as of September 30,
1999...................... $44 $52,471 $262 $18,976 $(206) $902,569 $ 31,246 $1,005,362
=== ======= ==== ======= ===== ======== ======== ==========
The accompanying notes are an integral part of the financial statements.
5
STARWOOD FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- -----------
Cash flows from operating activities:
Net income...................................... $ 31,271 $ 20,935 $ 89,371 $ 36,949
Adjustments to reconcile net income to cash
flows provided by operating activities:
Minority interest............................. -- -- -- 54
Non-cash expense for options issued to
advisor..................................... -- -- -- 5,985
Equity in earnings of unconsolidated joint
ventures and subsidiaries................... (48) (690) 65 (690)
Depreciation and amortization................. 2,709 2,363 8,359 4,870
Amortization of discount/premium and deferred
interest.................................... (6,295) (5,837) (19,025) (14,158)
Provision for possible credit losses.......... 1,250 1,000 3,500 1,750
Realized gain on sale of securities........... (11) -- (11) --
Changes in assets and liabilities:
(Increase) decrease in restricted cash...... (1) -- 2,201 --
(Increase) decrease in accrued interest and
rent receivable........................... (1,673) (2,059) (884) (7,586)
Increase in deferred expenses and other
assets.................................... (3,167) 329 (4,201) 3,270
Increase (decrease) in accounts payable,
accrued expenses and other liabilities.... (944) 4,179 (2,908) 9,146
--------- --------- --------- -----------
Cash flows provided by operating
activities................................ 23,091 20,220 76,467 39,590
--------- --------- --------- -----------
Cash flows from investing activities:
Net cash outflow for the Recapitalization
Transactions.............................. -- -- -- (334,916)
New loan or investment
originations/acquisitions................. (24,164) (564,816) (361,414) (770,916)
Principal fundings on existing loan
commitments............................... (14,483) (500) (37,207) (10,500)
Repayments of and principal collections from
loans and other investments............... 102,892 87,375 368,062 95,840
--------- --------- --------- -----------
Cash flows provided by (used in) investing
activities................................ 64,245 (477,941) (30,559) (1,020,492)
--------- --------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of Class B Shares.... -- -- -- 1,534
Net borrowings (repayments) under revolving
credit facilities......................... (663) 310,192 44,796 605,814
Net borrowings under term loans............. (64,634) 171,172 1,564 374,936
Borrowings (repayments) under repurchase
agreements................................ (200) (3,385) (6,691) 33,921
Dividends paid.............................. (28,016) (18,522) (78,135) (18,522)
Payments for deferred financing costs....... 566 (1,623) (4,592) (10,310)
Costs incurred in reorganization............ -- -- -- (480)
Proceeds from exercise of options........... -- -- 947 4
--------- --------- --------- -----------
Cash flows provided by (used in) financing
activities................................ (92,947) 457,834 (42,111) 986,897
--------- --------- --------- -----------
Increase (decrease) in cash and cash
equivalents................................... (5,611) 113 3,797 5,995
Cash and cash equivalents at beginning of
period........................................ 19,518 6,178 10,110 296
--------- --------- --------- -----------
Cash and cash equivalents at end of period...... $ 13,907 $ 6,291 $ 13,907 $ 6,291
========= ========= ========= ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest...... $ 19,219 $ 12,644 $ 57,578 $ 19,186
========= ========= ========= ===========
The accompanying notes are an integral part of the financial statements.
6
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS
ORGANIZATION--Starwood Financial Inc.(1) (the "Company") was formed on
March 18, 1998 to continue and expand its predecessors' business, started in
1993, of delivering flexible financial solutions to the commercial real estate
industry. Through a series of transactions during 1994 and 1996, Starwood
Mezzanine Investors, L.P. ("Starwood Mezzanine") and certain affiliates of the
general partner of Starwood Mezzanine (SAHI, Inc. and SAHI Partners) acquired
control of the Company.
On September 26, 1996, the Company became the sole general partner of APMT
Limited Partnership (see Note 4). As discussed in Note 4, on March 18, 1998, all
the outstanding interests in the partnership not held by the Company were
exchanged for additional $1.00 par value Class A Shares of beneficial interest
(the "Class A Shares") of the Company, the Company became the sole partner of
the partnership and the partnership was terminated.
Also as more fully described in Note 4, on March 18, 1998, the Company
entered into a series of transactions approved by the Company's shareholders
with Starwood Mezzanine and Starwood Opportunity Fund IV, L.P. ("SOF IV") (an
affiliate of the general partners of Starwood Mezzanine), which, among other
things, substantially recapitalized the Company and modified its investment
policy (Starwood Mezzanine, SOF IV, SAHI, Inc. and SAHI Partners are
collectively referred to as the "Starwood Investors").
Effective June 19, 1998, the Company (which had previously been organized
under California law) changed its domicile to Maryland by merging with a
newly-formed subsidiary organized as a real estate investment trust under
Maryland law. As a result of this merger, the Company effectively consummated a
one-for-six(2) reverse split of its capital stock.
Although the Company did not qualify as a real estate investment trust (a
"REIT") for federal income tax purposes for its fiscal years 1993 through 1997,
it did not incur any material tax liabilities as a result of its operations. As
confirmed by a closing agreement with the Internal Revenue Service ("IRS")
obtained in March 1998, the Company was eligible to and made an election to be
taxed as a REIT for its tax years beginning January 1, 1998.
BUSINESS--The Company is a leading structured finance company that delivers
financial solutions to the real estate industry by implementing a creative,
value added and entrepreneurial approach to providing investment capital. The
Company primarily focuses on providing custom-tailored mortgage, mezzanine and
lease financing to the real estate industry through its proprietary origination,
acquisition and servicing platform to create superior risk-adjusted returns for
its shareholders.
The Company currently originates and acquires loans backed by various types
of income-producing commercial real estate, with an emphasis on senior and
junior commercial mortgage loans, mezzanine financing and credit tenant leasing.
The Company has not in the past, and does not currently intend to invest a
significant portion of its capital in commercial mortgage-backed securities. A
significant portion of the Company's loans are structured so that the Company's
investment is subordinate to the third-party first mortgage debt but senior to
the real estate owner/operator's equity position. The Company does not have any
prescribed allocation among investments, and the Company could invest all or any
portion of its assets in any of the investments described above.
- ------------------------
Explanatory notes:
(1) As more fully discussed in Note 16, in connection with the Incorporation
Merger on November 4, 1999, the Company changed its form and became a
corporation under Maryland law and changed its name from Starwood Financial
Trust to Starwood Financial Inc.
(2) All share information contained herein is presented as adjusted for effects
of one-for-six reverse stock split effective June 19, 1998.
7
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in conformity with the instructions to Form 10-Q and article 10,
Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles ("GAAP") for complete financial statements. The
consolidated financial statements include the accounts of the Company and its
qualified REIT subsidiaries. Certain third-party mortgage servicing operations
are conducted through Starwood Operating, Inc. ("Starwood Operating"), a taxable
corporation, which is not consolidated with the Company for financial reporting
or income tax purposes. The Company owns all of the preferred stock and a 95%
economic interest in Starwood Operating, which is accounted for under the equity
method for financial reporting purposes. Further, certain other investments in
partnerships or joint ventures which the Company does not unilaterally control
are also accounted for under the equity method.
In the opinion of management, the accompanying financial statements contain
all adjustments, consisting of normal and recurring accruals, necessary for a
fair presentation of the Company's financial condition at September 30, 1999 and
December 31, 1998 and the results of its operations, changes in shareholders'
equity and its cash flows for the three- and nine-month periods ended
September 30, 1999 and 1998, respectively. Such operating results are not
necessarily indicative of the results that may be expected for any other interim
periods or the entire year.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LOANS AND OTHER INVESTMENTS, NET--As described in Note 5, loans and other
investments, net includes the following investments: senior mortgages, junior
mortgages, discount mortgages, partnership loans, construction loans, loan
participations and investments in certain real estate-related marketable
securities. In general, management considers its loan and marketable real
estate-related securities investments as held-to-maturity and, accordingly,
reflects such items at amortized historical cost.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash held in
banks or invested in money market funds with original maturity terms of less
than 90 days.
NON-CASH ACTIVITY--During the nine months ended September 30, 1998, the
Company had significant non-cash activity including: (i) conversion of units in
APMT Limited Partnership (shown as "minority interest" in the consolidated
financial statements) to Class A Shares (see Note 4); (ii) issuance to Starwood
Financial Advisors, L.L.C. (the "Advisor") of options to acquire Class A Shares
of the Company (see Note 12); and (iii) issuance of new Class A Shares in
exchange for a portion of the acquisition of loans and related investments as
part of the Recapitalization Transactions (see Note 4).
The cash portion of the Recapitalization Transactions is summarized as
follows (in thousands):
Acquisition of loans and other investments.................. $(1,061,006)
Acquired accrued interest and rent receivable............... (7,451)
Par value of Class A Shares issued.......................... 302,223
Additional paid in capital on Class A Shares issued......... 431,318
-----------
Net cash outflow for the Recapitalization Transactions...... $ (334,916)
===========
MARKETABLE SECURITIES--The Company has certain investments in marketable
securities such as those issued by the Government National Mortgage Association
(GNMA), Federal National Mortgage Association (FNMA), and Federal Home Loan
Mortgage Corporation (FHLMC). Although the Company generally intends to hold
such investments for long-term investment purposes, it may, from
8
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
time to time, sell any of its investments in these securities as part of its
management of liquidity. Accordingly, the Company considers such investments as
"available-for-sale" and reflects such investments at fair market value with
changes in fair market value reflected as a component of accumulated other
comprehensive income (losses) as part of shareholders equity.
DEFERRED FINANCING COSTS--Loan fees, hedging costs and other direct
financing costs are capitalized and amortized as additional interest expense
using the effective interest method over the term of the related obligation.
REPURCHASE AGREEMENTS--The Company may enter into sales of securities or
loans under agreements to repurchase the same security or loan. The amounts
borrowed under repurchase agreements are carried on the balance sheet as part of
debt obligations at the amount advanced plus accrued interest. Interest incurred
on the repurchase agreements is reported as interest expense.
REVENUE RECOGNITION--Interest income, including amortization of loan fees
and premiums or discounts, is recognized using the effective interest method.
Income under equity participation features is recognized when earned and
payable. Income from prepayment penalties is recognized when received.
PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's accounting policies
require that an allowance for estimated credit losses be maintained at a level
that management, based upon an evaluation of known and inherent risks in the
portfolio, considers adequate to provide for possible credit losses. Further,
specific valuation allowances are established for impaired loans in the amount
by which the carrying value, before allowance for estimated losses, exceeds the
fair value of collateral less disposition costs on an individual loan basis.
Management considers a loan to be impaired when, based upon current information
and events, it believes that it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
on a timely basis. Management measures these impaired loans at the fair value of
the loans' underlying collateral less estimated disposition costs. Impaired
loans may be left on accrual status during the period the Company is pursuing
repayment of the loan. These loans are placed on non-accrual status at such time
that the loans either: (i) become 90 days delinquent; or (ii) management
determines the borrower is incapable of, or has ceased efforts toward, curing
the cause of the impairment. Impairment losses are recognized as direct
write-downs of the related loan with a corresponding charge to the provision for
possible credit losses. Charge-offs occur when loans, or a portion thereof, are
considered uncollectible and of such little value that further pursuit of
collection is not warranted. Management's periodic evaluation of the allowance
for possible credit losses is based upon an analysis of the portfolio,
historical and industry loss experience, economic conditions and trends,
collateral values and quality and other relevant factors.
INCOME TAXES--The Company did not qualify as a REIT from 1993 through 1997;
however, it did not incur any material tax liabilities as a result of its
operations. See Note 11 to the consolidated financial statements for more
information.
As confirmed in a closing agreement with the IRS obtained in March 1998, the
Company was eligible to and elected to be taxed as a REIT for its tax year
beginning January 1, 1998. As a REIT, the Company is subject to income taxation
at corporate rates on its REIT taxable income; however, the Company is allowed a
deduction for the amount of dividends paid to its shareholders, thereby
subjecting the distributed net income of the Company to taxation at the
shareholder level only. Starwood Operating is not consolidated for federal
income tax purposes and is taxed separately as a corporation. For financial
reporting purposes, current and deferred taxes are provided for in the portion
of earnings recognized by the Company with respect to its interest in Starwood
Operating.
9
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET INCOME (LOSS) APPLICABLE TO CLASS A SHARES--Net income applicable to
Class A Shares represents net income less current accumulated dividends on the
outstanding preferred shares less 1% of the remaining net income, representing
amounts applicable to the Class B Shares ("Class B Shares"), which were required
to be issued by the Company in an amount equal to one-half of the number of
Class A Shares outstanding.(3)
EARNINGS (LOSS) PER CLASS A SHARE--In February 1997, the Financial
Accounting Standards Boards ("FASB") issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128") effective for periods
ending after December 15, 1997. SFAS No. 128 simplifies the standard for
computing earnings per share and makes them comparable with international
earnings per share standards. The statement replaces primary earnings per share
with basic earnings per share ("Basic EPS") and fully-diluted earnings per share
with diluted earnings per share ("Diluted EPS"). The Company adopted this
accounting standard effective December 31, 1997, as required.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 4--TRANSACTIONS WITH AFFILIATES AND RECAPITALIZATION
TRANSACTIONS WITH AFFILIATES--In November 1993, the Company was notified
that SAHI, Inc. (one of the Starwood Investors) had acquired all of the
Company's 212,500 outstanding Class B Shares. Subsequent to the acquisition of
the Class B Shares, SAHI Partners (another of the Starwood Investors) purchased
the Class B Shares from SAHI, Inc. and accumulated 40,683 Class A Shares, or
9.60% of the total Class A Shares then outstanding.
On March 15, 1994, the Company announced that it had entered into an
agreement with SAHI Partners and SAHI, Inc. for the sale of a warrant for the
right to purchase 833,333 Class A Shares at a price of $6.00 per share (the
"Class A Warrant") and 416,667 shares of Class B Shares at a price of $0.06 per
share (the "Class B Warrant"). SAHI and SAHI, Inc. purchased the warrants for
$101,000, which amount was applied against the purchase price for the initial
Class A Shares and Class B Shares purchased pursuant to the warrants. On
March 28, 1996, the Class A Warrant was assigned to Starwood Mezzanine.
On September 26, 1996, the Company became sole general partner of APMT
Limited Partnership by contributing $400,000 in cash in exchange for an 8.05%
interest in such partnership. Starwood Mezzanine became the 91.95% limited
partner by contributing to the partnership its entire interest in the
participation certificates in the Warwick Hotel mortgage note, valued by the
Company at approximately $4.6 million as of September 30, 1996. Starwood
Mezzanine's interest in the partnership was evidenced by units, which were
convertible into cash, Class A Shares or a combination of both pursuant to an
exchange rights agreement. As described below, the units were converted to
Class A Shares in the first quarter of 1998.
On January 22, 1997, Starwood Mezzanine exercised its rights under the
Class A Warrant to acquire 833,333 Class A Shares. After its exercise of the
Class A Warrant, Starwood Mezzanine beneficially owned 833,333 Class A Shares
and 761,491 units. In addition, SAHI, Inc. exercised its
- ------------------------
Explanatory note:
(3) Upon consummation of the Incorporation Merger, as more fully described in
Note 16, the Class B Shares were exchanged for Class A Shares on the basis
of 49 Class B Shares for 1 Class A Share and each Class A share was
converted into one share of Common Stock. As a result, the Company now has a
single class of Common Stock.
10
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
rights under the Class B Warrant to acquire 416,667 Class B Shares. After its
exercise of the Class B Warrant, SAHI Inc. beneficially owned 1,009,911 Class B
Shares and 40,683 Class A Shares. Upon exercise of the Class A Warrant and
Class B Warrant, SAHI Partners, SAHI, Inc. and Starwood Mezzanine jointly owned
69.46% of the outstanding Class A Shares and, with the voting interest of the
Class B Shares, controlled 79.64% of the voting interest of the Company. The
Company increased its capital by approximately $5.0 million, and the resulting
funds were used to purchase qualified short-term government securities.
During the quarter ended March 31, 1998, the Company consummated certain
transactions and entered into agreements which significantly recapitalized and
expanded the capital resources of the Company as well as modified future
operations, including those described herein below in "Recapitalization
Transactions."
RECAPITALIZATION TRANSACTIONS--Pursuant to a series of transactions
beginning in March 1994 and including the exercise of certain warrants in
January 1997, Starwood Mezzanine and certain entities affiliated with the
general partners of Starwood Mezzanine acquired joint ownership of 69.46% and
100% of the outstanding Class A Shares and Class B Shares of the Company,
respectively, through which they controlled approximately 79.64% of the voting
interest in the Company as of December 31, 1997. Prior to the consummation of
these transactions, Starwood Mezzanine also owned 761,491 units which
represented the remaining 91.95% of APMT Limited Partnership not held by the
Company, which were convertible into either cash, an additional 761,491 Class A
Shares of the Company, or a combination of the two, as determined by the
Company.
On March 18, 1998, each outstanding partnership unit held by Starwood
Mezzanine was exchanged for one Class A Share of the Company and, concurrently,
the partnership was liquidated through a distribution of its net assets to the
Company, its then sole partner.
Simultaneously, Starwood Mezzanine contributed various real estate loan
investments to the Company in exchange for 9,191,333 Class A Shares and
$25.5 million in cash, as adjusted. SOF IV contributed real estate loans and
investments, $17.9 million in cash and certain letters of intent in exchange for
41,179,133 Class A Shares of the Company and a cash payment of $324.3 million.
Concurrently, the holders of the Class B Shares who were affiliates of the
general partners of Starwood Mezzanine and SOF IV acquired 25,565,979 additional
Class B Shares sufficient to maintain existing voting preferences pursuant to
the Company's Amended and Restated Declaration of Trust (the "Declaration of
Trust"). Immediately after these transactions, the Starwood Investors owned
approximately 99.27% of the outstanding Class A Shares of the Company and 100%
of the Class B Shares. Assets acquired from Starwood Mezzanine were recorded
using step acquisition accounting at predecessor basis adjusted to fair value to
the extent of post-transaction third-party ownership. Assets acquired from SOF
IV were recorded at their fair market value.
The following summary pro forma information includes the effects of the
following transactions consummated in March 1998: (i) the Recapitalization
Transactions; (ii) the exchange of each outstanding unit in APMT Limited
Partnership held by holders other than the Company for one Class A Share;
(iii) the liquidation and termination of the partnership; and (iv) the
borrowings necessary to consummate the aforementioned transactions. The pro
forma operating data for the nine months ended September 30, 1998 is presented
as if the transactions had been completed on January 1, 1998.
11
PRO FORMA
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 1998
------------------
(UNAUDITED)
REVENUE:
Interest income........................................... $ 88,280
Operating lease income.................................... 11,850
Other income.............................................. 2,489
--------
Total revenue........................................... 102,619
--------
COSTS AND EXPENSES:
Interest expense.......................................... 31,333
Operating lease depreciation.............................. 4,332
General and administrative................................ 2,223
Advisory fees............................................. 10,045
Provision for possible credit losses...................... 1,750
--------
Total costs and expenses................................ 49,683
--------
Pro forma net income...................................... $ 52,936
========
Pro forma basic net income per Class A Share.............. $ 1.00
========
Weighted average number of Class A Shares outstanding..... 52,408
========
The pro forma operating data for the nine months ended September 30, 1998
excludes a charge of approximately $6.0 million or $0.11 per Class A Share, as
adjusted, relating to the value of options to acquire Class A Shares issued to
the Advisor concurrently with the consummation of the Recapitalization
Transactions, as such charge is considered largely non-recurring in nature.
However, future charges may be taken to the extent of additional option grants,
which are at the discretion of the Board of Directors.
While other real estate-related investments are assumed to have taken place
as of the beginning of each period, mortgage note receivable originations or
acquisitions are not reflected in these pro forma numbers until the actual
origination or acquisition date by Starwood Mezzanine or SOF IV. The pro forma
financial information is not necessarily indicative of what the consolidated
results of operations of the Company would have been as of and for the period
indicated, nor does it purport to represent the results of operations for future
periods.
ADVISORY AGREEMENT--In connection with the Recapitalization Transactions,
the Company and the Advisor entered into an Advisory Agreement (the "Advisory
Agreement") pursuant to which the Advisor managed the affairs of the Company,
subject to the Company's purpose and investment policy, the investment
restrictions and the directives of the Board of Directors. The services provided
by the Advisor included the following: (i) identifying investment opportunities
for the Company; (ii) advising the Company with respect to and effecting
acquisitions and dispositions of the Company's investments; (iii) monitoring,
managing and servicing the Company's loan portfolio; and (iv) arranging debt
financing for the Company. The Advisor was prohibited form acting in a manner
inconsistent with the express direction of the Board of Directors, and reported
to the Board of Directors and the officers of the Company with respect to its
activities.
12
PRO FORMA
CONDENSED STATEMENT OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The Company paid the Advisor a quarterly base management fee of 0.3125%
(1.25% per annum) of the "Book Equity Value" of the Company determined as of the
last day of each quarter but estimated and paid in advance subject to
recomputation. "Book Equity Value" is generally defined as the excess of the
book value of the assets of the Company over all liabilities of the Company.
In addition, the Company paid the Advisor a quarterly incentive fee of 5.00%
of the Company's "Adjusted Net Income" during each quarter that the Adjusted Net
Income for such quarter (restated and annualized as a rate of return on the
Company's Book Equity Value for such quarter) equaled or exceeded the "Benchmark
BB Rate." "Adjusted Net Income" is generally defined as the Company's gross
income less the Company's expenses for the applicable quarter (including the
base fee for such quarter but not the incentive fee for such quarter). In
calculating both Book Equity Value and Adjusted Net Income, real estate-related
depreciation and amortization (other than amortization of financing costs and
other prepaid expenses to the extent such costs and prepaid expenses have
previously been booked as an asset of the Company) are not deducted. In
addition, debt that is exchangeable or convertible into equity securities is not
treated as a liability of the Company if the value of the equity securities into
which such debt obligation is convertible equals or exceeds the outstanding
balance of such debt obligation and the interest expense of such debt is not
included as an expense and, thus, does operate to reduce the Company's gross
income. The Advisor was reimbursed for certain expenses it incured on behalf of
the Company.
Because payment of both the base fee and the incentive fee commenced
90 days after the consummation of the Recapitalization Transactions, fees were
recognized ratably over the period from March 18, 1998 through December 31,
1998. The operating results of the Company for such period were greater than
they would have been had the advisory fee not been deferred.
The Advisory Agreement had an initial term of three years subject to
automatic renewal for one-year periods unless the Company had been liquidated or
a Termination Event (as defined in the Advisory Agreement and which generally
included violations of the Advisory Agreement by the Advisor, a bankruptcy event
of the Advisor or the imposition of a material liability on the Company as a
result of the Advisor's bad faith, willful misconduct, gross negligence or
reckless disregard of duties) had occurred and was continuing. In addition, the
Advisor could have terminated the Advisory Agreement on 60 days' written notice
to the Company and the Company could have terminated the Advisory Agreement upon
60 days' written notice if a Termination Event had occurred or if the decision
to terminate were based on affirmative vote of the holders of two thirds or more
of the voting shares of the Company at the time outstanding.
Prior to the transactions described in Note 16 through which, among other
things, the Company became self-advised, the Company was dependent on the
services of the Advisor and its officers and employees for the successful
execution of its business strategy. As discussed further in Note 16, subsequent
to September 30, 1999, the Company consummated a series of transactions that
resulted in the Company becoming self-advised.
13
NOTE 5--LOANS AND OTHER INVESTMENTS
The following is a summary description of the Company's loans and other
investments as of September 30, 1999 (in thousands):
# OF ORIGINAL PRINCIPAL CARRYING VALUE AS OF
UNDERLYING BORROWERS COMMITMENT BALANCES SEPTEMBER 30, DECEMBER 31,
TYPE OF INVESTMENT PROPERTY TYPE IN CLASS AMOUNT OUTSTANDING 1999 1998
- ------------------ ------------- --------- ------------ ----------- ------------- ------------
(UNAUDITED)
Senior Mortgages......................... Office/Hotel/ 15 $ 849,092 $ 789,128 $ 785,094 $ 656,631
Mixed Use/
Apartment/
Retail
Subordinated Mortgages................... Office/Hotel/ 16 586,035 573,320 586,614 458,280
Mixed Use/
Retail
Discount Mortgages....................... Office/Hotel/ 1 72,900 72,900 51,678 86,259
Apartment
Partnership Loans/Unsecured Notes........ Office/Hotel/ 9 243,941 227,715 231,832 346,421
Residential/
Land
Construction Loans....................... Resorts/ 2 91,390 56,950 60,997 97,819
Conference
Center
Loan Participations...................... Hotel/Office/ 3 35,628 35,574 35,198 40,877
Retail
Specialty Finance Joint Venture Loans Various 3 50,400 36,723 34,101 47,722
(4)......................................
Investments in Unconsolidated Ventures... Various 6 N/A N/A 29,075 30,104
Other Real Estate-Related Investments.... Real Estate- N/A N/A N/A 62,146 62,398
Related
Securities
---------- ----------
Gross Carrying Value..................... $1,876,735 $1,826,511
Provision for Possible Credit Losses..... (6,250) (2,750)
---------- ----------
Total, Net............................... $1,870,485 $1,823,761
========== ==========
CONTRACTUAL CONTRACTUAL
EFFECTIVE INTEREST INTEREST
MATURITY ACCRUAL PAYMENT PRINCIPAL
TYPE OF INVESTMENT DATES RATES (5) RATES (5) AMORTIZATION
- ------------------ ------------- ----------------------- ----------------------- ------------
Senior Mortgages......................... 2000 to 2009 Fixed: 7.28% to 20.00% Fixed: 7.28% to 18.00% Yes(1)
Variable: LIBOR + Variable: LIBOR +
1.50% to 6.00% 1.50% to 6.00%
Subordinated Mortgages................... 2000 to 2007 Fixed: 9.53% to 17.00% Fixed: 9.53% to 15.25% Yes(1)
Variable: LIBOR + Variable: LIBOR +
4.50% to 5.80% 4.50% to 5.80%
Discount Mortgages....................... 2007 Fixed: 7.00% Fixed: 7.00% Yes
Partnership Loans/Unsecured Notes........ 2000 to 2008 Fixed: 10.00% to 17.50% Fixed: 9.00% to 15.00% Yes
Variable: LIBOR + Variable: LIBOR + 5.37%
5.37%
Construction Loans....................... 2004 to 2007 Fixed: 10.30% to 12.50% Fixed: 10.30% to 12.50% Yes
Loan Participations...................... 1999 to 2005 Fixed: 7.13% to 14.00% Fixed: 5.65% to 13.60% Yes
Specialty Finance Joint Venture Loans 2000 to 2018 Fixed: 9.45% Fixed: 9.45% Yes
(4)...................................... Variable: LIBOR + Variable: LIBOR +
4.25% to 4.50% 4.25% to 4.50%
Investments in Unconsolidated Ventures... N/A Various Various No
Other Real Estate-Related Investments.... 2002 and 2007 Fixed: 12.50% to 12.75% Fixed: 12.50% to 12.75% No
Gross Carrying Value.....................
Provision for Possible Credit Losses.....
Total, Net...............................
PARTICIPATION
TYPE OF INVESTMENT FEATURES
- ------------------ -------------
Senior Mortgages......................... Yes(2)
Subordinated Mortgages................... Yes(2)
Discount Mortgages....................... Yes(2)
Partnership Loans/Unsecured Notes........ Yes(2)
Construction Loans....................... No
Loan Participations...................... No
Specialty Finance Joint Venture Loans No
(4)......................................
Investments in Unconsolidated Ventures... No
Other Real Estate-Related Investments.... No
Gross Carrying Value.....................
Provision for Possible Credit Losses.....
Total, Net...............................
Explanatory Notes
1. The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity. In addition, one of the loans permits additional
annual prepayments of principal of up to $1.3 million without penalty at the
borrower's option.
2. Under some of these loans, the lender receives additional payments
representing additional interest from participation in available cash flow
from operations of the property and the proceeds, in excess of a base
amount, arising from a sale or refinancing of the property.
3. Information for this investment classification, except for the Company's
carrying value, represents terms of loans in an unconsolidated joint
venture. See narrative discussion of the joint venture in this note.
4. Substantially all variable-rate loans are based on 30-day LIBOR and reprice
monthly.
14
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND OTHER INVESTMENTS
During the nine months ended September 30, 1999 and 1998, respectively, the
Company and its affiliated ventures originated or acquired an aggregate of
$358.8 million and $723.7 million in loans and related investments, funded
$37.2 million and $10.5 million under existing loan commitments and received
principal repayments of $368.1 million and $95.8 million.
In addition, on July 24, 1998, the Company entered into a strategic
origination venture with a publicly-traded finance company to originate loans
secured by specialty real estate. On June 30, 1999, three of the loans funded by
the venture repaid in full, and the venture received approximately $2.8 million
in principal and accrued interest which was distributed to the partners. On
August 23, 1999, a fourth loan was repaid in full and the venture received
approximately $10.5 million in principal and accrued interest, a portion of
which was distributed to the Company in accordance with the terms of the
venture. As more fully discussed in Note 16, the remaining underlying loans were
repaid in full subsequent to September 30, 1999 and the joint venture was
terminated.
The Company has reflected additional provisions for possible credit losses
of approximately $3.5 million and $1.8 million in its results of operations
during the nine-month periods ended September 30, 1999 and 1998, respectively,
and approximately $1.3 million and $1.0 million for the three-month periods
ended September 30, 1999 and 1998, respectively. There was no other activity in
the Company's reserve balances during this period. These provisions represent
portfolio reserves based on management's evaluation of general market
conditions, the Company's and industry loss experience, likelihood of
delinquencies or defaults and the underlying collateral. No direct impairment
reserves on specific loans were considered necessary. Management may transfer
reserves between general and specific reserves as considered necessary.
NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES
The Company owns rental property under a bondable, triple-net operating
lease covering 17 hotels under which the lessee pays all costs associated with
operation of the hotels, including real estate taxes, insurance, utilities,
services and capital expenditures. The initial term of the lease expires on
December 31, 2020, and can be extended for up to three five-year terms at the
lessee's option. Rent payments under the lease consist of base rent of
$15.0 million per annum, payable monthly, and additional rent based on the
amount by which the aggregate operating revenue of the underlying hotels for any
given lease year exceeds the 1996 base year. The carrying amount is presented
net of accumulated depreciation of approximately $8.4 million and $4.3 million
as of September 30, 1999 and December 31, 1998, respectively.
15
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS
The Company had obligations under various arrangements with financial
institutions as follows (in thousands):
PRINCIPAL
MAXIMUM BALANCE AS OF PRINCIPAL EFFECTIVE
AMOUNT SEPTEMBER 30, BALANCE AS OF INTEREST MATURITY
AVAILABLE 1999 DECEMBER 31, 1998 RATE DATE
--------- -------------- ----------------- ---------------------- ----------------------
(UNAUDITED)
REVOLVING CREDIT
FACILITIES:
Line of credit......... $675,000 $ 476,432 $ 554,907 LIBOR + 1.50% March 2001
Line of credit......... 500,000 169,952 86,038 LIBOR + 1.00-1.25% August 2000
---------- ----------
Total revolving
credit
facilities......... 646,384 640,945
---------- ----------
TERM LOANS:
Secured by real estate under 154,292 -- 7.44% March 2009
operating leases................ -- 125,000 LIBOR + 1.50% March 1999
Secured by senior mortgage
investment...................... 89,985 89,991 LIBOR + 1.00% August 2000
Secured by senior and subordinate
mortgage investments............ 111,328 112,927 LIBOR + 1.00% August 2000
Secured by senior mortgage
investment...................... -- 40,765 LIBOR + 1.00% May 1999
Secured by senior mortgage
investment...................... 54,000 -- LIBOR + 1.75%(1) November 2000
---------- ----------
Total term loans................ 409,605 368,683
---------- ----------
OTHER DEBT OBLIGATIONS:............. 39,399 46,091 Various Various
---------- ----------
TOTAL DEBT OBLIGATIONS.............. $1,095,388 $1,055,719
========== ==========
- ------------------------------
(1) Based on a 12-month LIBOR contract currently at 5.317%, repricing in May
2000.
Availability of amounts under the revolving credit facilities is based on a
percentage borrowing base calculation. Except as indicated above, all debt
obligations are based on 30-day LIBOR and reprice monthly.
NOTE 8--PREFERRED SHARES
On December 15, 1998, the Company issued 4.4 million preferred shares and
warrants to acquire 6.0 million shares of common stock at $35.00 per share, for
aggregate proceeds of $220.0 million. The proceeds were allocated between the
two securities issued based on estimated relative fair values.
The preferred shares have a liquidation value of $50.00 per share, carry an
initial dividend yield of 9.50% per annum and are callable without premium at
the Company's option on or after December 15, 2003. The dividend rate on the
preferred shares will increase to 9.75% on December 15, 2005, to 10.00% on
December 15, 2006 and to 10.25% on December 15, 2007 and thereafter. No other
classes of preferred shares of beneficial interest were outstanding as of
September 30, 1999 or December 31, 1998.
Dividends on the preferred shares are payable quarterly in arrears and are
cumulative. The preferred shares have preference over the Company's common stock
with respect to the payment of dividends and the distribution of assets in the
event of a liquidation or dissolution of the Company.
16
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--CLASS A SHARES AND CLASS B SHARES
Prior to November 4, 1999, the Company was authorized to issue
105.0 million shares, representing 70.0 million Class A Shares and 35.0 million
Class B Shares, with a par value of $1.00 and $0.01 per share, respectively.
Class B Shares were required to be issued by the Company in an amount equal to
one half of the number of Class A Shares outstanding. Class A and Class B Shares
were each entitled to one vote per share with respect to the election of
trustees and other matters. Pursuant to the Declaration of Trust, the Class B
Shares were convertible at the option of the Class B Shareholders into Class A
Shares on the basis of 49 Class B Shares for one Class A Share. However, the
holder of Class B Shares had agreed with the Company that it would not convert
the Class B Shares into Class A Shares without the approval of a majority of
trustees that were not affiliated with such holder. All distributions of cash
were made 99% to the holders of Class A Shares and 1% to the holders of Class B
Shares.
As more fully described in Note 16, the Company consummated a series of
transactions on November 4, 1999, in which its Class A and Class B Shares were
exchanged into a single class of Common Stock.
NOTE 10--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
RISK MANAGEMENT--In the normal course of its on-going business operations,
the Company encounters economic risk. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or different bases, than its
interest-earning assets. Credit risk is the risk of default on the Company's
loan portfolio that results from a property's or borrower's inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of loans held for sale, securities available for sale and
purchased mortgage servicing rights due to changes in interest rates or other
market factors, including the rate of prepayments of principal and the value of
the collateral underlying loans and the valuation of real estate held by the
Company.
USE OF DERIVATIVE FINANCIAL INSTRUMENTS--The Company's use of derivative
financial instruments is primarily limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposure. The
principal objective of such arrangements is to minimize the risks and/or costs
associated with the Company's operating and financial structure as well as to
hedge specific anticipated transactions. The counterparties to these contractual
arrangements are major financial institutions with which the Company and its
affiliates may also have other financial relationships. The Company is
potentially exposed to credit loss in the event of nonperformance by these
counterparties. However, because of their high credit ratings, the Company does
not anticipate that any of the counterparties will fail to meet their
obligations. Prior to the Recapitalization Transactions, the Company did not
significantly utilize derivative financial instruments.
In anticipation of and since the completion of the Recapitalization
Transactions, the Company had entered into a LIBOR interest rate cap struck at
9.00% in the notional amount of $300.0 million expiring in March 2001. The
Company also entered into LIBOR interest rate caps struck at 7.50% in the
notional amounts of $40.4 million and $38.3 million expiring in January and
June 2001, respectively, on amounts borrowed under additional term loans. In
addition, the Company acquired a LIBOR interest rate cap struck at 8.50% in the
notional amount of $32.5 million expiring December 1999.
17
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
Further, the Company has entered into approximately $205.5 million of interest
rate swaps to effectively fix the interest rate on a portion of the Company's
floating-rate obligations.
The Company is currently pursuing or recently consummated certain
anticipated long-term fixed rate borrowings and had entered into certain
derivative instruments based on U.S. Treasury securities to hedge the potential
effects of interest rate movements on these transactions. Under these
agreements, the Company would generally receive additional cash flow at
settlement if interest rates rise and pay cash if interest rates fall. The
effects of such receipts or payments will be deferred and amortized over the
term of the specific related fixed-rate borrowings. During the three-month
period ended September 30, 1999, the Company settled an aggregate notional
amount of approximately $63.0 million that was outstanding under such
agreements, resulting in a receipt of approximately $0.6 million to be amortized
over the term of the anticipated borrowing.
During the nine-month period ended September 30, 1999, the Company
refinanced its $125.0 million term loan maturing March 15, 1999 with a
$155.4 million term loan maturing March 5, 2009. The new term loan bears
interest at 7.44% per annum, payable monthly, and amortizes over an
approximately 22-year schedule. The new term loan represented one of the
forecasted transactions for which the Company had previously entered into U.S.
Treasury-based hedging transactions. The net cost of the settlement of the
related interest rate hedges has been deferred and will be amortized as an
increase to the effective financing cost of the new term loan over its effective
10-year term.
In the event that, in the opinion of management, it is no longer probable
that the remaining forecasted transaction will occur under terms substantially
equivalent to those projected, the Company will cease recognizing such
transactions as hedges and immediately recognize related gains or losses based
on actual settlement or estimated settlement value of the underlying derivative
contract. No such gains or losses have been recognized by the Company.
NOTE 11--INCOME TAXES
Although originally formed to qualify as a REIT under the Code for the
purpose of making and acquiring various types of mortgage and other loans,
during 1993 through 1997, the Company failed to qualify as a REIT. The Company
did not incur any material tax liabilities as a result of its operations during
such years. As confirmed by a closing agreement with the Internal Revenue
Service (the "IRS") obtained in March 1998, the Company was eligible and has
elected to be taxed as a REIT for tax years commencing on January 1, 1998.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and income tax purposes, as well as operating loss and tax credit carry
forwards. A valuation allowance is recorded if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
income tax asset will not be realized. Given the limited nature of the Company's
operations and assets and liabilities from 1993 through 1997, the only deferred
tax assets are net operating loss carry forwards ("NOLs") of approximately
$4.0 million, which arose during such periods. Since the Company has elected to
be treated as a REIT for its tax years beginning January 1, 1998, it is
anticipated that such NOLs will expire unutilized. Accordingly, no net value,
after consideration of a 100% valuation allowance, has been reflected in these
financial statements as of September 30, 1999 or December 31, 1998.
18
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- 1996 SHARE INCENTIVE PLAN
The Company maintains a stock option plan to provide a means of incentive
compensation for officers, key employees, trustees, consultants and advisors.
Stock options, restricted stock awards and other performance awards may be
granted under the Starwood Financial Inc. 1996 Share Incentive Plan (as amended,
the "Plan"). Under the Plan, up to 9.00% of the outstanding shares on a
fully-diluted basis, as adjusted for subsequent issuances of shares, are
reserved for issuance under the Plan. All grants under the Plan, other than
automatic grants to non-employee trustees, will be at the sole discretion of the
Board of Directors or a specifically designated subcommittee of such trustees.
Approximately 2,493,843 options to purchase shares at $15.00 per share that are
immediately exercisable were granted to the Advisor on March 13, 1998 under the
Plan in connection with the consummation of the Recapitalization Transactions,
and additional grants may be made to employees of the Company in the future.
An independent financial advisory firm estimated the value of these options
at date of grant to be approximately $2.40 per share using a Black-Scholes
valuation model. In the absence of comparable historical market information for
the Company, the advisory firm utilized assumptions consistent with activity of
a comparable peer group of companies, including an estimated option life of five
years, a 27.50% volatility rate and an estimated annual dividend rate of 8.50%.
Options issued to employees will be accounted for using the intrinsic method
and, accordingly, no earnings charge will be reflected for options issued to
direct employees since the exercise price approximates the concurrent exchange
transaction price at date of grant. Options issued to the Advisor were accounted
for under the option value method and, accordingly, resulted in a charge to
earnings upon consummation of the Recapitalization Transactions equal to the
number of options allocated to the Advisor multiplied by the estimated value at
consummation. The charge of approximately $6.0 million was reflected in the
Company's first quarter 1998 financial results. Future charges may be taken to
the extent of additional option grants, which are at the discretion of the Board
of Directors.
No options to acquire shares were exercised in the three-month period ended
September 30, 1999. Options to acquire 63,233 shares were exercised in the
nine-month period ended September 30, 1999.
NOTE 13--EARNINGS PER SHARE
Basic EPS is computed based on the income applicable to Class A Shares
(which is net income reduced by accrued dividends on the preferred shares and by
1% allocated to Class B Shares) divided by the weighted average number of
Class A Shares outstanding during the period. Diluted EPS is based on the net
earnings applicable to Class A Shares plus dividends on Class B Shares which are
convertible into Class A Shares, divided by the weighted average number of
Class A Shares and dilutive potential Class A Shares that were outstanding
during the period. Dilutive potential Class A Shares include the Class B Shares,
which are convertible into Class A Shares at a rate of 49 Class B Shares for one
Class A Share, and potentially dilutive options to purchase Class A Shares
issued to the Advisor and the trustees of the Company and warrants to acquire
Class A Shares. Basic and diluted
19
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--EARNINGS PER SHARE (CONTINUED)
earnings per Class A Share are based upon the following weighted average shares
outstanding during each of the three- and nine-month periods ended
September 30, 1999 and 1998, respectively.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
1999 1998 1999 1998
------ ------ ------ ------
(IN THOUSANDS)
Weighted average Class A Shares outstanding for basic
earnings per Class A Share............................. 52,471 52,390 52,463 37,968
Add effect of assumed shares issued under treasury stock
method for stock options............................... 1,513 1,704 1,645 1,086
Add effects of conversion of Class B Shares (49-for-one
ratio)................................................. 560 560 568 405
Add effect of assumed warrants exercised under treasury
stock method for stock options......................... 783 -- 1,530 --
------ ------ ------ ------
Weighted average Class A Shares outstanding for diluted
earnings per Class A Share............................. 55,327 54,654 56,206 39,459
====== ====== ====== ======
As previously indicated, effective June 19, 1998, the Company consummated a
one-for-six reverse stock split for its Class A and Class B Shares. Historical
earnings per share and the information presented above have been retroactively
restated to reflect the reverse split for comparative purposes.
NOTE 14--COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") effective for fiscal years beginning after
December 15, 1997. The statement changes the reporting of certain items
currently reported as changes in the shareholders' equity section of the balance
sheet and establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 requires that all components of comprehensive income shall be
reported in the financial statements in the period in which they are recognized.
Furthermore, a total amount for comprehensive income shall be displayed in the
financial statement where the components of other comprehensive income are
reported. The Company was not previously required to present comprehensive
income or its components under generally accepted accounting principles. The
Company has adopted this standard effective January 1, 1998. Total comprehensive
income was $89.3 million and $36.9 million for the nine-month periods ended
September 30, 1999 and 1998, respectively, and $31.3 million and $21.0 million
for the three-month periods ended September 30, 1999 and 1998, respectively. The
primary component of comprehensive income other than net income was the change
in value of certain investments in marketable securities classified as
available-for-sale.
NOTE 15--DIVIDENDS
In order to maintain its election to qualify as a REIT, the Company must
distribute, at minimum, an amount equal to 95% of its taxable income and must
distribute 100% of its taxable income to avoid paying corporate federal income
taxes. Accordingly, the Company anticipates it will distribute all of its
taxable income to its shareholders. Because taxable income differs from cash
flow from operations due to non-cash revenues or expenses, in certain
circumstances, the Company may be required to borrow to make sufficient dividend
payments to meet this anticipated dividend threshold.
20
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--DIVIDENDS (CONTINUED)
Total dividends declared by the Company aggregated $22.8 and $45.1 million,
or $0.43 and $0.85 per Class A Share, for the three- and nine-months ended
September 30, 1999. On October 1, 1999, the Company declared a dividend of
approximately $23.1 million, or $0.44 per Class A Share, applicable to the third
quarter and payable to shareholders of record on October 15, 1999. In addition,
on October 1, 1999, the Company also declared dividends aggregating
approximately $0.2 million to the Class B Shareholders, applicable to the third
quarter and payable to shareholders of record on October 15, 1999. The Company
also declared a preferred dividend of approximately $5.2 million to all
preferred shareholders of record on September 30, 1999. The exact amount of
future quarterly dividends to shareholders will be determined by the Board of
Directors based on the Company's actual and expected operations for the fiscal
year and the Company's overall liquidity position.
NOTE 16--SUBSEQUENT TRANSACTIONS
Subsequent to September 30, 1999, the remaining loans underlying the
Company's strategic origination venture secured by specialty real estate, as
described in Note 5, were repaid in full. As the Company no longer intended to
originate additional loans through the venture, the net assets of the venture,
including the proceeds of these repayments, were distributed to the Company and
its venture partner, in accordance with the terms of the venture agreement, and
the venture was terminated.
On November 3, 1999, consistent with previously announced terms, the
Company's shareholders approved a series of transactions including: (i) the
acquisition, through a merger (the "Merger"), of TriNet Corporate Realty Trust,
Inc. ("TriNet"); (ii) the acquisition, through a merger and a contribution of
interests, of 100% of the ownership interests in the Company's external advisor
(the "Advisor Transaction"); and (iii) the change in form of the Company's
organization into a Maryland corporation (the "Incorporation Merger"). TriNet
stockholders also approved the Merger transaction on November 3, 1999. Pursuant
to the Merger, TriNet merged with and into a subsidiary of the Company, with
TriNet surviving as a wholly-owned subsidiary of the Company (the "Leasing
Subsidiary"). In the Merger, each share of TriNet common stock was converted
into 1.15 common shares of the Company. Each share of TriNet Series A, Series B
or Series C Cumulative Redeemable Preferred Stock was converted into a share of
Series B, Series C or Series D (respectively) Cumulative Redeemable Preferred
Stock of the Company. The Company's preferred stock issued to the former TriNet
preferred stockholders has substantially the same terms as the TriNet preferred
stock, except that the new Series B, C, and D preferred stock has additional
voting rights not associated with the TriNet preferred stock. The holders of the
Company's Series A Preferred Stock will retain their preferred shares with the
same rights and preferences as existed prior to the Merger. The Merger will be
accounted for as a purchase.
These transactions were consummated on November 4, 1999. As a result, the
Company is now self-advised and plans to continue to qualify as a REIT for
federal income tax purposes. As a part of these transactions, the Company also
changed its name to Starwood Financial Inc.
Contemporaneously with the consummation of the Merger, the Company acquired
100% of the interests in the Advisor in exchange for total consideration of four
million common shares of the Company in the Advisor Transaction. For accounting
purposes, the Advisor Transaction is not considered the acquisition of a
"business" in applying Accounting Principles Board Opinion No. 16, "Business
Combinations" and, therefore, the market value of the common shares issued (in
excess of the fair value of the net tangible assets acquired of approximately
$0.4 million) will be charged to
21
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SUBSEQUENT TRANSACTIONS (CONTINUED)
operating income as a one-time item in the fourth quarter of 1999 rather than
capitalized as goodwill as part of the transaction. The closings of the Merger
and the Advisor Transaction were conditions to the completion of each other.
Prior to the consummation of the Merger and the Advisor Transaction, the
Company changed its form from a Maryland trust to a Maryland corporation in the
Incorporation Merger through a merger with a wholly-owned subsidiary of the
Company formed solely to effect such merger. In the Incorporation Merger, the
Class B Shares were converted into shares of common stock on a 49-for-one basis
(the same ratio at which Class B Shares were previously convertible into
Class A Shares), and the Class A Shares were converted into shares of Common
Stock on a one-for-one basis. As a result, the Company no longer has multiple
classes of shares. The Incorporation Merger was treated as a transfer of assets
and liabilities under common control. Accordingly, the assets and liabilities
transferred from Starwood Financial Trust to Starwood Financial Inc. will be
reflected at their predecessor basis and no gain or loss will be recognized.
The Company declared a special dividend of one million shares of its Common
Stock payable pro rata to all holders of record of its Common Stock following
completion of the Incorporation Merger, but prior to the effective time of the
Merger with TriNet and the Advisor Transaction. The stock dividend has been
declared and will be paid on November 18, 1999.
On November 4, 1999, shares of the Company's single class of Common Stock
began trading on the New York Stock Exchange under the symbol "SFI".
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Prior to the Recapitalization Transactions (described in Note 4 to the
Company's consolidated financial statements), the Company's primary source of
cash during 1997 was from income earned on its interest in the participation
certificates in a mortgage note secured by an interest in the Warwick Hotel and
certain investments in government or government-sponsored securities, as well as
short-term cash investments. On October 1, 1997, the Warwick Hotel note was
repaid and the $4.5 million of proceeds were invested in government securities
and other short-term real estate investments.
On September 26, 1996, the Company became sole general partner of APMT
Limited Partnership (see Notes 1 and 4 to the Company's consolidated financial
statements) by contributing $400,000 in cash in exchange for a 8.05% interest in
the partnership. Starwood Mezzanine became the 91.95% limited partner by
contributing to the partnership its entire interest in the participation
certificates in the Warwick Hotel mortgage note, valued by the Company at
approximately $4.6 million at the time of contribution. Starwood Mezzanine's
units were converted into Class A Shares on March 18, 1998 on a one-for-one
basis and the partnership was dissolved.
On January 22, 1997, Starwood Mezzanine exercised its rights under a warrant
(see Note 4 to the Company's consolidated financial statements) to acquire
833,333 Class A Shares. In addition, SAHI, Inc. exercised its rights under the
warrant (see Note 4) to acquire 416,667 Class B Shares. As a result of the
exercise of warrants to purchase Class A and Class B Shares in January 1997, the
Company's capital increased by approximately $5.0 million, and the resulting
funds were used to purchase short-term government securities (see Note 4).
As more fully discussed in Note 4 to the Company's consolidated financial
statements, on March 18, 1998, the Company entered into a series of transactions
approved by the Company's shareholders which, among other things, substantially
recapitalized the Company and modified its investment policy. Effective
June 19, 1998, the Company (which was organized under California law) changed
its domicile to Maryland by merging with a newly-formed subsidiary organized
under Maryland law and issued new shares of the subsidiary to its shareholders
in exchange for the previous shares of the Company. Concurrently, the Company
consummated a one-for-six reverse stock split.
Immediately prior to the consummation of the Recapitalization Transactions,
the Company's assets primarily consisted of approximately $11.0 million in
short-term, liquid real estate investments, cash and cash equivalents.
On December 15, 1998, the Company sold $220.0 million of preferred shares
and warrants to purchase Class A Shares to Lazard Freres Real Estate Fund II,
L.P. ("Fund II"), Lazard Freres Real Estate Offshore Fund II, L.P. (the
"Offshore Fund"), and LF Mortgage REIT (the "Private REIT" and, collectively
with Fund II and the Offshore Fund, the "Investors"). Concurrent with the sale
of the preferred shares and warrants, the Company purchased $280.3 million in
real estate loans and participation interests (the "Acquired Assets") from
Lazard Freres Real Estate Fund L.P. ("Fund I"), Fund II, Prometheus Mid-Atlantic
Holding, L.P. ("PMAH"), Pacific Preferred LLC ("Pacific"), Atlantic Preferred II
LLC ("Atlantic"), Indian Preferred LLC ("Indian") and Prometheus Investment
Holding L.P. ("PIHLP" and, collectively with Fund I, Fund II, PMAH, Pacific,
Atlantic, Indian and PIHLP, the "Sellers"). Such transactions are referred to
collectively as the "Lazard Transaction."
As more fully discussed in Note 16 to the Company's consolidated financial
statements, on November 3, 1999, consistent with previously announced terms, the
Company's shareholders approved a series of transactions including: (i) the
acquisition, through Merger, of TriNet; (ii) the Advisor Transaction; and
(iii) the Incorporation Merger. TriNet stockholders also approved the Merger on
November 3, 1999. Pursuant to the Merger, TriNet merged with and into a
subsidiary of the Company,
23
with TriNet surviving as a wholly-owned subsidiary of the Company. In the
Merger, each share of common stock of TriNet was converted into 1.15 common
shares of the Company. Each share of TriNet Series A, Series B or Series C
Cumulative Redeemable Preferred Stock was converted into a share of Series B,
Series C or Series D (respectively) Cumulative Redeemable Preferred Stock of the
Company. The Company's preferred stock issued to the former TriNet preferred
stockholders has substantially the same terms as the TriNet preferred stock,
except that the new Series B, C, and D preferred stock has additional voting
rights not associated with the TriNet preferred stock. The holders of the
Company's Series A Preferred Stock will retain their preferred shares with the
same rights and preferences as existed prior to the Merger. The Merger will be
accounted for as a purchase.
The Recapitalization Transactions, the Lazard Transaction, the Merger, the
Advisor Transaction and other related transactions have materially impacted the
operations of the Company and will continue to impact the Company's future
operations. Accordingly, the reported historical financial information for
periods prior to these transactions is not believed to be fully indicative of
the Company's future operating results or financial condition.
RESULTS OF OPERATIONS
ORIGINATIONS
AND ADDITIONAL PRINCIPAL
ACQUISITIONS FUNDINGS REPAYMENTS
------------ ---------- ----------
(IN MILLIONS)
Quarter Ended March 31, 1998
(Including Recapitalization Transactions)................. $1,061.0 $ -- $ (1.0)
Quarter Ended June 30, 1998................................. 206.1 10.0 (7.4)
Quarter Ended September 30, 1998............................ 564.8 0.5 (87.2)
Quarter Ended December 31, 1998
(Including Lazard Transaction)............................ 250.1 6.0 (8.1)
Quarter Ended March 31, 1999................................ 152.1 7.1 (56.7)
Quarter Ended June 30, 1999................................. 183.8 15.6 (208.5)
Quarter Ended September 30, 1999............................ 52.9(1) 14.5 (102.9)
-------- ----- -------
Totals...................................................... $2,470.8 $53.7 $(471.8)
======== ===== =======
- ------------------------
(1) Amount includes a $30.0 million loan commitment made during the quarter
ended September 30, 1999, but not funded as of quarter end.
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
During the three months ended September 30, 1999, total revenue increased by
$18.6 million as compared to total revenue for the three months ended
September 30, 1998. This increase is a result of the interest generated by the
real estate loan investments contributed in the Recapitalization Transactions,
as well as other loan investments newly originated or acquired by the Company
and additional fundings under loan commitments.
Included in other income for the three-month period ended September 30, 1999
is a yield maintenance fee of $2.5 million from the early repayment of a $16.9
million unsecured note.
The increase in the Company's total costs during the three months ended
September 30, 1998 compared to the three months ended September 30, 1999 is
primarily due to the expense associated with the interest expense on borrowings
under revolving credit facilities and other borrowings used to fund the
Company's loan origination and acquisition activities, as well as general and
administrative costs and advisory fee expenses under the Advisory Agreement.
24
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
During the nine months ended September 30, 1999, total revenue increased by
$95.6 million as compared to total revenue for the nine months ended
September 30, 1998. This increase is a result of the interest generated by the
real estate loan investments contributed in the Recapitalization Transactions,
as well as other loan investments newly originated or acquired by the Company
and additional fundings under loan commitments.
Included in other income for the nine-month period ended September 30, 1999
is a yield maintenance fee of $2.5 million from the early repayment of a
$16.9 million unsecured note and a $1.9 million prepayment penalty from the
early repayment of a $40.0 million senior mortgage. Additionally, included in
other income is a gain of $3.1 million from the early repayment of a
$90.6 million senior mortgage and a $50.1 million subordinated mortgage, which
had been acquired at a discount, from a single borrower.
The increase in the Company's total costs during the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1999 is
primarily due to the expense associated with the interest expense on the
borrowings under revolving credit facilities and other borrowings used to fund
the Company's loan origination and acquisition activities. Further, as discussed
in Note 5 to the consolidated financial statements, the Company recognized a
$3.5 million provision in the nine-month period ended September 30, 1999 for
possible credit losses, as compared to $1.8 million taken in the nine-month
period ended September 30, 1998. Additionally, general and administrative costs
and advisory fee expenses under the Advisory Agreement increased the Company's
total costs and expenses during the nine months ended September 30, 1999. These
increases were partially offset by a $6.0 million charge in the nine-month
period ended September 30, 1998 for the stock option compensation for options
issued to the Advisor concurrently with the Recapitalization Transactions (see
Note 12 to the Company's consolidated financial statements.)
INTEREST RATE RISK MANAGEMENT
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. In
pursuing its business plan, the primary market risk to which the Company is
exposed is interest rate risk. Consistent with its expected election to qualify
as a REIT, the Company has implemented an interest rate risk management policy
based on match funding, with the objective that floating-rate assets be
primarily financed by floating-rate liabilities and fixed-rate assets be
primarily financed by fixed-rate liabilities.
The Company's operating results will depend in part on the difference
between the interest and related income earned on its assets and the interest
expense incurred in connection with its interest-bearing liabilities.
Competition from other providers of real estate financing may lead to a decrease
in the interest rate earned on the Company's interest-bearing assets, which the
Company may not be able to offset by obtaining lower interest costs on its
borrowings. Changes in the general level of interest rates prevailing in the
financial markets may affect the spread between the Company's interest-earning
assets and interest-bearing liabilities. Any significant compression of the
spreads between interest-earning assets and interest-bearing liabilities could
have a material adverse effect on the Company. In addition, an increase in
interest rates could, among other things, reduce the value of the Company's
interest-bearing assets and its ability to realize gains from the sale of such
assets, and a decrease in interest rates could reduce the average life of the
Company's interest-earning assets.
A substantial portion of the Company's loan investments are subject to
significant prepayment protection in the form of lock-outs, yield maintenance
provisions or other prepayment premiums which provide substantial yield
protection to the Company. Those assets generally not subject to prepayment
penalties include: (i) variable-rate loans based on LIBOR, originated or
acquired at par, which would not result in any gain or loss upon repayment; and
(ii) discount loans and loan participations acquired
25
at discounts to face values, which would result in gains upon repayment.
Further, while the Company generally seeks to enter into loan investments which
provide for substantial prepayment protection, in the event of declining
interest rates, the Company could receive such prepayments and may not be able
to reinvest such proceeds at favorable returns. Such prepayments could have an
adverse effect on the spreads between interest-earning assets and
interest-bearing liabilities.
While the Company has not experienced any significant credit losses,
delinquencies or defaults, in the event of a significant rising interest rate
environment and/or economic downturn, defaults could increase and result in
credit losses to the Company which adversely affect its liquidity and operating
results. Further, such delinquencies or defaults could have an adverse effect on
the spreads between interest-earning assets and interest-bearing liabilities.
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
conditions, and other factors beyond the control of the Company. As more fully
discussed in Note 10 to the Company's consolidated financial statements, the
Company employs match funding-based hedging strategies to limit the effects of
changes in interest rates on its operations, including engaging in interest rate
caps, floors, swaps, futures and other interest rate-related derivative
contracts. These strategies are specifically designed to reduce the Company's
exposure, on specific transactions or on a portfolio basis, to changes in cash
flows as a result of interest rate movements in the market. The Company does not
enter into derivative contracts for speculative purposes nor as a hedge against
changes in credit risk of its borrowers or of the Company itself.
Each interest rate cap or floor agreement is a legal contract between the
Company and a third party (the "counterparty"). When the Company purchases a cap
or floor contract, the Company makes an up-front payment to the counterparty and
the counterparty agrees to make payments to the Company in the future should the
reference rate (typically one- or three-month LIBOR) rise above (cap agreements)
or fall below (floor agreements) the "strike" rate specified in the contract.
Each contract has a notional face amount. Should the reference rate rise above
the contractual strike rate in a cap, the Company will earn cap income. Should
the reference rate fall below the contractual strike rate in a floor, the
Company will earn floor income. Payments on an annualized basis will equal the
contractual notional face amount multiplied by the difference between actual
reference rate and the contracted strike rate. The cost of the up-front payment
is amortized over the term of the contract.
Interest rate swaps are agreements in which a series of interest rate flows
are exchanged over a prescribed period. The notional amount on which swaps are
based is not exchanged. In general, the Company's swaps are "pay fixed" swaps
involving the exchange of floating-rate interest payments from the counterparty
for fixed interest payments from the Company.
Interest rate futures are contracts, generally settled in cash, in which the
seller agrees to deliver on a specified future date the cash equivalent of the
difference between the specified price or yield indicated in the contract and
the value of that of the specified instrument (e.g., U.S. Treasury securities)
upon settlement. The Company generally uses such instruments to hedge forecasted
fixed-rate borrowings. Under these agreements, the Company will generally
receive additional cash flow at settlement if interest rates rise and pay cash
if interest rates fall. The effects of such receipts or payments will be
deferred and amortized over the term of the specific related fixed-rate
borrowings. In the event that, in the opinion of management, it is no longer
probable that a forecasted transaction will occur under terms substantially
equivalent to those projected, the Company will cease recognizing such
transactions as hedges and immediately recognize related gains or losses based
on actual settlement or estimated settlement value. No such gains or losses have
been recognized by the Company.
While a REIT may freely utilize the types of derivative instruments
discussed above to hedge interest rate risk on its liabilities, the use of
derivatives for other purposes, including hedging asset-related risks such as
credit, prepayment or interest rate exposure on the Company's loan assets, could
26
generate income which is not qualified income for purposes of maintaining REIT
status. As a consequence, the Company may only engage in such instruments to
hedge such risks on a limited basis.
There can be no assurance that the Company's profitability will not be
adversely affected during any period as a result of changing interest rates. In
addition, hedging transactions using derivative instruments involve certain
additional risks such as counterparty credit risk, legal enforceability of
hedging contracts and the risk that unanticipated and significant changes in
interest rates will cause a significant loss of basis in the contract. With
regard to loss of basis in a hedging contract, indices upon which contracts are
based may be more or less variable than the indices upon which the hedged assets
or liabilities are based, thereby making the hedge less effective. The
counterparties to these contractual arrangements are major financial
institutions with which the Company and its affiliates may also have other
financial relationships. The Company is potentially exposed to credit loss in
the event of nonperformance by these counterparties. However, because of their
high credit ratings, the Company does not anticipate that any of the
counterparties will fail to meet their obligations. There can be no assurance
that the Company will be able to adequately protect against the foregoing risks
and that the Company will ultimately realize an economic benefit from any
hedging contract it enters into which exceeds the related costs incurred in
connection with engaging in such hedges.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL: The Company requires capital to fund its investment origination
and acquisition activities and operating expenses. The Company's capital sources
include cash flow from operations, borrowings under lines of credit, additional
term borrowings and reverse repurchase arrangements, long-term financing secured
by the Company's assets, unsecured financing and the issuance of common,
convertible and/or preferred equity securities.
As a result of the Recapitalization Transactions, the Lazard Transaction,
the Merger, the Advisor Transaction, and other transactions completed by the
Company, the Company has significant access to capital resources to fund its
existing business plan, which includes the expansion of its real estate lending
and credit tenant leasing businesses. Further, the Company may acquire other
businesses or assets using its capital stock, cash or a combination thereof.
The distribution requirements under the REIT provisions of the Code restrict
the Company's ability to retain earnings and thereby replenish capital committed
to its operations. However, the Company believes that its significant capital
resources and access to financing will provide it with financial flexibility and
market responsiveness at levels sufficient to meet current and anticipated
capital requirements, including expected new lending and leasing transactions.
The Company's ability to meet its long-term (i.e., beyond one year)
liquidity requirements is subject to the renewal of its credit lines and/or
obtaining other sources of financing, including issuing additional debt or
equity from time to time. Any decision by the Company's lenders and investors to
enter into such transactions with the Company will depend upon a number of
factors, such as compliance with the terms of its existing credit arrangements,
the Company's financial performance, industry or market trends, the general
availability of and rates applicable to financing transactions, such lenders'
and investors' resources and policies concerning the terms under which they make
such capital commitments and the relative attractiveness of alternative
investment or lending opportunities.
Based on its monthly interest and other expenses, monthly cash receipts,
existing investment commitments and funding plans, the Company believes that its
existing sources of funds will be adequate for purposes of meeting its short-
and long-term liquidity needs. Material increases in monthly interest expense or
material decreases in monthly cash receipts would negatively impact the
Company's liquidity. On the other hand, material decreases in monthly interest
expense would positively affect the Company's liquidity.
27
STARWOOD FINANCIAL: As more fully described in Note 7 to the Company's
consolidated financial statements, at September 30, 1999, the Company had
existing fixed-rate borrowings of approximately $154.3 million secured by real
estate under operating leases which mature in 2009, and an aggregate of
approximately $255.3 million in LIBOR-based, variable-rate loans secured by
various senior and subordinate mortgage investments which mature in fiscal 2000.
In addition, the Company has entered into LIBOR-based secured revolving
credit facilities of $675.0 and $500.0 million which expire in fiscal 2001 and
2000, respectively. As of September 30, 1999, the Company had drawn
approximately $476.4 million and $169.9 million under these facilities.
Availability under these facilities is based on collateral provided under a
borrowing base calculation.
In anticipation of and since the completion of the Recapitalization
Transactions, the Company had entered into a LIBOR interest rate cap struck at
9.00% in the notional amount of $300.0 million, which expires in March 2001. The
Company also entered into LIBOR interest rate caps struck at 7.50% in the
notional amounts of $40.4 million and $38.3 million which expire in January and
June 2001, respectively, on amounts borrowed under additional term loans. In
addition, the Company acquired a LIBOR interest rate cap struck at 8.50% in the
notional amount of $32.5 million expiring December 1999. Further, the Company
has originated or acquired assets subject to approximately $205.5 million of
interest rate swaps to effectively fix the interest rate on a portion of the
Company's floating-rate obligations.
The Company is currently pursuing or has recently consummated certain
anticipated long-term fixed-rate borrowings and had entered into certain
derivative instruments based on U.S. Treasury securities to hedge the potential
effects of interest rate movements on these transactions. Under these
agreements, the Company would generally receive additional cash flow at
settlement if interest rates rise and pay cash if interest rates fall. The
effects of such receipts or payments will be deferred and amortized over the
term of the specific related fixed-rates borrowings. During the three-month
period ended September 30, 1999, the Company settled an aggregate notional
amount of approximately $63.0 million that was outstanding under such
agreements, resulting in a receipt of approximately of $0.6 million to be
amortized over the term of the anticipated borrowing.
During the nine-month period ended September 30, 1999, the Company
refinanced its $125.0 million term loan maturing March 15, 1999 with a
$155.4 million term loan maturing March 5, 2009. The new term loan bears
interest at 7.44% per annum, payable monthly, and amortizes over an
approximately 22-year schedule. The new term loan represented one of the
forecasted transactions for which the Company had previously entered into U.S.
Treasury-based hedging transactions. The net cost of the settlement of such
hedges has been deferred and will be amortized as an increase to the effective
financing cost of the new term loan over its effective 10-year term.
In the event that, in the opinion of management, it is no longer probable
that the remaining forecasted transactions will occur under terms substantially
equivalent to those projected, the Company will cease recognizing such
transactions as hedges and immediately recognize related gains or losses based
on actual settlement or estimated settlement value. No such gains or losses have
been recognized by the Company.
LEASING SUBSIDIARY: Upon consummation of the Merger, the Leasing Subsidiary
had fixed-rate corporate debt obligations aggregating approximately $375.0
million which mature between 2001 and 2017. The Leasing Subsidiary also had
other variable- and fixed-rate secured debt obligations aggregating
approximately $73.4 million which mature at various dates through 2010.
The Leasing Subsidiary also has an agreement with a group of 13 banks led by
Bank of America, N.A. which provides it with a $350.0 million unsecured
revolving credit facility. This facility matures on May 31, 2001 and has an
automatic one-year extension option. Interest incurred on the facility is
LIBOR-based with a margin dependent on the Leasing Subsidiary's credit ratings.
Facility fees under
28
the Leasing Subsidiary's credit facility are also tied to its credit ratings.
Based on changes to these ratings, following the Merger, the borrowing costs and
fees under the facility are expected to increase. All of the available
commitment under the facility may be borrowed for general corporate and working
capital needs of the Leasing Subsidiary, as well as for investments. The
facility requires interest-only payments until maturity, at which time
outstanding borrowings are due and payable. Upon consummation of the Merger, the
Leasing Subsidiary had $146.1 million drawn and $203.9 million available under
this facility.
YEAR 2000 ISSUES
Many computer systems were originally designed to recognize calendar years
by the last two digits in the date code field. Beginning in the Year 2000, these
date code fields will need to accept four-digit entries to distinguish 21(st)
century dates. As a result, computerized systems, which include information and
non-information technology systems and applications used by the Company and the
Leasing Subsidiary, will need to be reviewed, evaluated and modified or
replaced, if necessary, to ensure all such financial information and operating
systems are Year 2000 compliant.
STATE OF READINESS
The Company and, prior to the Merger, the Leasing Subsidiary, have
separately adopted plans and formed teams of internal and external personnel to
address Year 2000 issues. Further, the personnel of the Company and its Leasing
Subsidiary are currently jointly finalizing a plan to integrate many of the
existing computer information systems and processes. Implementation of this plan
is expected to begin in the fourth quarter of fiscal 1999 and continue into the
first half of fiscal 2000. This plan takes into consideration the separate Year
2000 issue reviews completed by the separate companies prior to the Merger which
are summarized as follows:
STARWOOD FINANCIAL: The Company has conducted the discovery and assessment
stages on all its in-house systems that could be significantly affected by the
Year 2000. The completed assessment indicated that all of the Company's in-house
systems are Year 2000 capable. The Company has a 95% economic interest in
Starwood Operating, which is in the third-party mortgage servicing business.
Starwood Operating has completed the assessment of its systems and implemented
all required upgrades and modifications. Starwood Operating has completed
testing all of its systems during the first half of 1999. Year 2000 issues at
Starwood Operating were addressed by the previous owner of the business, which
agreed to indemnify Starwood Operating for any of Starwood Operating's losses
relating to Starwood Operating's systems and has ensured Starwood Operating that
all such systems are Year 2000 compliant.
The Company is in the process of communicating with its significant
depository institutions, lenders, custodians, vendors, tenants under operating
leases and borrowers with which it interfaces to evaluate their Year 2000
compliance. Approximately 80% of these counterparties have provided written
responses to the Company's written questionnaires. The Company is currently
contacting all counterparties that have not yet been responsive to the written
questionnaires. These counterparties are being interviewed telephonically to
assess their Year 2000 compliance. To date, the Company is not aware of any such
counterparty with a Year 2000 issue that would materially impact the Company's
results of operations, liquidity, or capital resources. Other than communicating
with its counterparties, the Company has no means of ascertaining whether a
given counterparty will be Year 2000 ready. The inability of counterparties to
complete their Year 2000 resolution process in a timely manner could materially
impact the Company.
LEASING SUBSIDIARY: The state of readiness of the Leasing Subsidiary
systems can be classified into three major component areas as follows:
29
INFORMATION TECHNOLOGY SYSTEMS: The Leasing Subsidiary has completed an
inventory of all information technology systems and has contacted vendors to
determine whether such systems are Year 2000 compliant. Based on manufacturers'
representations, the Leasing Subsidiary has determined that its primary network
operating system, Novel Netware 5, its newly-acquired property management and
accounting software and all desktop personal computers are Year 2000 compliant.
EMBEDDED SYSTEMS: The Leasing Subsidiary has reviewed all of its
properties' operating leases to determine whether the tenant or the Leasing
Subsidiary has the responsibility to address Year 2000 issues. For those
properties with respect to which the Leasing Subsidiary is responsible for Year
2000 compliance, independent consultants have performed on-site inventories of
the embedded systems (e.g., security, heating, ventilation and air conditioning,
fire and elevator systems) and have contacted the various manufacturers to
determine whether the embedded systems are Year 2000 compliant. Based on the
inventory and responses from manufacturers to date, the Leasing Subsidiary
identified embedded systems that are not Year 2000 compliant, and were in need
of replacement or repair. For these non-compliant systems, all remediation and
testing has been completed. With respect to those properties for which the
Leasing Subsidiary is not responsible for Year 2000 compliance, written notices
have been sent to tenants informing them of their obligations under the lease.
No assurance can be given that such tenants will comply with their obligations.
THIRD-PARTY RELATIONSHIPS: The Leasing Subsidiary has requested year 2000
compliance certificates from all third party relationships that have a
significant impact on the Leasing Subsidiary's operations (e.g., transfer agent,
financial institutions, utility companies and landlords). To date all of these
critical third party relationships have responded with compliance certificates
or written plans of action that anticipate compliance by December 31, 1999. No
assurance can be given that such certifications will prove to be accurate.
YEAR 2000 PROJECT COSTS
The Company estimates that total costs for the Year 2000 compliance review,
evaluation, assessment and remediation efforts should not exceed $20,000
(excluding costs incurred by the Leasing Subsidiary, as described below),
although there can be no assurance that actual costs will not exceed this
amount. This amount will be funded through cash flows from operations.
As of September 30, 1999, prior to the Merger, the Leasing Subsidiary had
paid and accrued approximately $915,000 for Year 2000 costs since the inception
of the program, of which approximately $330,000 will be incurred by the Company
subsequent to the Merger. The Leasing Subsidiary expects that a substantial
portion of these costs for the embedded systems will be passed through to the
Leasing Subsidiary's tenants through recoveries of operating expenses and that
the remaining costs of addressing the Year 2000 issues will be funded through
operating cash flow.
Because the Leasing Subsidiary's Year 2000 assessment is ongoing and
additional funds may be required as a result of future findings, the Leasing
Subsidiary's current accrual amounts may increase as a result of unanticipated
delays or preparedness issues. While the Leasing Subsidiary's efforts to address
its Year 2000 issues may involve additional costs, the Leasing Subsidiary
believes, based on available information, that these costs will not have a
material adverse effect on its business, financial condition or results of
operations.
Although the Leasing Subsidiary has concluded that many of its tenants are
responsible for certain Year 2000 compliance costs, there is a possibility that
certain tenants will not agree with such conclusions.
30
RISKS OF YEAR 2000
At this time, neither the Company nor its Leasing Subsidiary have identified
any specific business functions that are likely to suffer material disruption as
a result of Year 2000 related events. Due to the unique and pervasive nature of
the Year 2000 issue, it is not possible to anticipate all of the wide variety of
Year 2000 events, particularly those outside the Company, that might arise in a
worst case scenario. The Company believes that it has an effective program in
place to resolve the Year 2000 issue in a timely manner. However, disruptions in
the economy generally resulting from Year 2000 issues could materially affect
the Company. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
The Company has asked substantially all of its significant vendors and
service providers to provide reasonable assurances as to those parties' Year
2000 state of readiness. To the extent that vendors and service providers do not
provide satisfactory evidence that their products and services are Year 2000
compliant, the Company will seek to obtain the necessary products and services
from alternate sources. There can be no assurance, however, that Year 2000
remediation by vendors and service providers will be available, and any failure
of such third parties' systems could have a material adverse impact on the
Company's operations. In addition, the failure of borrowers and lease tenants to
address Year 2000 issues fully could have a material and adverse effect on their
operations and financial condition, which could impact their ability to service
the outstanding obligations to the Company. This, in turn, could have a material
and adverse effect on the Company's operations and financial position.
CONTINGENCY PLAN
A reasonably likely worst case scenario involves the Company's leasing
business, whereby a failure of an energy management system in a building may
occur in relation to a Year 2000 embedded system issue. Such a failure could
adversely affect the environmental conditions of the occupied space, thus
creating discomfort and inconvenience to the tenant until the condition could be
manually corrected. Persistence of this problem for a long period of time could
result in an increase in the operating costs for the building until the energy
management system is restored to proper operations.
In the event of an unforseen failure of any energy management system due to
a Year 2000 issue that cannot be readily cured, the Leasing Subsidiary's
contingency plan includes the deployment of teams consisting of regional
facility managers, building engineers and customer service personnel, which
would manually override any such energy management system in a timely manner.
Based on the assessment to date, the Company believes it is prepared for the
most reasonably likely worst-case scenarios regarding Year 2000 compliance.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS No. 131") effective for
financial statements issued for periods beginning after December 15, 1997. SFAS
No. 131 requires disclosures about segments of an enterprise and related
information regarding the different types of business activities in which an
enterprise engages and the different economic environments in which it operates.
The Company adopted the requirements of this pronouncement in its financial
statements beginning with the three-month periods ended March 31, 1999 and 1998.
The adoption of SFAS No. 131 has not had a material impact on the Company's
financial statement disclosures because it is currently considered to operate in
a single segment.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). On June 23, 1999 the FASB voted to defer the effectiveness of SFAS
133 for one year. SFAS 133 is now effective for fiscal years
31
beginning after June 15, 2000, but earlier application is permitted as of the
beginning of any fiscal quarter subsequent to June 15, 1998. SFAS No. 133
establishes accounting and reporting standards for derivative financial
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as: (i) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment; (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction; or (iii) in certain circumstances a hedge of
a foreign currency exposure. The Company currently plans to adopt this
pronouncement as required effective January 1, 2001. The adoption of SFAS 133 is
not expected to have a material impact on the financial impact on the financial
position or results of operations of the Company.
OTHER MATTERS
1940 ACT EXEMPTION
The Company at all times intends to conduct its business so as to not become
regulated as an investment company under the Investment Company Act of 1940. If
the Company were to become regulated as an investment company, then the
Company's ability to use leverage would be substantially reduced. The Investment
Company Act exempts entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" (i.e., "Qualifying Interests"). Under the current interpretation of
the staff of the SEC, in order to qualify for this exemption, the Company must
maintain at least 55% of its assets directly in Qualifying Interests. As of
September 30, 1999, the Company calculates that it is in and has maintained
compliance with this requirement.
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q, in future SEC filings or in press releases or
other written or oral communications, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Company
cautions that such forward looking statements speak only as of the date made and
that various factors including regional and national economic conditions,
changes in levels of market interest rates, credit and other risks of lending
and investment activities, and competitive and regulatory factors could affect
the Company's financial performance and could cause actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect events or circumstances after
the date of such statements except as required by law.
32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the Incorporation Merger, the Company changed its form of
organization and became a Maryland corporation on November 3, 1999. Pursuant to
the Merger and the Advisor Transaction on November 4, 1999, the Company issued
additional shares of its Common Stock to the shareholders of TriNet and the
Advisor. In connection with these transactions, the constituent instruments
defining the rights of the capital stock of the Company were modified as
previously reported and described in the Company's Proxy Statement dated
September 22, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM-8-K
A. EXHIBITS
2.1 Agreement and Plan of Merger, dated as of June 15, 1999, by and between
Starwood Financial Trust, ST Merger Sub, Inc. and TriNet Corporate Realty
Trust, Inc. (incorporated by reference in exhibit 10.1 of Starwood
Financial Trust's Form 8-K, dated June 22, 1999).
2.2 Agreement and Plan of Merger, dated as of June 15, 1999, by and between
Starwood Financial Trust, Starwood Financial, Inc. and, to the extent
described therein, TriNet Corporate Realty Trust, Inc. (incorporated by
reference to exhibit 10.2 of Starwood Financial Trust's Form 8-K, dated
June 22, 1999).
2.3 Agreement and Plan of Merger and Interest Contribution Agreement, dated
as of June 15, 1999, by and between Starwood Financial Trust, SA Merger
Sub, Inc., STW Holdings I, Inc., certain stockholder named therein.
Starwood Capital Group, LLC and, to the extent described therein, TriNet
Corporate Realty Trust, Inc. (incorporated by reference to exhibit 10.3
of Starwood Financial Trust's Form 8-K, dated June 22, 1999).
2.4 First Amendment to the Agreement and Plan of Merger, dated as of
September 15, 1999, by and between Starwood Financial Trust, ST Merger
Sub, Inc. and TriNet Corporate Realty Trust, Inc. (incorporated by
reference to exhibit 2.4 of Starwood Financial Inc.'s Form 8-K, dated
November 9, 1999).
2.5 Second Amendment to the Agreement and Plan of Merger, dated as of
November 3, 1999, by and between Starwood Financial Trust, ST Merger Sub,
Inc., and TriNet Corporate Realty Trust, Inc. (incorporated by reference
to exhibit 2.5 of Starwood Financial Inc.'s Form 8-K, dated November 9,
1999).
33
4.1 Amended and Restated Charter of Starwood Financial Inc. (incorporated by
reference to exhibit 4.1 of Starwood Financial Inc.'s Form 8-K, dated
November 9, 1999).
4.2 Amended and Restated By Laws of Starwood Financial Inc. (incorporated by
reference to exhibit 4.2 of Starwood Financial Inc.'s Form 8-K, dated
November 9, 1999).
B. REPORTS ON FORM 8-K
On July 12, 1999, a Current Report on Form 8-K/A was filed in connection
with the First Amendment to the Shareholder Agreement between TriNet Corporate
Realty Trust, Inc., Starwood Mezzanine Investors, L.P., SOF IV SAHI Holdings,
L.L.C., and B Holdings, L.L.C.
On November 9, 1999, a Current Report on Form 8-K was filed in connection
with the Merger, the Advisor Transaction and the Incorporation Merger.
34
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
STARWOOD FINANCIAL INC.
----------------------------------------------
Registrant
Date November 15, 1999 /s/ Jay Sugarman
---------------------------------------------
Jay Sugarman
Chief Executive Officer and President
Date November 15, 1999 /s/ Spencer B. Haber
---------------------------------------------
Spencer B. Haber
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
35
5
1,000
9-MOS
DEC-31-1999
SEP-30-1999
SEP-30-1999
17,405
4,597
14,006
6,250
0
29,758
194,229
8,384
2,108,378
8,572
0
0
44
52,733
952,585
2,108,378
0
175,314
0
0
21,095
3,500
61,348
89,371
0
89,371
0
0
0
89,371
1.39
1.31
